YUEN KUNG CHUN v. TSE WAI MING RAYMOND AND ANOTHER

DCCJ465/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATION REGION

CIVIL ACTION CASE NO 465 OF 2002

(FORMERLY HIGH COURT ACTION NO. 18753 OF 1998)

__________

__________

_____________________

JUDGMENT

_____________________

1. The plaintiff sued the defendants on 3 November 1998 for:-

(i)	damages for misrepresentation;
(ii)	duty to account for a sum of HK$600,000 paid to the 1st defendant (hereinafter referred as D1) and the 2nd defendant (hereinafter referred to as D2) for the purpose of investing in and developing a video game centre in Panyu of China; and
(iii)	damages for breach of trust.

2. Both defendants made blanket denials but put forward no positive averment of facts either to refute the plaintiff's contended facts or to supplement their denial until shortly before the trial was due to commence.

3. Plaintiff's counsel objected to the admission of evidence from the defendants on account of their lack of factual averments in their defence case. After hearing the parties' submissions I permitted the defendants to make amendments to their pleadings though it was late in time, as the plaintiff had been made aware of the defendants' contended facts in the witness statements exchanged before the trial.

Background Events

4. The plaintiff came to know D1 and a Mr. Gordon Wong in the summer of 1994 at the Changsha airport in Hunan of the mainland. The plaintiff was a flamboyant businesswoman, having quite a few business ventures in the mainland.

5. She kept regular contacts with D1 and was introduced by D1 to the other friends of D1 including D2.

The Hunan Magic World

6. In 1994 D1 and his friends coordinated a business venture to run a video game centre in Hunan known as "The Hunan Magic World" (hereinafter called the 'HMW' for short), with a targeted capital of RMB$6 millions. The first 4 investors establishing the HMW were D1, a Mr. Patrick Chan, D2 and D2's younger brother Anthony Wong. The parties pooled in a total of RMB$4millions in the following contribution: $2m from Patrick Chan, $1m from D2 and Anthony Wong, and $1m from D1 and a Mr. Stephen Chung. The rest of the $2m was to come from other investors.

7. The plaintiff signed a syndication agreement on 23 January 1995 to invest in the HMW. She paid a sum of HK$500,000 for the return of 5 shares out of a total of 100 shares in the syndication. The syndicate was formed for the purpose of developing a recreation centre in Changsha of Hunan in China.

8. The syndication agreement showed the promoter and manager of the Hunan project was a BVI company called Gold Flash Enterprises Limited. D1 and D2, in their verbal testimony in court, disclosed they were the directors of Gold Flash Enterprises Limited.

9. According to D2's testimony, HMW commenced its operation in about May to June of 1994. In D1's recollection HMW was still under construction when he met the plaintiff in the Changsha airport. D1 told the court that HMW was making a profit of about RMB$900,000 in the first year of its operation but made cumulative losses thereafter until it ceased business by the end of 1996.

The Panyu Magic World

10. According to D1 and D2's testimony in court, sometime in July 1995 whilst D2, Mr. Gordon Wong and D1 were at D1's home in Toronto, Stephen Chung and D2's younger brother Anthony Wong telephoned D1 and spoke to D1 about their proposal of setting up another video game centre in Panyu. Anthony Wong and Stephen Chung invited D1 to come back to Hong Kong to assess the business opportunity in Panyu.

11. On his return to Hong Kong from Canada D2 executed a set of documents in August 1995 to acquire a BVI company known as "Golden Gate Development Group Limited " (hereinafter called "Golden Gate" for short) for the purpose of running the Panyu project. D2 also signed various bank documents in September 1995 for the opening of a bank account for Golden Gate.

12. In the bank account opening mandate D1, D2, Anthony Wong and Stephen Chung were stated to be the directors of Golden Gate.

13. D1 gave an account that he was not aware of the formation of the company Golden Gate nor was he aware of his directorship nomination in Golden Gate at the time when Golden Gate was formed. According to D1, the bank account for Golden Gate was opened when he was not in Hong Kong. He never signed against the opening mandate nor had he supplied a copy of his identity card to the bank. The bank record confirmed that D1 had not signed nor was a copy of D1's identity card ever supplied.

14. After D1's return to Hong Kong sometime in January or February 1996 he visited Panyu on a few occasions to assess the investment potential of the proposed site.

15. In the explanations of both defendants it was the group's resolution to use 2 BVI companies as their trading vehicles to hold Golden Gate for the purpose of running the Panyu Magic World (hereinafter called "PMW" for short). The two BVI companies nominated were "R.J. Seatain" and "Silver Sand". "R.J. Seatain" invested HK$400,000 in Golden Gate while "Silver Sand" injected HK$800,000 into Golden Gate for the running of the Panyu project.

16. In D2's explanation in court "R.J. Seatain" was a BVI company owned in a 1:1 ratio between Stephen Chung and D1. "Silver Sand" was owned by D1 and the Wong brothers: D2, Anthony Wong and Frankie Wong. D1 owned 1/3 shareholding of "Silver Sand" while the 3 Wong brothers collectively owned 2/3 shareholding of "Silver Sand" through its parent company "Keen Wise", the latter being a BVI company wholly owned by the Wong's family.

17. According to D2, the investment ratio of 400,000 : 800,000 between "R.J. Seatain" and "Silver Sand" was chosen to maintain the balance of power between the Wong's family and the party of Stephen Chung and D1. As "Silver Sand" invested a sum of HK$800,000 in Golden Gate, the 3 Wong brothers' investment would roughly be HK$600,000, namely 2/3 of HK$800,000. As D1 owned 1/3 of Silver Sand, D1's investment in Golden Gate through "Silver Sand" would be 1/3 of HK$800,000, which was a little over HK$200,000. D1 and Stephen Chung also pooled in HK$400,000 from "R.J. Seatain", together with a sum of approximately HK$200,000 in respect of D1's share in "Silver Sand", D1 and Stephen Chung made a collective investment of approximately HK$600,000 as well.

18. Sometime in October 1995 two other investors signed up their respective syndication agreement to participate in the investment of the PMW.

19. According to D2, he resigned from the directorship of Golden Gate on 30 November 1995 when he felt there was too much paper work in the running of a BVI company. D2 also stated that he realized D1 would be returning to Hong Kong and he wished to make way for new directors joining the company.

20. Despite D2's resignation from directorship of Golden Gate and holding no post in Golden Gate he remained a signatory of the cheque account of Golden Gate. Such arrangement was understandable as D2 and his brothers were still holding about 1/2 interest of Golden Gate through Silver Sand. D2 and his brothers had an active interest in the running of the affairs of Golden Gate and the PMW.

21. Before March 1996 the plaintiff, D1 and the others visited the Panyu site. It was the opinion of all those present in the visit that the site proposed was a good location for the setting up of a video game centre as the location was potentially vibrant. The proposed site was a busy area in the town centre with a fast food restaurant nearby.

22. There were roughly 10 odd social meetings between the plaintiff, D1, D2 and others before the execution of the Panyu Syndication agreement by the plaintiff on 25 March 1996. During these 10 odd meetings, the PMW investment was amongst the topics of discussions.

23. On 25 March 1996 D1 accompanied the plaintiff to attend a solicitors' office to sign her syndication agreement to invest in the Panyu project. Stephen Chung executed the syndication agreement on behalf of Golden Gate. The agreement stated that the plaintiff was acquiring 1 share out of 10 shares of the syndication with her payment of HK$600,000. After signing the syndication agreement, the plaintiff paid a cheque for the sum of HK$600,000 to Golden Gate. The object of the syndication was to promote the PMW.

24. Bank record showed the plaintiff's HK$600,000 cheque was banked into the Golden Gate account on the same day the cheque was drawn by the plaintiff. The next day, on 26 March 1996, four cheques of Golden Gate were issued and signed by D2 and Stephen Chung for the following payments:-

(i)	a bearer cheque drawn for HK$70,000. The endorsement at the back of the cheque showed D1 had encashed the cheque on 26 March 1996;
(ii)	a cheque drawn for the sum of HK$100,000 which was transferred into D1's account on 26 March 1996;
(iii)	a cheque for HK$280,000 drawn in favour of D2 which was paid into D2's account on 26 March 1996;
(iv)	a sum of HK$150,000 drawn in favour of Hung On Hardware Company Limited which was paid into the a/c 019-612-0000108-0 on 27 March 1996.

25. It was D1's explanation in court that the sum of HK$70,000 was given to Stephen Chung on the same day of the cashing of the cheque for Stephen Chung to take the money to Panyu for use of the video game project; the sum of HK$100,000 was received by him to repay a HK$60,000 loan he made to Golden Gate while the balance of HK$40,000 represented the reimbursement for D1's travelling expenses in coming back to Hong Kong from Canada for the purpose of setting up the PMW.

26. In D2's explanation the HK$280,000 cheque was paid to him for the purpose of remitting the same to China for the Panyu project.

27. On 20 August 1996 a syndicate agreement was signed between Golden Gate and Mr. Thomas Lo for the latter to invest a sum of HK$300,000 to acquire 1/2 share in the syndication. The said syndicate agreement was executed by D1 on behalf of Golden Gate.

28. It was D1's contention in his statement that he and 9 other investors deposited money into Golden Gate for the purpose of running the PMW. As at the date of the trial the plaintiff was still a 1/10th shareholder of Golden Gate.

29. In D2's testimony in court, Silver Sand was sold off to a Taiwan consortium in late 1998 or early 1999. The total profits made in the sale of Silver Sand was roughly HK$2 millions. Since the sale of Silver Sand, the Wong's family including D2 no longer had an interest in the running of PMW.

The Plaintiff's Case

30. It was the plaintiff's contention that representations made to her by D1 and D2 were as follows:-

(i)	In late 1995 or early 1996 D1 and D2 orally informed the plaintiff that they intended to set up a syndicate of investors for the purpose of investing and developing a video game centre at Panyu Hotel in Panyu.
(ii)	On or about 18 March 1996, D1 and D2:-
	(a) invited the plaintiff to join in the Panyu investment; and
	(b) orally represented to the plaintiff that if she were to pay a sum of HK$600,000, the said sum would be applied towards the said investment, and the plaintiff would acquire 1/10 of the shares of the said investment.

31. The said representations were untrue in that her said sum of HK$600,000 was not applied by D1 and D2 towards the PMW investment and the plaintiff did not acquire a share in the said investment.

32. Whilst testifying in court, the plaintiff insisted she knows no English. She was not aware of the contents of the syndication agreement. She gave a blank cheque of HK$600,000 to D1 and D2 for D1 and D2 to invest in the Panyu project on her behalf.

33. In the plaintiff counsel's contention, the plaintiff relied on the representations of D1 and D2 that her HK$600,000 was to be utilized in the PMW investment and she would acquire 1 share out of a total of 10 shares in the syndication. Such representation was untrue. She now seeks damages from D1 and D2 in misrepresentation, duty to account for the said sum of HK$600,000, or alternatively damages for breach of trust.

The Defence's Case

34. It was the defence's case of the two defendants that they made no representation to the plaintiff about the Panyu investment. It was the plaintiff's own decision in investing in the said Panyu project.

35. D1, through his solicitor suggested:-

(a)	No representation was made to the plaintiff to induce her into joining the PMW investment. She made up her mind of her own accord to participate in the investment after visiting the Panyu site and considering the pros and cons of the investment potential of the location for the setting up of a video game centre.
(b)	If one was to consider the truthfulness of the representation being a proposed site with investment potential for the setting up of the PMW, the representation was true in every aspect.
(c)	D1 owed no duty to account to the plaintiff in respect of her payment of the HK$600,000. Though D1 was made a director of Golden Gate, he was not named as a signatory to the Ka Wah Bank account of Golden Gate.
(d)	D1 considered himself to be set up by Anthony Wong who intentionally rid him of the Panyu project by carrying out a swap of his shares of PMW with those of HMW.
(e)	According to D2, Silver Sand was sold in late 1998 or early 1999 but D1 was not ware of the sale until hearing the evidence of D2 in this trial. If an order for account was granted by court, D1 was not in a position to comply with the order.
(f)	The Plaintiff should have sued Stephen Chung or Anthony Wong if she felt she did not get a fair share of her investment.

36. D2 appeared in person. He put forward the following arguments:-

(a)	He seldom talked to the plaintiff during the various group meetings involving the plaintiff. Any representation made concerning the Panyu investment could not have come from him.
(b)	The plaintiff agreed with him that he was not present in the solicitors' office on 25 March 1996 during her execution of the syndication agreement, hence he was not party to any representation made in the solicitors' office on 25 March 1996.
(c)	The representations made about the location being a viable site for the PMW was true.
(d)	There was no trust reposed on him in respect of the HK$600,000 payment paid by the plaintiff to Golden Gate. The plaintiff acted unreasonably in failing to take the matter up with the Panyu Magic World.

Court's Ruling

(A) Misrepresentation

(i) Representation about the contents of the 25/3/96 agreement

37. In her evidence, the plaintiff sought to maintain she knows no English and was not aware of the contents of the syndication agreement executed by her on 25 March 1996. This I do not accept. The plaintiff agreed in her cross-examination that the agreement had been explained to her by the solicitor prior to her execution of it. Further the plaintiff, as an experienced businesswoman, had executed a similar syndication agreement in 1995 in respect of the Hunan project. She could not possibly have failed to appreciate the contents of the syndication agreement in respect of the Panyu project.

(ii) Representation about the investment potentials

38. Considerable time has been spent by both the plaintiff and the defendants to debate whether misrepresentation had been made about the setting up a video game centre at Panyu Hotel and whether the plaintiff decided on participating in the investment solely at the solicitation and invitation of the defendants or whether the plaintiff exercised her independent value judgment in deciding upon the investment.

39. Evidentially there could be no dispute that the plaintiff had exercised her own independent value judgment in deciding to invest in the Panyu project, after evaluating the potentials of the investment proposal.

(iii) Identity of the representators

40. On the available evidence, I am satisfied on balance that D1 was a director of Golden Gate at all material time of these events. He might not be aware of the exact date when Golden Gate was incorporated or the date when the bank account was opened for Golden Gate. On his return to Hong Kong in January to February 1996 or the latest by the time when he first visited Panyu in early 1996 for the purpose of assessing the suitability of setting up a video game centre within the Panyu Hotel, D1 was fully aware of his director status with Golden Gate.

41. D2, though having resigned from the directorship of Golden Gate, remained a signatory of the cheque account of Golden Gate. D2 and his brothers owned 1/2 of the shareholding of Golden Gate through Silver Sand. D2 never relinquished his control over the affairs of Golden Gate until the sale of Silver Sand to the Taiwanese consortium. He was present in most of the meetings involving the potential investors in the PMW project discussions.

42. The plaintiff agreed D2 was not present in the solicitor's office on 25 March 1996 when she executed the agreement. But what took place inside the solicitors' office on 25 March 1996 could only be a confirmation of what was discussed prior to the parties attending the solicitors for the execution of the agreement. D2 was, in the plaintiff's description, a very quiet person who seldom generated active conversations. He was the director of Gold Flash and he actively participated in the running of the affairs of HMW. He was in the company of the plaintiff, D1 and the others whilst the PMW investment was discussed in the various social meetings. The various discussions generated an understanding by the plaintiff that the PMW was a branch of the HMW. D2 was in the company of D1, the plaintiff and the others whilst the group was visiting the Panyu site for inspection to determine if the site was a suitable location for the setting up of the video game centre. D2's presence and acquiescence with the D1's conversations constituted a positive representation by conduct on his part to the plaintiff that he was a party of the promoters of the PMW and a party to the representations made by D1 to the plaintiff on behalf of the group of the promoters of the PMW. Such an inference is consistent with the fact that D2 and his brothers were owning 1/2 of Golden Gate through Silver Sand at all material time leading to the execution of the plaintiff's syndication agreement. It was in D2's interest that investors were solicited to participate in the PMW investment.

43. Had D2 genuinely wished to relinquish his interest or control over the affairs of Golden Gate or the PMW, he would not have remained a signatory to the cheque account of Golden Gate.

44. I accept on the available evidence, D1 and D2 collectively made the following representations to the plaintiff:-

(a)	that D1, D2 and the other investors intended to set up a video game centre to be known as "Magic World" in Panyu;
(b)	that the investment sum to be paid by the plaintiff to the promoters would be applied towards the development of this PMW; and
(c)	that the plaintiff would be allotted 1 share out of 10 shares of a syndication of investors in respect of her HK$600,000 contribution for the purpose of developing the PMW.

(iv) Representation about the setting up of PMW

45. D1 gave a detailed account about the setting up of the PMW, how he set up the working team, how he supervised the staff and programmed the training course to ensure the efficient running of the game centre.

46. The mainland solicitors conducted a search with the local authority in Panyu and confirmed an entertainment game centre by the name of "Magic World" was in operation in the Panyu Hotel from 25/12/96 until late April 2002 when it ceased business. According to the registration record, "Magic World" in Panyu was operated by "Guangzhou Panyu China Travel Entertainment City" under the licenced trade name of "Magic World". The "Magic World" in Panyu was a State Owned Enterprise. Its shareholder was the "China Travel Agency" of the Panyu province. Golden Gate was not a shareholder of the "Magic World" in Panyu.

47. I accept, on balance, a video game centre by the name of Magic World had been set up at the Panyu Hotel as promised by D1 and D2. There was, however, no documentary evidence to show any connection between the "Magic World" in Panyu and the BVI company Golden Gate. D2 sought to explain the anomaly by suggesting Golden Gate was operating the Panyu Magic World on a licence arrangement. However, no licence agreement was produced.

48. D2 sought to adduce an informal letter purportedly issued by the Panyu Hotel letter to suggest that Golden Gate had rented part of the Panyu Hotel from 1 January 1996 to 31 December 2000 for the running of the Panyu Magic World. D2 also sought to adduce a letter purportedly issued by Golden Gate on 1 June 2000 to suggest the plaintiff was still a registered member of Golden Gate owning 1/10 of the company's shares since 1 April 1996. Such letters were subject to the counter notice of the plaintiff. The defendant did not summons any of the authors of the documents to testify on the contents of the 2 documents. I see no justification to admit the 2 letters when there was no reasonable explanation why the makers of the 2 letters could not be called. Also the contents of the 2 letters were clearly in conflict with the rest of the evidence before me. There was no other evidence, apart from the bare verbal assertions of the 2 defendants before this court to suggest that the plaintiff was a 1/10 shareholder of the BVI company Golden Gate, or that Golden Gate promoted, owned, operated or had an interest in the operation of Panyu Magic World. There was a clear lack of evidential link to show the relationship between Golden Gate and the trading vehicle operating the Panyu Magic World.

49. I accept, on balance, though a video game centre had been set up in Panyu as represented by D1 and D2, there was no correlation between the BVI company Golden Gate and the PMW in operation in Panyu Hotel between December 1996 and April 2002. The representation that Golden Gate would be the promoter promoting or operating the PMW was untrue.

(v) Representation about the use of the HK$600,000

50. Both defendants sought to contend that the sum of HK$600,000 paid by the plaintiff had either been remitted to China for the operation of the PMW or been used towards the payment of the supplier of PMW. However there was no discernible relationship between Golden Gate and the PMW. The various cheque movements only showed the payment of the money to D1, D2 and another company. There was no documentary evidence to show the HK$600,000 ended up in the operating accounts of PMW. The remittance of the money to the mainland for use of PMW was bare assertion without documentary proof. I accept the representation that the investment fund of HK$600,000 paid by the plaintiff would be applied towards the investment of PMW was untrue.

(vi) Representation about share allotment

51. The plaintiff testified in court that she never received any share allotment of the syndication by Golden Gate. She was not given any annual return. She received no dividend, no bonus nor was she ever informed of the accounts of the PMW. From the company search carried out by the PRC lawyers, the PMW had clearly been in operation for 5 1/2 years between 1996 and 2002. Had the plaintiff been a shareholder owning a share in the trading vehicle operating the PMW, she should have received information about the financial status of the PMW within those 5 years.

52. If the 2 defendants genuinely intended to honour their promise to procure the allotment of shares to the plaintiff, a directors' meeting should have been convened shortly after the receipt of the HK$600,000 for the allotment of the plaintiff's share. No evidence of a directors' meeting was forthcoming.

53. Neither defendant was able to provide any documentary evidence, such as the records kept by registered agent in the British Virgin Islands to show the plaintiff was a member of the Golden Gate or any official record from the Panyu province to show the plaintiff was the shareholder of the syndication operating the PMW.

54. According to the search conducted by the plaintiff, Golden Gate was incorporated on 21 June 1995 with an authorized capital of US$50,000 divided into 50,000 shares of US$1 per share. Golden Gate did not file the names of its shareholders, directors nor financial records with the Companies Registry of the British Virgin Islands. The company was struck off the Register of Companies of the British Virgin Islands on 1 November 1996 for non-payment of licence fee. It was restored to the BVI Company Register on 8 September 1998 after the company paid off its outstanding fees and penalties. No other company record was disclosed in respect of the identity of the shareholders of Golden Gate.

55. I accept, on balance, the plaintiff was never allotted a share in Golden Gate or in a syndication promoted by Golden Gate for the purpose of investing in the PMW. The representation that the plaintiff would be allotted one share of the syndication was untrue.

(vii) Misrepresentations

56. Hence the untrue representations made by D1 and D2 were:-

(a)	that Golden Gate would promote, run or operate PMW;
(b)	the sum of HK$600,000 paid by the plaintiff would be applied towards the promotion, running or operation of the PMW;
(c)	that the plaintiff would be allotted 1 share out of the 10 shares of the syndicate in the development, promotion, construction and operation of PMW.

(B) Duty to account in trust ?

57. The evidence showed the cheque of HK$600,000 was banked into the account of Golden Gate and 4 payments were paid out respectively to D1, D2 and one other company.

58. There was no documentary evidence to confirm a director's loan of HK$60,000 had been made by D1 to Golden Gate or an agreement to reimburse D1 travelling expenses of HK$40,000. If the loan were in fact made to Golden Gate or if there were agreement to reimburse D1 his travelling expenses, such payments might possibly constitute preferential payments relative to other expenses of the company. Falling short of documentary proof of D1's right to such payments, I do not accept D1 could justifiably pocket the 2 sums of HK$40,000 and HK$60,000.

59. There was also no reasonable explanation why Golden Gate, if acting genuinely as the promoter of PMW, could not pay out the respective sums to the creditors of the PMW by direct payments. There is no reasonable explanation why the sum of HK$70,000 had to be cashed by D1 to be given to Stephen Chung for the purpose of bringing the fund to the mainland for use of PMW.

60. Nevertheless should D1 be in breach of his duty as the director of Golden Gate to wrongly apply its funds, giving preferential treatments to himself, the entity that D1 would be held liable to account was Golden Gate as opposed to the plaintiff. If the plaintiff had sued Golden Gate for an account, D1 would possibly have been liable to account to Golden Gate in respect of the sums he wrongfully pocketed, and Golden Gate would correspondingly have been liable to account to the plaintiff for the sum of HK$600,000 received from the plaintiff for the purpose of investing in the PMW.

61. Similarly, if D2 wrongly applied the sum of HK$600,000 giving preferential payments to D1, himself and the others or failing to apply the sum of HK$600,000 towards the promotion or investment of the PMW, D2 would have a duty to account to Golden Gate. And Golden Gate would in turn have a duty to account to the plaintiff for wrongful application of the fund paid over for the purpose to invest.

62. D2 was not present in the meeting of 26/3/96 at the execution of the syndication agreement by the plaintiff. He did not physically receive the money from the plaintiff. Though D2 must be aware of the source of the HK$600,000 payment and the purpose for which the sum of HK$600,000 was paid by the plaintiff, he would only be liable to account to Golden Gate in respect of the wrongful application of the Golden Gate fund.

Court's Order

63. D1 and D2 should be held jointly liable to the plaintiff on account of their misrepresentations.

64. D1 and D2 were not contracting parties to the syndication agreement. The issue of collateral contract has not been raised; it is inappropriate to consider contractual remedies.

65. Damages in tort are awarded on the basis as though the tort had not been committed. Had the plaintiff come to know it was never the intention of D1, D2 to procure the allotment of the 1/10 share of the syndication to her, she would not have invested nor would she have paid over the HK$600,000 cheque. Hence D1 and D2 are jointly and severally liable to reimburse the Plaintiff the sum of HK$600,000.

Order for Costs

66. Costs order nisi for this action is awarded in favour of the Plaintiff against D1 and D2, with certificate for counsel.