YEUNG GA WAI v. LAU MING SHUM

CACV 106/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 106 OF 2013

(ON APPEAL FROM HCA NO. 798 OF 2004)

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J U D G M E N T

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Hon Cheung CJHC:

1.  I agree with the judgment of Chu JA and the order that she proposes.

Hon Chu JA:

2.  This is the defendant’s appeal against the judgment of Deputy High Court Judge Seagroatt (“the Judge”) dated 30 April 2013 giving judgment for the plaintiff in the sum of HK$1,800,000 together with interest and costs.

3.  The dispute between the parties arose out of an agreement made between them in 2002 in respect of an investment into a hotel in Changsha, Hunan called Treasure Spot Hotel (“the Hotel”).  The facts leading to the dispute can be summarized as follows.

The facts

4.  At the material times, the defendant held a controlling interest in a Hong Kong company called Treasure Spot Limited (“TSL”), the business of which was property development in the New Territories. The defendant was also the chairman of TSL.  The defendant held 80% of the shareholding with the remaining 20% being held by his brothers on his behalf. 

5.  The defendant was at the same time a majority shareholder and the chairman of another Hong Kong company called Treasure Spot Finance Limited (“TSFL”).  He held 90% of the shares with the remaining 10% being held by one Mr Ngai Shek Keung (“Mr Ngai”). TSFL is a licensed moneylender.   

6.  TSL was the sole shareholder of a company incorporated in the PRC called Treasure Spot (Cheung Sha) Management Company Limited (“Management Company”).  The Management Company was established on 10 June 2002 for the purpose of taking up the lease for the premises of the Hotel and the operation of the Hotel.

7.  The business licence for the Hotel was granted on 10 January 2003 and the Hotel opened for business on 12 January 2003.  Due in part to the SARS epidemic, the business of the Hotel did not flourish.  On 25 April 2003, the hotel ceased business.   

8.  The plaintiff is an experienced businessman in the finance sector.  He also had some experience running a gymnasia business.  After the hotel ceased business, he entered into an agreement with the Management Company to lease part of the hotel premises to operate a gym.  

9.  It is common ground that through the introduction of a mutual friend, one Mr Kwong Yick Chor (“Mr Kwong”), the plaintiff and the defendant came to know each other.  In about August or September 2002, the plaintiff and Mr Kwong orally agreed with the defendant to invest in the Hotel and jointly gave the defendant a total of $3 million for investing in the Hotel.  The payment was by means of two cheques drawn by the plaintiff on 23 September and 13 November 2002 in favour of the defendant in the respective sums of $2 million and $1 million.  After the hotel ceased business, Mr Kwong paid $1.2 million to the plaintiff as his share in the investment.  The plaintiff’s share in the investment was therefore $1.8 million.

The claim

10.  On 2 April 2004, the plaintiff issued the writ against the defendant claiming for the return of the $1.8 million and for an account.  The dispute between the plaintiff and the defendant turns on the terms under which the plaintiff made the payment of $1.8 million, what had become of the money and whether the plaintiff was entitled to have the money back from the defendant.

11.  According to the plaintiff, the key aspect of the agreement he and Mr Kwong reached with the defendant was that the defendant would on their behalf invest their money in an equivalent amount of share capital in the hotel and that they would be issued shares in the share capital of the Hotel to reflect their investment. 

12.  His case is that the defendant was in breach of the Agreement in failing to invest his money in the share capital of the Hotel, and in failing to issue to him share certificate in the share capital of the Hotel to reflect his investment. Alternatively, he says that he gave the money to the defendant as his agent for investing in the share capital of the Hotel, but the defendant had converted the money for his use. 

13.  The plaintiff claims for the return of the $1.8 million as damages or as money had and received.  Alternatively, he claims for an account of the money received by the defendant as trustee or agent and an order for payment of money found due on the taking of account.  

The defence

14.  The defendant denies he had promised the plaintiff and Mr Kwong a shareholding in the Hotel or that they would be issued with share certificate of any company so as to reflect their investment.  According to him, the agreement was that the plaintiff and Kwong would jointly invest in one-tenth of TSL’s investment in the Hotel[1] and share in the profit and loss of the Hotel in accordance with that proportion.  His case is that the funds from the plaintiff and Mr Kwong would be treated as part of the investment of TSL and, in return for his investment, the plaintiff would participate in the management of the Hotel and be given access to books and accounts relating to the financial position of the Hotel.             

15.  The defendant denies being in breach of the agreement.  He says that the plaintiff’s funds together with funds from Mr Ngai (who was another investor) had been transferred to the Management Company as operating expenses.  He also says that the plaintiff was appointed the deputy chairman of the Management Company and had taken active part in the management and operation of the Hotel. 

16.  The defendant says that as the hotel had suffered great loss, the funds obtained from realizing its assets were insufficient to pay off the debts.  There is thus nothing to be distributed or returned to the investors.

The Judgment

17.  The Judge found the plaintiff entirely credible whereas the defendant for the most part was not credible.  He did not accept the account of events given by the defendant and his witness, Mr Liu, who was the general manager of the hotel project.  The judge held (at paragraphs 26, 29 to 31 of the Judgment):

“26. I am satisfied that [the plaintiff] was promised shares by the defendant and that the defendant failed to honour this promise. It matters not whether there were obstacles to the defendant in fact securing shares for the plaintiff. He at no time suggests that he informed the plaintiff that he could not arrange the shareholding for which he had been paid. The plaintiff made persistent oral requests and he was ignored. The fact that he did not put such requests into writing is immaterial. There was a total failure of consideration and the money went into the defendant’s bank account, and from there we know not where it went, despite what the defendant says. Even if there had been no specific request until after the first payment, I am satisfied that the second payment was made on the strength of the defendant’s promise, and related to the full amount paid. Furthermore the plaintiff declined to make any further payment when informed that the project was still underfunded. He had still not received a share certificate to reflect his financial payments to date. It was suggested though not with real force, that because Mr. Kwong had not pursued the same course as the plaintiff that should be seen as some evidence against the plaintiff’s case. That is not logical. The defendant breached the agreement.”

“29. The defendant received the sums of money from the plaintiff, as agent with the express purpose and intent of securing shares for him. He failed to do so. He is therefore liable to account for the money and return it.

30. In receiving that money for the agreed purpose and paying it into his own bank account he was a trustee of those monies. He failed to honour the promise he made and the agreement reached. He is in breach of the trust. He is therefore liable to account for, and repay the money entrusted to him for the failed purpose.

31. There will therefore be judgment for the plaintiff for the sum of $1.8 million HKD, with costs to be taxed if not agreed. … ”    

Ground 1 of the appeal

18.  Ground 1 in the Supplemental Notice of Appeal complains that the plaintiff has failed to plead an enforceable agreement by which the defendant promised to issue the plaintiff with any share in any company.  Mr Leong SC, who appears together with Mr Lee for the defendant on the appeal, points out that the plaintiff has not positively pleaded that he had been promised shares or share certificate in the Management Company.  Since the Hotel was owned and operated by the Management Company and not a legal entity in itself, there was no certainty of the subject matter of the defendant’s promise.  Accordingly, the agreement as found by the Judge was not pleaded and the Judge should have held that the agreement relied on by the plaintiff to be vague and uncertain and dismissed the claim on that basis.  It is also argued that a reading of paragraphs 4, 6 and 8A of the Re-Amended Statement of Claim (RASOC) does not show that the defendant’s promise to issue share certificate to the plaintiff was supported by consideration. 

19.  Paragraph 4 of the RASOC pleads that the parties had reached an oral agreement in about August or September 2002 which was varied by the Supplemental Agreement pleaded in paragraph 6.  Paragraph 6 pleads that, having paid the $2 million, the plaintiff and Mr Kwong requested the defendant to have share certificates in the share capital of the Hotel issued to them in order to reflect their investment in the Hotel, to which request the defendant orally agreed, and that in November 2002, at the defendant’s request, the plaintiff and Mr Kwong agreed to invest a further $1 million on the condition that they would make no further capital injection even if the hotel project would require additional capital. The paragraph concludes by stating “The defendant agreed to this arrangement (“the Supplemental Agreement”).”  In paragraph 8A, it is pleaded that “If and insofar as [the Hotel was] in truth owned by the [Management Company], the plaintiff will contend that share capital of the Hotel meant, for the purposes of the Agreement, the share capital of the [Management Company]”.  

20.  While paragraph 6 of the RASOC is a long paragraph and there is room for clearer drafting, the combined effect of paragraphs 4 and 6 is that the promise of giving the plaintiff a shareholding and share certificate is part of the Supplemental Agreement that varies the previous oral agreement and forms part of the agreement between the parties.  The Judge did not err when he held that the second payment of $1 million by the plaintiff was made on the strength of the defendant’s promise, and related to the full amount paid by the plaintiff (paragraph 26 of the Judgment).  There is no basis for the plaintiff’s complaint of lack of consideration. 

21.  The plaintiff’s evidence, which the Judge accepts, is that he did not know at the time when he reached the agreements with the defendant, which company owned the Hotel.  His case, on the basis of paragraph 8A of the RASOC, is that if the Hotel was owned by the Management Company, then the shareholding and the share certificate that he was promised would be in relation to the share capital of the Management Company.          

22.  I agree with Mr Swaine for the plaintiff that this is not a case where the agreement can be regarded as being void for uncertainty.  On the facts as found by the Judge, the defendant had promised the plaintiff that he would be given a shareholding in the Hotel and be issued with the share certificate to reflect his investment.  Even though there was no mention or express agreement on the identity of the company involved, given that the parties’ agreement was about investment in the Hotel, the promise must relate to, and the parties must have contemplated, the shareholding of the company that owned the Hotel.  The cases of Peter Lind & Co Ltd v. Mersey Docks [1972] 2 Lloyds Rep 234 and Bushwall Properties Ltd v. Vortex Properties Ltd (1976) 32 P&CR 334 are distinguishable in that in the present case, the subject matter can be readily ascertained.

23.  Further, as pointed out by Mr Swaine, even if the defendant were to succeed on the argument that the parties’ agreement was unenforceable on the ground of uncertainty, the plaintiff would still be entitled to the same judgment on the basis that the agreement being void for uncertainty, payment made in purported performance of it was made for a consideration which had totally failed and therefore recoverable as money had and received: Guinness Mahon & Co Ltd v. Council of the Royal Borough of Kensington and Chelsea [1998] 2 All ER 272, 293e to 294h.              

Grounds 2 to 5 of the appeal

24.  Under Ground 2, the defendant says that by reason of Grounds 3 to 5, the Judge ought to have concluded that the plaintiff has failed to prove that the defendant did not invest his money in the Management Company and his entitlement to be issued with the shares in the Management Company. 

25.  Ground 3 complains that the Judge failed to attach proper weight to various matters that go to show the incredibility and inherent improbability of the plaintiff’s case.  This includes the plaintiff’s evidence that he had little knowledge of and did not inquire into the defendant’s financial position and business and the ownership of the Hotel; the uncertainty of the subject matter to which the promise about giving the plaintiff a shareholding and share certificate relate; the articles of association of the Management Company which provided that the registered capital was wholly owned by TSL and any change to it required the unanimous approval of the board and the approval of the PRC authority; and the plaintiff’s evidence that the parties had only agreed on the sharing of profits but did not agree on sharing the loss of the hotel business.

26.  Ground 4 states that the Judge had attached undue weight to some aspects of the evidence thereby affected his assessment of the defendant’s case.  This relates to Mr Liu’s statement in his witness statement that the plaintiff was also a shareholder; the defendant’s evidence under cross-examination that looking back, instead of using the Management Company as the corporate vehicle for the Hotel, a new shareholding company should have been established, in which case shares would have been issued to all the four investors; the absence of books and records to show how the money paid by the plaintiff had been used; and also the bare denial in the defendant’s solicitors’ reply to the plaintiff’s letter before action.

27.  Ground 5 challenges the Judge’s conclusion on the credibility of the defendant and his evidence.  It is argued that the Judge’s criticisms were not justified having regard to the documentary evidence showing the plaintiff’s participation in the management of the Management Company and the Hotel. 

28.  Mr Leong SC readily accepts that to succeed in a challenge to a judge’s finding of facts, it must be shown that the judge was plainly wrong in the sense that either (a) there is no evidence to support it, or (b) it is contrary to the documentary or incontrovertible evidence that the judge overlooked: Ting Kwok Keung v. Tam Dick Yuen (2002) 5 HKCFAR 336, para 42 and Tin Kwong International Enterprise Co Ltd v. San Tung [2006] 2 HKLRD 185, para 14, applied in Silver Bell Uniform Ltd [2012] 1 HKLRD 719, para 18.  

29.  I agree with Mr Leong SC that even though the Judge rejected the defendant’s case, he would still have to consider whether the plaintiff’s case was credible and probable. I, however, do not accept that the Judge had failed to do so and/or was plainly wrong in his assessment of the evidence and the finding of facts.

30.  At the outset, it is to be noted that the points raised under Grounds 3 to 5 had been addressed by the defendant’s trial counsel in his closing submissions.  They would have been considered by the Judge.  At the same time, there are other evidence and features in the case that the Judge was entitled to have regard to.  The evaluation of the evidence and the weight to be put to the evidence was a matter for the Judge.  When assessing and making conclusions on the evidence, the Judge would not only have regard to individual pieces of evidence, but would also look at the circumstances of the case as a whole. 

31.  For instance, in considering the inherent probability of the plaintiff’s evidence that he did not know the financial position and business of the defendant and the ownership of the Hotel, the Judge was entitled to have regard to the fact that Mr Kwong was a mutual friend of the parties and because of him the plaintiff had trusted the defendant. 

32.  Similarly, the Judge had considered the defendant’s contention that the articles of association of the Management Company prevented him from giving the plaintiff shares in the Management Company, but did not accept it would undermine the strength of the plaintiff’s case.  In coming to this view, the Judge, as he was entitled to, took into account that at no time had the defendant informed the plaintiff he could not arrange the shareholding for which he had been paid.  In connection with the argument on the articles of association of the Management Company, the Respondent’s Notice (at paragraph 2) rightly points out that the Management Company had on more than one occasion applied for and obtained approval from the PRC authority to amend its articles of association for the purpose of increasing its share capital.  This contradicts the defendant’s assertion that it is not possible to give the plaintiff shares in the Management Company or that it is improbable for the defendant to agree to give the plaintiff shares in the Hotel.

33.  Important to the Judge’s finding and acceptance of the plaintiff’s case is his view that given the amount of money paid by the plaintiff and Mr Kwong, common sense dictated that there would be or should be some guarantee or recorded account of their investment, and the fact (as conceded by the defence) that their investment was in fact not documented in any record or books of accounts.  In my view, the Judge is well justified in taking a common sense view of the matter.  Given that he is an experienced businessman, it is inherently unlikely that the plaintiff would be contented with having no record and not being given anything to reflect the investment he had made. 

34.  In respect of his view that the defendant’s evidence in cross-examination and Mr Liu’s evidence afford substantial corroboration of the plaintiff’s case, the Judge had given cogent reasons for it.  He rejected Mr Liu’s attempt to explain away his statement in the witness statement that the plaintiff was also a shareholder, after considering the cross-examination of Mr Liu on this point and accepting the suggestion that it was because Mr Liu’s attention had recently been drawn to this part of his witness statement that he would at the outset of his oral evidence sought to clarify or amend the statement.  As to the defendant’s evidence that in hindsight, it would have been better to use a new corporate vehicle to hold the Hotel, in which case the investors would have been issued with shares to reflect their investment, the Judge saw it as indicative of the parties’ intention that the plaintiff was to be given some shares for his investment (see the discussions in paragraph 24 of the Judgment).  It is open to the Judge to draw such conclusion from the defendant’s answers, notwithstanding his repeated assertion that it was impossible to issue share certificates for the Hotel.  It also matters not that answers given by the plaintiff was premised on a hypothetical situation of a new company being established to hold the Hotel.       

35.  The Judge has also pointed to the fact that the defendant has not produced any documentary evidence to show what had become of the payments made by the plaintiff after the cheques were deposited into the defendant’s bank account.  Although the defendant had in his witness statement given an account of the amount of funds injected into the Management Company and had produced various Capital Examination Reports showing the capital injections into the Management Company, they do not show that the plaintiff’s money had been injected into the Management Company. On the contrary, the remittance records attached to the Capital Examination Reports reveal that the remittances were all made by TSFL.  No evidence has been adduced to link the remittances to TSL or the defendant.  The documentary evidence is therefore at variance with the defendant’s assertion that the plaintiff’s money had all been remitted to the Management Company and used as the operating expenses of the Hotel.  In the premises, the Judge could not be faulted for taking the view that the Capital Examination Reports and financial statements have no evidential value in relation to the dispute between the parties.  It is also open to the Judge to take a critical view of the defendant’s credibility and evidence and to reject his case.  Even though the defendant had produced various documents of the Management Company to show that the plaintiff was actively involved in the management of the Management Company and the Hotel, the Judge was entitled in the light of all the evidence available at the trial to disbelieve the defendant and to reject his account of the terms of the parties’ agreement.

36.  Having regard to the state of evidence, the Judge was further entitled to find that the defendant was in breach of his contractual obligation to invest the plaintiff’s money in the Hotel.  Mr Leong SC in his submission seeks to argue that the investment by the plaintiff was only an indirect investment and the money paid by the plaintiff was in effect a reimbursement of the funds injected by the defendant into the Management Company.  The problem with this submission is threefold.  Firstly, it is not the defendant’s pleaded case that the plaintiff was investing in the defendant’s interest in TSL’s investment in the Hotel. Paragraph 7(d) of the Re-Re-Re-Amended Defence referred to by Mr Leong SC only pleads that the plaintiff’s investment was “indirectly made through the defendant to the Management Company” and the plaintiff’s funds would be treated as part of the investment of TSL in the Hotel.  Secondly, it would also appear from defence counsel’s closing submission at the trial that this was not the case run at the trial.  Thirdly, the defendant has produced no evidence of his funds or TSL’s funds being remitted or transferred to the Management Company for the use of the Hotel.       

Ground 6 of the appeal

37.  In the light of the rejection of Grounds 2 to 5, Ground 6 which seeks to overturn the Judge’s conclusions in paragraphs 26, 29 and 30 of the Judgment must also fail.

Conclusion

38.  For the reasons set out above, I would dismiss the appeal with costs to the plaintiff, to be taxed if not agreed.

Hon McWalters J:

39.  I agree with the judgment of Chu JA.

Hon Cheung CJHC:

40.  Accordingly, we dismiss the appeal with costs to the plaintiff, to be taxed if not agreed.