LAW LAM WAI v. YEUNG HO AND OTHERS

1994, No.A1824

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. This is an action by the Plaintiff against the 1^st Defendant for breach of an oral agreement. The 2^nd and 3^rd Defendants are companies owned or controlled by the 1^st Defendant. The claim against them is for the return of monies paid by the Plaintiff to each of them pursuant to the 1^st Defendant's direction and received by them as agents for the 1^st Defendant.

2. The writ in this action was issued on 25 February 1994. Until the eve of the trial, the same firm of solicitors was retained to represent all three Defendants. The 2^nd Defendant was beneficially owned by the 1^st Defendant and was so his alter ego. The 1st Defendant through a nominee company held one of two issued shares in the 3^rd Defendant, the other issued share being registered in the name of one of the employees of the 2^nd Defendant.

3. On 20 August 1997, a receiving order was made against the 1^st Defendant. It was not till some two months later on 24 October 1997 that the Defendants' solicitors informed both the court and the Plaintiff's solicitors that the 1st Defendant had been adjudged bankrupt. They stated in that letter that they had only shortly before been so informed by the 1^st Defendant. That may be so but they also acted for the other Defendants and it is inconceivable that the 2^nd and 3^rd Defendants did not know about the receiving order much earlier. Be that as it may, the same letter referred to the 1^st Defendant being "now outside Hong Kong". The impression created was that the whereabouts of the 1^st Defendant were unknown, that it was unlikely that he would be returning to Hong Kong in the foreseeable future and that the other Defendants were therefore considering their position.

4. On 27 October 1997, the day prior to the hearing, the Official Receiver advised the Plaintiff's solicitors of the receiving order stating that "[t]his office has yet to locate [the 1^st Defendant] and is not prepared to take up the defence for him in the trial." The Plaintiff was invited to lodge a proof of debt instead of continuing the action against the 1^st Defendant.

5. The 1^st Defendant did not appear when the hearing commenced. Counsel for the 2^nd and 3^rd Defendants applied for an adjournment on the basis that the 2^nd and 3^rd Defendants could not effectively defend themselves without the 1^st Defendant who was to be their sole witness and that a trial in those circumstances would not be fair to them. Because of the obvious adverse consequences that an adjournment would cause the Plaintiff, the Plaintiff sought the payment into court of 40% of the claim in addition to $100,000 being the costs thrown away. Upon the court's intimation that an adjournment would only be granted if the payment in was made, the 2^nd and 3^rd Defendants, surprisingly, "withdrew" their application.

6. The trial thus proceeded in the absence of the 1st Defendant. In view of that fact, the Plaintiff abandoned the claim for misrepresentation so that the Plaintiff's credibility would cease to be an issue and his witness statement could stand as his evidence-in-chief thus considerably shortening the length of the hearing. At the conclusion of the Plaintiff's case in the afternoon of the first day, counsel for the 2^nd and 3^rd Defendants applied to stand the trial over until the following afternoon so that they would have a last opportunity to locate the 1^st Defendant and persuade him to come to court to give evidence. It transpired that the 1^st Defendant was in Beijing and that the 3^rd Defendant had in its possession a telephone number at which the 1^st Defendant could be reached. This was surprising given the impression the letter from the Defendants' solicitors had sought to convey, an impression under which, to their knowledge, the court had laboured that morning but which the 2^nd and 3^rd Defendants and their legal representatives did not seek to correct.

7. When the hearing resumed in the afternoon of the second day, the 1^st Defendant duly appeared and gave evidence on his own behalf as well as on behalf of the 2^nd and 3^rd Defendants. It is for surmise whether the making of the original application for an adjournment was at all bona fide. At the very least, there was a general lack of candour which does little credit to the 2^nd and 3^rd Defendants and those representing them.

The Plaintiff's claim

8. In September 1992, the Plaintiff and the 1^st Defendant entered into an oral agreement, the terms of which are evidenced in a Deed of Declaration of Trust ("the Trust Deed") executed by the 1^st Defendant on 10 September 1992.

9. The Plaintiff's evidence is that he entered into an oral agreement with the 1^st Defendant to subscribe for 250,000 shares of $1 each in Win Access Development Limited ("Win Access") and to lend $2.25 million to Win Access by way of shareholders' loan, both of which were to be done through the name of the 1^st Defendant. This accords with the Trust Deed which recited that the Trustee (namely the 1^st Defendant) was a director of Win Access, a Hong Kong company having an authorised capital of HK$10 million divided into 10 million shares of $1 each, that Win Access was a sole purpose company incorporated for the purpose of investing and taking part in a development project in China ("the Project"), that the Project was wholly owned by a PRC company in which Win Access had a 62.5% interest, that the Trustee had invited the Plaintiff

"... to invest in the Project and the [Plaintiff] in reliance on the facts aforementioned agrees to do so by subscribing and taking 2.5% of the issued share capital of [Win Access] for the agreed consideration of HK$250,000.00 and to lend to [Win Access] by way of shareholder's loan the sum of HK$2,250,000.00"

and that the sum of HK$2.5 million had been paid by the Plaintiff to the Trustee. In the operative part, the Trustee declared that the 250,000 shares in Win Access specified in the Schedule to the Trust Deed "[did] not belong to the Trustee but to the [Plaintiff]". The Trust Deed further provided :

"4. That the Trustee FURTHER UNDERTAKE that he will at the request of the [Plaintiff] attended all meetings of stockholders, shareholders or otherwise which he shall be entitled to attend by virtue of being the registered holder of the said stocks and shares or any of them and will vote at such meeting.

.....

6. That the shareholders' loan of HK$2,250,000.00 in the name of the Trustee is in fact owing by [Win Access] to the [Plaintiff]."

Clause 7 referred to blank share transfer forms having been executed by the Trustee and delivered to the Plaintiff together with the Trust Deed.

10. It is common ground that pursuant to the oral agreement, the Plaintiff paid $1.5 million to the 2^nd Defendant and $1 million to the 3^rd Defendant on 22 August and 10 September 1992 respectively. According to the Plaintiff, notwithstanding the terms of Clause 7 of the Trust Deed, blank share transfer forms were not delivered to him together with the Trust Deed.

11. The Plaintiff's case is that in breach of the oral agreement as evidenced by the Trust Deed, the 1^st Defendant failed to subscribe for 250,000 shares in Win Access and to hold the same on trust for the Plaintiff and that he further failed to advance the $2.25 million by way of shareholders' loan to Win Access despite having received $2.5 million from the Plaintiff. It is the Plaintiff's evidence that in the course of 1993 he asked about his investment on a number of occasions. The 1^st Defendant simply procrastinated, saying that the time was not ripe for disclosing the Plaintiff's interest in Win Access. By December 1993, the Plaintiff had reason to become suspicious of the 1^st Defendant's conduct and sought documentary evidence of his investment in Win Access. On 10 January 1994, the Plaintiff demanded repayment from the 1st Defendant of the $2.5 million. On 15 January 1994, the Plaintiff's solicitors wrote in the following terms :

" However, despite repeated requests and demands, you have failed/refused to fulfil your obligations as aforesaid in accordance with the said Declaration of Trust and in particular, in failing to transfer the said shares to our client as directed and accounting to our client the affairs and accounts of the said Company and are therefore in breach of the said Declaration of Trust. Our client hereby accepts the said breach/repudiation on your part."

On 25 February 1994, the Plaintiff issued the writ.

Findings of fact

12. I find as a fact that the Trust Deed executed by the 1^st Defendant reflected the essential terms of the oral agreement made between the parties. It was a term of that agreement that the 1^st Defendant as Trustee would be the registered holder of the 250,000 shares to be subscribed in Win Access. That much is evident from Clause 4 of the Trust Deed. Equally, the shareholder's loan of $2.25 million also had to be in the name of the 1^st Defendant.

13. The 1^st Defendant was never the registered owner of any shares in Win Access although the 1^st Defendant was the beneficial owner of, inter alia, 1.5 million shares in Win Access held through Win Bright Nominees Limited ("Win Bright"). As to the shareholders' loan of $2.25 million, the 1^st Defendant's evidence is that the entire investment amount of $2.5 million, namely the loan of $2.25 million plus $0.25 million for the shares was paid over by him to Win Access on 25 February 1993. The 1^st Defendant relies on a cheque drawn on his account dated 25 February 1993 in favour of Win Access. The 1^st Defendant's evidence is that the $9 million paid over to Win Access included the Plaintiff's investment of $2.5 million. On the face of the cheque, there is handwritten next to the 1^st Defendant's printed name the words "(for Win Bright)". The 1^st Defendant could shed no light on how that came about. Although the 1^st Defendant maintained that the original cheque still exists, he was not able to produce it.

14. According to the balance sheet of Win Access as at 31 December 1992, current assets include an amount due from Win Bright of $9.176 million. The balance sheet as at 30 September 1993 shows that that amount had been reduced to $134,630. The 1^st Defendant relies on those balance sheets as substantiating the payment of $9 million to Win Access during this period. It is to be noted that both balance sheets show an item described as "shareholders' loan". The value of shareholders' loan remained unchanged at $50 million during the period from the end of December 1992 till the end of September 1993. In other words, the balance sheets do not reflect any addition having been made to shareholders' loan which they would have done had there been the addition asserted by the 1st Defendant in February 1993. Accordingly, I reject the 1^st Defendant's assertion that the Plaintiff's investment of $2.5 million was paid to Win Access on 25 February 1993 and find that there is no evidence to show any payment to Win Access by the 1st Defendant of the $2.5 million received from the Plaintiff.

Breach of contract

15. It is plain from the facts set out above that the 1^st Defendant was in breach of both those terms : he was not the registered holder of 250,000 shares in Win Access, and there is no evidence that there was any shareholders' loan of $2.25 million in his name in Win Access which he could have held on trust for the Plaintiff. The Defendant's case that it was never contemplated or agreed that the 250,000 shares in Win Access had to be in his name, that upon the execution of the Trust Deed, the 1^st Defendant held 250,000 of the shares that he beneficially owned for the Plaintiff : all that was needed was a mental allocation of 250,000 Win Access shares to the Plaintiff. I reject the 1^st Defendant's submission : it glosses over the difficulty concerning the shareholders' loan and is inconsistent with the terms of the Trust Deed.

16. But irrespective of the need to have the shares and the shareholder's loan in the 1^st Defendant's name, I have no doubt that the 1^st Defendant was in breach of the agreement in as much as there is no evidence that $2.5 million was ever paid to Win Access in respect of 250,000 shares and shareholders' loan of which the Plaintiff was the beneficial owner. Whilst there appears to have been a payment by the 1^st Defendant to Win Access of $9 million on 25 February 1993, there is simply no evidence, as opposed to bare assertion, that any part of that payment was attributable to the 250,000 shares or to any shareholders' loan. So much is clear from the two financial statements in evidence. The payment was simply in reduction of a debt already owing by Win Bright to Win Access. The fact that Win Bright had run up a debt of over $9 million in favour of Win Access by year end 1992 has nothing to do with the Plaintiff's investment in Win Access. Even if (which is not the case as no evidence as to this was adduced by the 1^st Defendant) part of the accrued liability was in respect of monies due as shareholders' loan, the payment would nonetheless have shown a reduction in accrued liabilities and a corresponding increase in the amount of shareholders' loan. That was not the case.

17. The Plaintiff has succeeded in establishing that the 1st Defendant was in repudiatory breach of the oral agreement. I accept the Plaintiff's evidence that he did demand the return of the $2.5 million in December 1993 and January 1994. Although the 1^st Defendant had asserted that he was always ready and willing to transfer the shares to the Plaintiff at any time, that was not his response when confronted with the letter of 15 January 1994. The 1^st Defendant is therefore liable to return the $2.5 million received to the Plaintiff.

18. So far as the 2^nd and 3^rd Defendants are concerned, they do not deny receiving the payment made to them respectively by the Plaintiff in 1992. Since there is no evidence that the amounts received by them respectively were ever paid to the 1^st Defendant, those amounts are still held by them as money had and received. The 2^nd and 3^rd Defendants as agents have not put forward any evidence that the sums received by them have been paid over to the 1^st Defendant, their principal. The burden is on the agent to show that there has been a payment over. See Goff and Jones on The Law of Restitution, 4^thed. at p.753. The 2^nd and 3^rd Defendants have failed to discharge that burden and thus are liable to the Plaintiff for the sums received.

Interest

19. Simple interest is payable on the sum of $1.5 million from 22 August 1992 and on the sum of $1 million from 10 September 1992 until 6 November 1997 at 7% per annum and thereafter at the judgment rate.

Costs

20. I also make an order nisi for costs in favour of the Plaintiff against all three Defendants.