CHU SIU WO v. KOLDTECH DEVELOPMENT (INTERNATIONAL) LTD

HCA 3641/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3641OF 2003

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JUDGEMENT

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1.  In these proceedings, the Plaintiff, Mr Chu, sues the Defendant, Koldtech, for the repayment of two loans, totalling now $1,323,360, together with interest thereon.  The evidence is that the loans were made by Mr Chu in his capacity as a director of Koldtech.  He says that another director of Koldtech, Mr David Pang, now deceased, negotiated the loans on behalf of Koldtech.  Mr Chu says the first loan was made on 18 December 1995, in the sum of $1,546,200.  He says that the second loan was made on 28 August 1996, in the sum of $177,160.  He says that on 1 December 1998, the total loans were reduced by the sum of $400,000, by a payment made for that purpose by Koldtech.

2.  He says that variable interest rates were agreed, and calculating the interest to the 30 September 2003, the day on which the writ was issued, total interest was payable to that day of $1,226,993.98.  He acknowledges that certain payments have been made.  He says that those are interest payments.  Those are set out in the statement of claim and reduce the interest outstanding, as at 30 September 2003, to $270,456.94.

3.  Koldtech admits the first loan, but puts Mr Chu to proof of the second loan.  It denies that there was any agreement to pay interest at all and says that the payments that were made, all of which are admitted, were payments in reduction of the capital sum.

4.  By way of counterclaim Koldtech sues Mr Chu for breach of fiduciary duty in his capacity as a director of Koldtech.

5.  I am left in no doubt at all that the second loan was duly made by Mr Chu to Koldtech.  It is evidenced by a payment into Koldtech’s Hongkong Bank bank account of the sum of $177,160 on 28 August 1996 by way of cash deposit.  A voucher prepared by the accountant for Koldtech, dated 28 August 1996, records the payment as being “From Norman Chu.”  Koldtech’s annual accounts for the year ended the 31st December 1996, show that loans from directors were increased during the year by the sum of $177,160.  Those accounts were signed by Mr Yung, the witness called for the Koldtech.  In all of those circumstances there can be no doubt at all that the loan was made by Mr Chu as alleged.  In the face of such evidence it was futile for Koldtech to contend otherwise.

6.  Mr Chu’s evidence, which was not disputed in this respect, was that the arrangements for the loans, and the interest rates, were made with another director, Mr David Pang.  Mr Chu’s evidence was further that the agreement was that the interest rate was variable, for some of the period assessed by certain percentages above the prime lending rate, for other parts of the period, set by fixed sums.

7.  That assertion is substantiated by the annual accounts of Koldtech.  The accounts for the year ended 31 December 1996, signed by Mr Yung, record loan interest being paid to directors as an operating expense.  In the notes to the accounts, at note 9, the following statement appears:

“The loans from directors are unsecured and have no fixed repayment terms.  Interest are (sic) charged at 2-3% above prime rate.”

8.  The accounts for the year ended 31 December 1998, signed by Mr Chu and Mr Pang, record, in current liabilities some $4,300,000 in loans from directors.  The accounts record in note 4, the payment of loan interest to directors.  Note 9, records that interest on the directors loans is charged at 10-13% per annum.  The operating expenses record, as a separate item, the payment of loan interest to directors.

9.  The accounts for the year ended 31 December 2000, signed by Mr Yung and Mr Pang, record some $3,360,000 in loans from directors, and again loan interest being paid to directors.  The accounts record that interest on loans from directors is charged at 10% and revised to 12% with effect from 1 December 2000.

10.  The accounts for the year ended 31 December 2002 record loans from directors as a current liability in the sum of $2,834,903.  These accounts were prepared by a different set of accountants and no statement is made as to the interest rate, if any, on loans from directors.  However interest expenses totalling $341,000 are recorded as an financial expense of the company in the income statement.  It is right to note that the accountant has qualified the accounts in the following terms:

“ No sufficient evidences (sic) in respect of Loan from Directors amounting to $2,834,903 have been provided to us for examination.  There were (sic) no other satisfactory evidence regarding the completeness and accuracy of the Loan from Directors.”

11.  There is another significant document which goes to establish the existence of the loans and the liability for interest.  In April 2003 negotiations began between Mr Chu and the other shareholders, first in which Mr Chu would sell his shares in Koldtech to the other shareholders, later in which Mr Chu would be the buyer of shares.  On 18 April 2003, in the course of negotiating the purchase of his shares in Koldtech from Mr Chu, a Mr Somerville, the representative of one of the other shareholders in Koldtech,  sent an e-mail to Mr Chu, which was copied to Mr Yung, which recorded as follows:

“The 80% shareholders of Koldtech Development (Intl) Ltd viz. Annette Siu, Li Hon Wai, Yung Hon Sang, Sunny Siu, W.A.Somerville, are agreeable to buy the 20% shares held by you in the company for the sum of $100,000 and we pay to you the loan of $1,323,360 held in your name on 31 December 2002 together with interest due up to the date of repayment.”

There was no suggestion from Mr Yung either that he did not receive that email, or that if he did, he expressed disagreement at the assertion in relation to the loan and interest.  I have carefully weighed the terms of the qualification to the year 2000 accounts in reaching my conclusion.   I am in no doubt at all that agreement that interest would be payable was reached as alleged by Mr Chu.  In the face of the documentary evidence, all of that emanating from Koldtech, or its directors other than Mr Chu, it was futile for Koldtech to contend otherwise.

12.  In paragraph 16 of the statement of claim Mr Chu set out specific rates of interest, at different periods, ranging from 10.25% in December 1995, down to 9.25% in mid-1996, and up to 13% in 1998.  His evidence was that at the time at which he prepared the information upon which he gave instructions to his solicitor, he was not only a shareholder but a director of Koldtech, and had access to its accounting documents.  He said that he prepared the figures in that paragraph based upon documents in the possession of Koldtech.  Subsequently, after negotiations between Mr Chu and the other shareholders of Koldtech in relation to the sale and purchase of the shares in Koldtech broke down, Mr Chu’s appointment as a director of the company was terminated.  From that time he has not had access to Koldtech’s accounting documents.

13.  Other than the accounting documents to which I have referred, Koldtech has not disclosed, through discovery, any other documents.  Mr Yung, whilst acknowledging that he was, by virtue of his signature on the company accounts, “briefly aware” of the terms recorded in the accounts, was obliged to say that he had no other knowledge of the loans or the terms upon which interest if any might be paid.  I found Mr Chu to be a straightforward honest witness, and I believe his evidence as to the source of the information from which he prepared the schedule of interest calculations.  There was no other evidence to the contrary.  The interest rates recorded in the company accounts accord with the rates claimed by Mr Chu in the statement of claim. In all the circumstances I am satisfied on the balance of probabilities that agreement was reached between Mr Chu, and Mr Pang, on behalf of Koldtech, to pay interest on the loans as claimed in paragraph 16 of the statement of claim.

14.  There was nothing in the evidence at all to indicate that the payments, with the exception of the one payment of $400,000, acknowledged to have been paid by Koldtech and received by Mr Chu, were anything other than interest.  All of these payments were made within the period of time within which Koldtech is obliged to keep its accounting records for tax purposes.  The vouchers for each of the payments made, which would record the purpose of the payment and whether or not they were payments of interest or capital are in possession of Koldtech.  They were not disclosed.  Having found Mr Chu to be a believable witness, and there being no evidence to the contrary, I am satisfied on the balance of probabilities that the payments made between March 1997 and May 2003, and set out in paragraph 16 of the statement of claim, were payments to Mr Chu by Koldtech, of interest on his outstanding loan.

15.  It was argued for Koldtech that there were no other documents, other than the company’s financial statements and records to establish the existence of the loan or the obligation to pay interest.  Those documents by themselves are sufficient to establish both the loans and the obligation to pay interest.  In any event, the submission conveniently disregards Mr Somerville’s e-mail, to which Mr Yung took no exception.

16.  A Limitation defence was pleaded, but in the light of an admitted payment on account of either interest or principal on the loans made as recently as 30 May 2003, the defence was sensibly not pursued.

17.  It follows that there will be judgment for the Plaintiff against the Defendant for the full amount due of $1,332,360, together with interest outstanding to 30 September 2003, of $270,456.94.  There will be judgment for the Plaintiff against the Defendant for interest on the sum of $1,323,360 at the rate of 12% per annum from 30 September 2003, until the date of payment.

18.  Koldtech counterclaimed against Mr Chu alleging a breach of fiduciary duty.  The claim arose in the following circumstances.  In April 2003, Mr Chu began negotiations with the other shareholders in Koldtech, in which it was first suggested that the other shareholders would buy Mr Chu’s shares, and later that Mr Chu buy all the shares held by the other shareholders.  In the course of those negotiations, at a time when the negotiations were for Mr Chu to buy the shares, anticipating that the negotiations would be successful, Mr Chu registered a company under the name Koldtech Refrigeration (China) Ltd (Koldtech China).  It was his intention to use that company to carry on the business of Koldtech if the negotiations were successful.

19.  An associate company of Koldtech, Panyu Koldtech Refrigeration Manufacturing Limited, (Panyu Koldtech), in China, is a company which manufactures refrigeration equipment, which is sold in Hong Kong through Koldtech.  Mr Chu was at all material times, and still is, a director of Panyu Koldtech.  In the course of the negotiations Mr Chu gave to Mr Yung a business card on which the company names of both Koldtech China and Panyu Koldtech were shown.  Mr Yung takes the view that that is evidence of Mr Chu carrying on business in opposition to Koldtech, at a time when he was a director of that company.

20.  Mr Chu frankly acknowledges that in the period before the negotiations broke down he undertook seven sales of refrigeration equipment through his company, Koldtech China.  The evidence establishes that in respect of each sale, following the breakdown of the negotiations, Mr Chu has properly accounted to Koldtech for the profits involved.  He was perfectly entitled to have both the names of Koldtech China and Panyu Koldtech on his business card, as at the time he gave the card to Mr Yung he was a director of both companies.  He has acted entirely properly in accounting to Koldtech for the profit on the seven sales he undertook.  There is not a shred of evidence at all to support the counterclaim based upon breach of fiduciary duty.

21.  In the course of the evidence I declined to allow counsel for Koldtech to pursue matters relating to non-payment of rent for the premises occupied by Panyu Koldtech in China, or an alleged mortgage of the factory site in China, as none of these matters were pleaded and were raised only in the witness statements.

22.  There will be judgment for the plaintiff on the counterclaim, which is dismissed.

23.  I heard Counsel on the issue of costs.  Ms Wong sought indemnity costs.  Mr Lam contended that costs should be on the usual party and party basis.  As I have indicated in this judgment it was quite futile for Koldtech to resist the claim in relation to the loans and interest, and it was no evidence whatsoever to support the counterclaim.  If a party to a litigation has no actual personal knowledge of the events, and in the face of overwhelming evidence puts a plaintiff to proof of the claim, he must expect costs against him on a higher basis.  Notwithstanding Ms Wong’s strong submission I am not satisfied that this matter reaches the threshold of scandalous, vexatious or malicious conduct on the part of Koldtech, to justify indemnity costs.  However I am satisfied that costs should be on a higher level than the usual basis.

24.  There will be an order that the Defendant must pay the Plaintiff’s costs on both the claim and counterclaim on a common fund basis.