YIP WAI HUNG v. LEUNG NGA SZE AND ANOTHER

DCCJ 990/2013

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 990 OF 2013

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JUDGMENT

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The Claim

1. As against the 1^st defendant, the claim was last narrowed down to (a) a declaration that the 1^st defendant was at the material times holding 1,500 shares of the 2^nd defendanton trust for the plaintiff; and (b) damages representing the value of the trust shares which the 1^st defendant failed to return.

2. As against the 2^nd defendant, the claim is for repayment of  HK$178,500 representing two shareholders’ loans advanced by the plaintiff.

Issues for Determination

3. The dispute of trust is resolved upon the 1^st defendant’s admission in the course of trial. Hence, the only issue between the plaintiff and the 1^st defendant is what are the damages representing the value of the trust shares for which the 1^st defendant is liable?

4. It is no longer in dispute that the two advancements (if proved to be loans) are repayable on demand by the plaintiff. Hence, the only issue between the plaintiff and the 2^nd defendant is whether the two advancements are enforceable debts?

Background

5. The 2^nd defendant “PACW Limited” is a limited company incorporated in Hong Kong with a share capital of HK$10,000 divided into 10,000 ordinary shares, then at the par value of HK$1 each before the no-par regime under the new CO Cap 622 has come into force.

6. While the 1^st defendant and Leung Ting Yin (“Leung”) were the only registered shareholderseach holding 5,000 shares, they were in fact holding the same not only for themselves but also on trust for others. The 1^st defendant held 2,000 shares for herself, 1,500 shares for the plaintiff and 1,500 shares for Clara Yau (“Clara”). Leung held 1,000 shares for himself and 4,000 shares for Alson Wong (“Wong”).

7. The total amount of funds received from shareholders on two occasions was HK$1,200,000. In proportion to her shareholding, the plaintiff made two advancements in the total sum of HK$180,000 out of which HK$1,500 was share capital contribution. The balance of HK$178,500 is now the subject matter of dispute.

8. The 1^st defendant and Leung were at the material times directors of the 2^nd defendant.

9. Despite demand and commencement of this action for return of the trust shares, the 1^st defendant dissipated the entire 5,000 shares registered in her name by selling them to Leung at HK$1 each. 

Are the plaintiff’s advancements enforceable debts?

10. The 2^nd defendant disputes the plaintiff’s advancements being shareholder’s advancements; and it is submitted that as a matter of law the plaintiff was not recognized by the company as holding any share upon any trust. I find this argument untenable.

11. It is plain and unarguable, both in law and in fact that the advancements were made by the plaintiff in her capacity as a beneficial shareholder. Firstly, the 2^nd defendant has imputed notice of the 1^st defendant’s knowledge of the trust relationship and advancements.Further, the 2^nd defendant’s recognition of the same is evident by  undisputed facts, in particular the fact that the plaintiff attended all shareholders’ meetings and exercised her rights as a shareholder.

12. Since the plaintiff’s advancements of HK$178,500 was neither absorbed as share capital nor made as gift, Mr Lai for the plaintiff submitted that a reasonable conclusion can be yielded by deduction that theycould notbe anything else but loans; and that they could only be properly recorded in company accounts as shareholder’s loans.

13. I am not convinced that such a conclusion can fairly be drawn. The nature and substance of the advancements have to be determined by reference to all of the surrounding circumstances, not by deduction, nor by how they should be bookedin company records froman accounting standpoint. In the absence of those characteristics of any agreement similar to those for loans, it is particularly important to ascertainthe shareholders’ intent when they structured the advances.

Analysis of Evidence

14. It is noteworthy that the plaintiff herself has never in her witness statement mentioned about the lending of money.She described the two advancements respectively as “夾錢成立公司” (literally meaning “gather money to set up the company”) and “再夾(錢)以用作公司的營運資金” (literally meaning “gather money again to be used as company’s operating fund”).

15. It was only under cross-examination the plaintiff described the advancements as loans. She interpreted the term “夾錢” (literally meaning “gather money”) to mean “lending money to the company because the company had to borrow money from shareholders in order to operate its business and to open shops.”

16. When Mr Chong for the 2^nd defendant put to the plaintiff that lending money to the company was never mentioned among shareholders, she disagreed. She said although the amount of share capital was yet to be fixed, it was clearly mentionedthat funds would comprise share capital contributions and shareholders’ loans. Notably, this piece of important information is also missing in her witness statement.

17. In my evaluation of evidence, much importance is attached to thoserelating to twoshareholders’ meetings. These are meetings during which share capital, shareholders’ contributions and the company’s liabilities weretalked about in the presence of accountant Fan Lo (“Fan”) and the newly engaged accountant Patrick Wong (“Patrick”).

18. At the first meeting Patrick has enquired about the liabilities of the company.In natural responseto the enquiry, one would reasonably expect that the shareholderswould have promptly told Patrick about their loans to the company. Yet, according to the plaintiff’s account of event in her witness statement, nobody did.

19. However, the plaintiff during her oral testimony said when Patrick enquired about the company’s liabilities at the first meeting, she and Fan immediately told Patrick that one of the company’s liabilities is the shareholders’ loans. Notably, this piece of information is also missing in her witness statement.

20. Atthe second meeting, Patrick said he had verified the share capital of HK$10,000; and he told the shareholders that the balance of their contributions “屬股東貸款” (literally meaning “belong as shareholders’ loans”).

21. Applying the guiding principles inassessingthe credibility of witnesses, I have tested the consistency of the plaintiff’s internal evidence by making comparison between her oral testimony and her witness statement, albeit some are unchallenged. I have also consideredthe current likelihood or unlikelihood of an event having happened, which in this case is the loan arrangement.

22. When the claim against the 2^nd defendant is so straightforwardly premised on loans, itis unreasonable and weird that the simple direct and important evidence subsequently adduced by oral testimony could beomitted fromthe plaintiff’s witness statement.

23. In testing the consistency of the plaintiff’s internal evidence in light of the overall evidence, I find the following oral testimony of the plaintiff incredible : (a) I reject her evidence that the shareholders have agreed that their advancements would comprise share capital contributions and shareholders’ loans; and (b) I disbelieve her that she and Fan have told Patrick about the shareholders’ loans during the first meeting.

24. Regardingthe current likelihood or unlikelihood of the event of loan arrangement having happened, the following is considered. I find it improbable that there was a loan arrangement, whether as alleged or at all.

(a)  Both the 1^stdefendant and Wongdenied loan arrangement and are adamant thatshareholders’ contributions are not repayable as debts. It is noted that the 1^st defendant and Wonghave respectively advanced HK$240,000 and HK$480,000in proportion to their respective shareholding. Had there been loan arrangement as alleged, they would not have denied the same against their own interest.

(b)  From what have been said in the two meetings, it is evident that the shareholders were not at all clear aboutthe nature or precise distribution of their contributions, let alone the idea of loans.No intention was ever evinced that their contributions shall remain as the company’s liability to them irrespective of whether it trades with profit or at loss.  

(c)  I have also considered but excluded the probability of parties having agreed to treat the advancements as loans retrospectively upon Patrick’s representation. There is no evidence of any agreement. Had it been agreed, the 1^stdefendantought to have demanded for repayment instead of selling the 5,000 shares at nominal value in order to cut loss.

25. To conclude, I find that the plaintiff has failed to prove on a balance of probability that the advancements are enforceable debts. The claim against the 2^nd defendant failed.

Damages the 1^st defendant is liable for

26. There is no dispute that HK$1,500 being sale proceeds of the trust shares should be returned to the plaintiff.

27. Mr Lai submitted there is evidence that the trust shares were worth much more than HK$1,500. In reliance of two contracts by which the 2^nd defendant has acquired two businesses in 2011 worth of HK$480,000, the plaintiff seeks damages of HK$72,000 representing her share of interest in the company’s assets on pro rata basis.

28. I do not accept that the two contracts provide adequate basis to quantify HK$72,000 as damages representing the value of the trust shares.How much the trust shares are worth has to be considered against both the liabilities and assets of the company; unfortunately there is no financial document before the court. Although the company might be making profit in August 2011, nothing enables the court to assess the value of the trust shares at the material time of demand for return or dissipation.

29. Mr Lai further submitted that in the event the plaintiff’s advancements was held not to be loans but equity contribution, the sum of HK$178,500should be awarded as damages representing value of the trust shares.

30. Since the 1^st defendant has resolutely indicated that shareholders’ contribution was investment with no guarantee of return, I shall for the purpose of assessing damages regard the plaintiff’s advancements as equity contribution. However, by the same token that there is no financial document before the court, damages of HK$178,500 cannot be substantiated. 

31. It is of regret that no evidence of the company’s financial situation has been laid before the court; but it will not render the plaintiff any manner of help by attributing blame on the 1^st defendant for having hindered proper discovery. After all, the plaintiff bears the burden of proof.

32. Therefore, doing the best the court can and resolving doubts in favor of the plaintiff as invited by Mr Lai, no award of damages other than the sale proceeds of HK$1,500 can be justified.

Conclusion

33. The following is pronounced :

(1)  a declaration that the 1^st defendant was holding on trust for the plaintiff  the 1,500 shares of the 2^nd defendantfrom 30 December 2010 up to the 1^st defendant’s unauthorized dissipation of the same;

(2)  an order that the 1^st defendant do pay damages to the plaintiff in the sum of HK$1,500, plus interest accured at HSBC prime + 1% from 16 January 2013 until the date of judgment, and thereafter at judgment rate until payment; and

(3)  an order that the claim against the 2^nd defendant is dismissed.

34. I make an order nisi that

(1)  the 1^st defendant do pay 50% of the plaintiff’s costs of the action, at District Court scale, with certificate for Counsel, to be taxed if not agreed; and

(2)  the plaintiff do pay the 2^nd defendant’s costs of the action, to be taxed if not agreed.

35. The ordernisi shall become absolute unless an application to vary is made within 14 days from today.