FUNG YUEN CHOY DENNIS AND ANOTHER v. CHAN HAK KAN JIM

HCA2797/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2797 OF 2006

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J U D G M E N T

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1.  This action has been brought by the 1^st and 2^nd plaintiffs against the defendant for the repayment of 6 loans made on the following dates in the following amounts :

	Date of Advancement	Amount
	9 May 2005	HK$600,000
	29 June 2005	HK$440,000
	1 August 2005	HK$200,000
	16 August 2005	HK$240,000
	13 September 2005	HK$200,000
	15 February 2006	HK$100,000
	Total :	HK$1,780,000

2.  The 1^st loan, made on 9 May 2005, was made by the 2^nd plaintiff and she claims repayment of the same.  The 1^st plaintiff made the other five loans particularised above and he claims repayment of the same. 

3.  The defence to the action is simple.  The defendant, who was previously represented but appeared before me in person, filed a Defence admitting that the above advances had been made but denying that these were loans made to him; rather, they were loans made to a company set up in the People’s Republic of China called the Innovative Marketing Limited (“Innovative”).  His witness statement, made on 30 June 2008 when he was still represented, is to the same effect.

4.  The 1^st plaintiff gave evidence before me adopting his witness statement dated 11 June 2008.  The 2^nd plaintiff also gave evidence adopting her witness statement also dated 11 June 2008 and corroborating the evidence of the 1^st plaintiff.  Much of their evidence was not disputed.  The 1^st plaintiff was a general manager of a German company distributing optical lens products since 1996 and came to know the defendant at an Optical Fair in China in 2003.  The defendant has been a designer of optical frames and sunglasses for many years.  He was a director of a company incorporated in Hong Kong called Hop Hing Asia Limited of which he and his wife were the major shareholders (“Hop Hing”).  Hop Hing had been granted a licence for designing and manufacturing branded optical frames and sunglasses such as Jessica and Episode.  Innovative was set up in the People’s Republic of China on or about 1 January 2004 as the distributor of these branded products in China.  The registered shareholders of Innovative were one, Chan Wai Sing Frankie (“Frankie Chan”), and his father.  Frankie Chan was also the director of Innovative.  It was not disputed by the defendant that Frankie Chan and his father were holding the shares of Innovative on his behalf.

5.  The 1^st plaintiff and the 2^nd plaintiff, his acquaintance, became interested in investing in the business of Hop Hing and Innovative and had been provided with a marketing plan outline for Jessica and Episode (at p. C198 of the Trial Bundle) by the defendant which contained a business projection for the next few years up until 2008.  On the other hand, the defendant, who was facing cash flow problems, was happy to accept the plaintiffs as investors in his business.

6.  The meetings between the plaintiffs and the defendant in March and April 2005 cumulated in an oral agreement reached on 16 April 2005 whereby the 2^nd plaintiff agreed to advance a sum of HK$500,000 to the defendant who agreed in return to procure an allotment of 20% of the shares in Hop Hing and Innovative to the 2^nd plaintiff (according to the 1^st and 2^nd plaintiffs, the defendant asserting that the allotment was to be 20% of the shares in Innovative only).  It is common ground that the transfer of these shares was never completed.  However, there is no claim before me for return of the said sum of HK$500,000, or for damages for breach of the agreement to allot the said shares.

7.  The defendant also gave evidence and adopted his witness statement dated 30 June 2008.  The defendant’s explanation for the failure to allot the shares was that the investment structure was subsequently changed to create a simpler holding structure by way of the incorporation of a company in Hong Kong called Hugo Win Limited (“Hugo Win”) on 30 April 2005, the shareholding of which was to mirror that of Innovative, namely, that he would hold 80% of the shares of Hugo Win whilst the 2^nd plaintiff held 20% of those shares.

8.  On the other hand, the plaintiffs’ case was that the advance of HK$500,000 to the defendant was made in consideration of the defendant agreeing to procure an allotment of 20% of the shareholding of both Innovative and Hop Hing to the 2^nd plaintiff.  Subsequently, however, it was agreed that a new Hong Kong company would be established to replace Hop Hing, and to take over the business of Hop Hing relating to Jessica and Episode products.  Simply transferring 20% of the shareholding of Hop Hing to the 2^nd plaintiff was not a practicable proposition since Hop Hing had other business interests which were unrelated to the Jessica and Episode optical products.

9.  Insofar as there is a conflict of evidence between the evidence from the 1^st and 2^nd plaintiffs and from the defendant on this issue, I accept the evidence of the 1^st and 2^nd plaintiffs.  The defendant carried out the optical business involving the manufacture and distribution of Jessica and Episode branded optical products through Hop Hing, which designed and manufactured such products, and through Innovative, which distributed them in China.  The investment by the 2^nd plaintiff in this business should have been reflected in a shareholding in both companies.  As far as the shareholding in Hop Hing was concerned, the arrangement was varied by using a new company, Hugo Win, the expectation being that Hugo Win would become the supplier of the products to Innovative.  However, as stated above, the allotment of 20% of the shareholding of Innovative to the 2^nd plaintiff never took place.

10.  In addition to the advance of the said HK$500,000 (as consideration for the allotment of 20% of the shareholding of Innovative and Hop Hing), the plaintiffs also made further advances by way of loans to ease the severe cash flow problem faced by the defendant. 

11.  The defendant in his witness statement accepted that the advances were made in the amounts and on the dates as particularised in paragraph 1 above, but he said that these advances were made as shareholders’ loans to Innovative (see §§13, 14, 18, 19, 20 and 21 of his witness statement).  According to the defendant, all these loans were made on the specific terms that no interest should accrue on the loans and that the loans should enjoy priority of repayment once Innovative was able to generate a profit.

12.  However, the plaintiffs’ case was that, pending the receipt of proper audited financial statements of Hop Hing and Innovative, the advances were to be regarded as personal loans to the defendant. 

13.  In support of this contention, the 1^st plaintiff referred to an email dated 5 May 2005 from the 2^nd plaintiff to Frankie Chan, which was copied to the 1^st plaintiff and to the defendant and which appears at p. C2 of the Trial Bundle (with translation on p. C3 and 4 thereof).  I set out the same in full :

“--- Original message ---

From : Jovy

To :      frankiewschan@yahoo.com

Cc :     Denis Fung : Jim Chan

Sent :  Thursday, May 05, 2005 10:52 PM

Subject :  cash flows

Frankie,

The book of accounts of Innovative Marketing was received last week.  Since Dennis has left for trip on 4^th of this month, (he) was unable to discuss the problem of the account with you promptly.  Whereas, due to the current shortage of cash flow in the Company, it is incapable to deal with the emergency outgoings of May.  To deal with the emergency outgoings of Innovative Marketing, I would deposit HKD800,000 on behalf of Dennis within a short period of time.  Since you, Jim and Dennis, the three of you still have not signed the Agreement for allotment of share and shareholders’ shareholding document(s) of Innovative Marketing and the Hong Kong New Company, therefore, the HKD800,000 would be temporarily lent to you as a loan.  Before the amount of money is prepared to be paid into the Account of Hop Hing, I would first contact you to sign the facilities documents.  I apologize for any inconvenience caused.  Awaiting Dennis’s arrival Hong Kong, thereafter, we shall have a detailed discussion about the issue of the books of account in respect of the company.

Need HKD800,000 to pay the following emergency account payable:–

(1)     SWANK                       $84,000       5/8/05 Payment for goods

(2)     TOPPY                       $560,000       year 2004 balance of the royalty

(3)     DIRECTORS LOAN    $50,000

Balance of HKD100,000 is used for the Company’s day-to-day outgoings

Besides, He Fang is required to prepare some of the accounts breakdown.  Should you have anything unclear, you may contact me direct.

(1)     the quantity of each order, amount, model number information, quantity of each sell of goods, amount, model number information

(2)     Defer detailed list of Assets

(3)     Detailed list of sum for Welfare Allowance

(4)     Detailed list of Current account of Frankie (reimbursement)

According to the latest updated book of account, the company has incurred a debt of about HKD1,900,000 exceeding the figure Jim provided previously by almost 100%.  Pursuant to the verbal agreement between Dennis and Jim, apart from using HKD500,000 to purchase 20% of the shares, Dennis would also lend cash HKD1,500,000 for the Company’s operation fund, for dealing with the company’s emergency outgoings account payable.  Should the company has any surplus, Dennis has the priority to be repaid first.  This agreement will be inserted into the co-operation agreement as a provision.

Should there be anything unclear about the above information, please contact me.

Jovy” [Emphasis added]

14.  It is common ground that Frankie Chan handled the business of Innovative whilst the defendant handled the business of Hop Hing.  The 1^st plaintiff frankly conceded that anyone reading this email might get the impression that the personal loans would be made to Frankie Chan.  However, he stressed that this was not his case and that he had not made any personal loans to Frankie Chan.  He always understood Frankie Chan to be the defendant’s agent in running the business of Innovative.  He did not know Frankie Chan.  He had previously known the defendant and was interested in investing his business and he was prepared to advance loans to the defendant because of his knowledge of the defendant.

15.  The 1^st plaintiff also relied on the email dated 11 August 2005, at p. C187, paragraph 2 of which stated as follows :

“As discussed, the bank account at the HK company (Hugo Win) is activated.  Jovy (the 2^nd plaintiff) will deposit the balance $260K (less what have been expensed for setting up the Company) so that Jim (the defendant) can draw it next week for Innovative’s operating expenses.”

16.  This email was from the 1^st plaintiff to Frankie Chan and to the defendant and copied to the 2^nd plaintiff.  The 1^st plaintiff referred to and relied on the phrase “so that Jim can draw it next week” as being consistent with the agreement that these were personal loans made to the defendant and that he could draw upon it for the use of his company.

17.  When questioned about these two emails, the defendant conceded in respect of the email dated 5 May 2005 (at p. C2) that he had received a copy of the same and that, before the transfer of the shares actually occurred, the plaintiff was worried that in case the shares were not transferred to him, the advances should be treated as a loan.  Although he referred to the 1^st plaintiff, it was common ground that the 2^nd plaintiff had been nominated by the 1^st plaintiff to hold the shares.  However, the defendant would not accept that the reference to “lent to you as a loan” in the said email was a reference to himself.  His explanation for this was that :

“It is because the main thing is that the company belonged to Frankie Chan.  What I mean is that legally it is in his name, it was a loan to him in case he deliberately was unwilling to transfer the shares to her (i.e. the 2^nd plaintiff).”

18.  The defendant also gave the following responses to the following questions :

“Q.    During that period, did you have any concerns that Frankie Chan would breach his obligations to you?

A.      At that time, it did not occur to me about that.  He had been engaged in the industry in marketing goods in China for more than 10 years.

Q.      Did the plaintiffs know you were the beneficial owner of Innovative and Hop Hing?

A.      Yes.”

19.  The defendant also conceded that he had not challenged the contents of the email of 5 May 2005.

20.  In the light of the background and circumstances of the case, and particularly given the fact that Frankie Chan had no beneficial interest in Innovative, I find it difficult to accept the defendant’s suggestion that the plaintiffs were advancing personal loans to Frankie Chan pending the transfer of shares to the 2^nd plaintiff.  I also reject the defendant’s defence that the loans were shareholder loans advanced to Innovative.  Clearly, the 2^nd plaintiff had never been allotted any shares in Innovative.

21.  When asked about the email dated 11 August 2005 (at p. C187) and why he was allowed to draw on the sum if it was not a loan made to him, the defendant answered that he was only responsible to pass the money to Innovative as the bank account opened by Hugo Win required two signatures and he was one of the two authorised signatories, the 2^nd plaintiff being the other authorised signatory.  I do not accept this explanation and find that the email meant exactly what it said, namely, that the advance, by the injection of cash into Hugo Win’s account, was a personal loan to the defendant “so that Jim can draw it next week for Innovative’s operating expenses”.

22.  The defendant accepted that “they got no money and no shares” for the advances that the plaintiffs had made.

23.  I accept the evidence of the 1^st and 2^nd plaintiffs and find that they made the advances as personal loans to the defendant.  The advances made to Hop Hing and Innovative were made at the direction of the defendant and were not loans made to Hop Hing and Innovative by the plaintiffs, whether as shareholders or otherwise.  I also reject the evidence of the defendant that the increase of the 2^nd plaintiff’s shareholding in Hugo Win from 20% to 33.3% was effected because of the agreement not to charge interest.  There was no suggestion that contractual interest was payable on any of these loans and I accept the 1^st and 2^nd plaintiffs’ evidence that the increase in the shareholding was made to comfort the plaintiffs for the delay in allotting to the 2^nd plaintiff 20% of the shares in Innovative.

24.  Accordingly, I conclude that the plaintiffs have established their claims to my satisfaction and I therefore enter judgment in the sum of HK$1,180,000 in favour of the 1^st plaintiff against the defendant and in the sum of HK$600,000 in favour of the 2^nd plaintiff against the defendant.

25.  I was not satisfied with the evidence adduced by the plaintiffs in relation to the demands made on the defendant for repayment of these loans.  The relationship between the plaintiffs and the defendant obviously broke down and I find that, at some stage, demands were made to the defendant for the return of these loans.  I was told by counsel for the plaintiffs, Mr Alan Ng, that there was a written letter of demand.  This letter has not been produced to me.  In any event, I need not make any findings in this connection as there is no claim for contractual interest and as the plaintiffs’ counsel has limited his claim for discretionary interest under section 48 of the High Court Ordinance from the date of the issue of the Writ and Statement of Claim, which was 19 December 2006, to the date of judgment.  The defendant declined to make any submissions on interest.  Although there was no evidence that the loans were interest bearing and no proper evidence, which I could accept, as to when the demand for repayment was first made, the defendant was clearly under an obligation to repay the said sums when he was served with the Writ and Statement of Claim, if not before.  In the exercise of the discretion under the said section, I award interest on the aforesaid sums at the rate of HSBC prime plus 1% from the date of service of the Writ up to the date of judgment.

26.  I also award costs of the action to the plaintiffs, to be taxed if not agreed.