LEUNG KAM MING v. POON KING MAN

HCA 816/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 816 OF 2010

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J U D G M E N T

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1.  In this action the plaintiff claims against the defendant for the sum of MOP2,200,000 (Macanese currency) (“Sum”) said to be payable to him pursuant to the terms of an Agreement entitled “債務承擔及債權轉移協議書” (“Agreement”) signed by the plaintiff and defendant on 7 August 2009.

2.  The facts of this case are relatively simple and the scope of dispute is narrow.  I proceed to set out the material facts. Where there is material dispute, I shall refer to it and indicate what I accept to be the facts.

3.  Back in 1991, the plaintiff worked for a company by the name of Chi Luen Engineering Co Ltd (“CLHK”).  It was a Hong Kong company.  90% of the shares in CLHK were owned by the defendant with the remainder owned by his wife.  The defendant and his wife were the directors of CLHK.  CLHK was in the construction business and plaintiff was employed by it as a foreman. 

4.  In about July 2001, the parties commenced a manufacturing business in Shenzhen (“SZ Business”).  The plaintiff did not have sufficient finance for the purpose, so he obtained a loan from the defendant in the sum of HK$310,000 (“Loan”).  There is a simple document in English dated 18 July 2001 which evidenced the Loan.  Although that document was poorly drafted, there is no dispute between the parties about the existence of the Loan which is the subject matter of the defendant’s counterclaim before this court.  The dispute concerns the allegation of the plaintiff that it had been repaid and I shall deal with that issue below. 

5.  Turning the clock forward to 2005.  At that time the defendant wanted to exploit the construction business in Macau and Chi Luen (Macau) Engineering Co Ltd (“CLM”) was formed.  He decided to co-operate with the plaintiff in that venture and 20% of the shares in CLM were given to him. The rest of the shares were owned by the defendant.  The defendant and the plaintiff were the two directors of CLM. 

6.  In February 2009, CLHK was in financial difficulty which resulted in labour unrest.  CLHK then sought and obtained financial assistance from Young’s Engineering Co Ltd (“YHK”).  I do not believe that the details of such assistance are relevant.  They are not disputed.  It suffices to say that the money borrowed from YHK by CLHK was eventually repaid by a series of set-off of debts involving not just those two companies but other companies associated with them. 

7.  The set-off exercise involved, inter alia, making use of debts owed to CLM to cancel out some of the money borrowed from YHK by CLHK.  Altogether, 3 debts owed to CLM by companies associated with YHK, totalling MOP6,309,539, were utilised for the purpose.  The set-off exercise which involved CLM’s assets was completed by April 2009. 

8.  However, in late July 2009, the plaintiff first learned about the use of CLM’s assets for the repayment of CLHK’s debts.  He got to know about it from the defendant who wanted him to sign 3 sets of minutes of extraordinary shareholders’ meeting to regularise the use of CLM’s assets as aforesaid.  It is common ground that eventually the minutes were signed by the plaintiff as requested.  However, he insisted that the Agreement be signed by the defendant as a quid pro quo.  The signing was done at a meeting held at the office of a Macanese lawyer on 7 August 2009 (“Meeting”). The circumstances under which the Agreement came to be signed are in dispute.

9.  According to the plaintiff, after considering the defendant’s request, he wanted to put an end to his business dealings with the defendant.  In order to do so and to protect his interest, he needed to settle with the defendant their financial affairs.  After carrying out an accounting exercise to settle their financial affairs, they came to a consensus that part of the MOP6,309,539 was attributable to the plaintiff as his entitlement.  The entitlement was agreed at MOP2,200,000.  Subsequently, the Agreement, drafted by the plaintiff, was signed by the parties in return for the plaintiff’s agreement to sign the minutes. 

10.  The Agreement was made between the plaintiff and the defendant only.  In that document, they were identified respectively as the shareholder of CLHK and CLM and shareholder of CLM.  The preamble referred to, inter alia, the use of CLM’s assets to pay off the debts of CLHK and the fact that the agreement was reached in order to obtain the plaintiff’s consent to sacrifice his personal interest in support of the defendant’s decision (“甲乙雙方達成如下協議，取得乙方墊付個人權益以支持甲方所作決定”).  According to clause 2 of the Agreement, the Sum was regarded as money personally put up by the plaintiff (“ … 屬乙方“澳門志聯－股東梁錦明先生”個人所墊支款”).  Clause 3 provided for a promise by the defendant that the Sum would be paid to the plaintiff by CLHK with its income after the repayment of all the debts owed to YHK. Under clause 4, the plaintiff would be personally responsible for any deficiency in the payment of the Sum if any part of it remained outstanding by the time the final account in respect of a contract for certain work at the Hong Kong Convention and Exhibition Centre had been settled.  The signing of the Agreement was witnessed by one Mr Lo who was YHK’s in-house lawyer. 

11.  There is no dispute that the final account mentioned in the preceding paragraph had been settled and no payment has been made to the plaintiff in respect of the Sum.

12.  The defendant’s case is that he did not know about the contents of the Agreement prior to the Meeting.  In cross-examination, he said that he was “a bit unclear” about the contents of the Agreement but he knew that he had to pay the Sum to the plaintiff.  It appears from the evidence unravelled in cross-examination that the defendant, assuming that he did not know about the contents of the Agreement prior to the Meeting, was able to read the document at the Meeting and to understand its contents.  Indeed, he complained in his evidence about having reservation over the Sum when he read the Agreement.  He wanted to ask the plaintiff about it but did not want to embarrass him in front of Mr Lo and other people. 

13.  In my view, any suggestion that the defendant had signed the Agreement without being aware of its contents cannot, with respect, be taken seriously.  It was a simple two-page document in Chinese.  On the first page, the three sums belonging to CLM which were used to set-off CLHK’s debts were mentioned.  The defendant’s personal obligation to pay the Sum was clearly stated in clause 4 appearing just above his signature on the second page. 

14.  In these circumstances, and subject to a point of law raised by Ms Tam who appeared for the defendant, I am unable to see any defence to the plaintiff’s claim.

15.  With respect, Ms Tam’s argument is not an obvious one.  It is based on the fundamental principle that a company is a separate legal entity.  Its shareholders have no right over the properties owned by it.  Ms Tam said that the rights to reimbursement arising out of the use of CLM’s assets to pay off CLHK’s debts belonged to CLM (“CLM’s Rights”).  CLM’s Rights were never assigned to the plaintiff and he, as a shareholder of CLM, had no entitlement over the same. Further, Ms Tam said that despite being the majority shareholder of CLHK, the defendant had no right to make any promise on its behalf to pay the plaintiff.  CLHK was not privy to the Agreement and not bound by the same. 

16.  First of all, the principles of law relied upon by Ms Tam are not disputed and I have no difficulty accepting them.  Secondly, it is quite clear that in entering into the Agreement the parties were either ignorant of the law concerning the separation between a company and its shareholders or they simply ignored it.  In the course in cross-examination, it was put to the plaintiff that repayment should be made by CLHK to CLM.  To which question, the plaintiff answered: “No.  Honestly, both companies belonged to the same person [the defendant].  I don’t know how he dealt with this.  I only wanted to protect my interest.”.  I believe that the answer accurately reflects how two relatively unsophisticated businessmen went about their affairs in ignorance of the law.  Also, one should not forget that the parties were in control of CLHK and CLM. 

17.  However, I do not see how Ms Tam’s submissions can assist the defendant.  The Agreement was only made between the plaintiff and the defendant.  There is no legal impediment to shareholders agreeing between themselves how certain assets of company are to be dealt with or ultimately divided between them.  Of course, Board approval will have to be obtained and all necessary procedure will have to be complied with so as to uphold the constitution of the company.  On proper construction, clause 3 of the Agreement was no more than a promise by the defendant that the plaintiff would be paid by CLHK when certain event occurred.  That promise did not bind CLHK because it was not a party to the Agreement. 

18.  Clause 4 of the Agreement clearly imposed a liability on the part of the defendant to pay the plaintiff when CLHK had failed to do so.  I cannot see why the lack of any assignment of CLM’s Rights to the plaintiff or the absence of CLHK as a party to the Agreement should affect the personal liability of the defendant. 

19.  In the premises, I find in favour of the plaintiff in respect of his claim over the Sum. 

20.  I turn to deal with the counterclaim.  The plaintiff’s case is that the Loan was already taken into account when he settled his financial affairs with the defendant prior to signing the Agreement.  He said in evidence that the SZ Business was owed by him and the defendant in equal shares.  CLHK was the main trading partner for the SZ Business and there was a considerable amount of trade debts owed by the former to the latter.  Further, he had injected funds into the SZ Business which served to gradually reduce the money he owed to the defendant. 

21.  The defendant denies that the Loan was in any way repaid.

22.  On balance, I am inclined to reject the plaintiff’s evidence on the settlement of the Loan.  I find his evidence lacking in specificities.  Even allowing for his relative lack of sophistication, his evidence on how the Loan was repaid is very vague. Further, he made no mention of the alleged trade debts owed to the SZ Business by CLHK or his injection of funds in his witness statement.  Furthermore, he appeared uncomfortable when he was cross-examined on the counterclaim.  Such demeanour did not inspire confidence on his credibility.

23.  Mr Ko, who appeared for the plaintiff, has valiantly argued that the absence of any demand by the defendant for repayment of the Loan over the years goes to support his case that the Loan had been settled by the time the Agreement was made.  It appears to me that the lack of demand can be explained by the fact that the parties were in business together and, as the plaintiff’s evidence suggests, there were debts owed to each other over different transactions.  As for the post Agreement period, there was no reason for the defendant to make any demand when he had a much larger outstanding obligation to the plaintiff. 

24.  For completeness, I have not lost sight of the fact that the Sum (about 35% of MOP6,309,539) did not reflect the plaintiff’s shareholding in CLM (he owned 20% of the shares).  It tends to suggest that there was indeed an exercise carried out to determine the plaintiff’s “entitlement”.  However, it is accepted by Mr Ko that the plaintiff bears the evidential burden to demonstrate that the Loan had been repaid.  He has failed to do so.

25.  For these reasons, I uphold the counterclaim. 

26.  In conclusion, I give judgment in favour of the plaintiff for the balance between MOP2,200,000 and HK$310,000 (“Balance”).  In respect of interest, to simplify the matter, I award interest on the Balance at prime rates plus 1% from 3 July 2010 until the date of judgment and thereafter at judgment rates until payment.  The costs of this action be to the plaintiff and the costs of the counterclaim be to the defendant.