WING FAI CONSTRUCTION CO LTD (In Liquidation) v. YIP KWONG ROBERT

cacv 333/2007

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 333 of 2007

(on appeal from HCA NO. 4251 of 2003)

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J U D G M E N T

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This was an appeal from a judgment of 6 September 2007 of Burrell J entering judgment in the sum of $1.25 million for the plaintiff against the defendant.  At the conclusion of the hearing judgment was reserved which we now give.

Background

3.  The plaintiff is a company in liquidation and the defendant was a former director of the plaintiff and at the relevant time was also a substantial shareholder of the plaintiff’s holding company (“China Rich”).  From December 2002 to April 2002 inclusive, a period of 17 months, the plaintiff paid to the defendant $100,000 a month.  The company was sold for $5 million two weeks after the last of the 17 payments totalling $1.7 million and provisional liquidators were appointed in July 2002. The defendant resigned as a director in July 2001.

4.  The liquidators sought an explanation from the defendant regarding the payments and, not being satisfied with the explanation proferred, commenced proceedings to recover the sum of $1.7 million on the basis that the monies constituted advances/loans for the purposes of section 157H of the Companies Ordinance and were liable to be repaid to the plaintiff under section 157I.  In the alternative, the plaintiff sought restitution of money had received by the defendant to the plaintiff’s use.

5.  On the company law question, the judge ruled that the advances constituted a loan for the purposes of section 157H and as the conditions in subsections 4(a) or (b) were not satisfied, the defendant was liable to repay the loan in full.  On the unjust enrichment issue, the explanation given at trial was that at a meeting of the plaintiff’s directors in December 2000, it was orally agreed that the defendant would be paid $100,000 a month for expenses incurred or to be incurred (with no requirement or necessity to provide receipts) in promoting the plaintiff’s business in China in connection with its attempt to secure a contract for the maintenance and repairs of the runways at what was to be the Baiyun Airport near Guangzhou.  The defendant claimed that the money had been spent on entertainment of businessmen including PRC officials, in restaurants, karaoke lounges in and around Guangzhou and that at least 80% of the spending was in cash because many places there did not accept credit cards.  No receipts were produced because it was said that often in the PRC receipts were not given and, in any event, his agreement with the plaintiff was that there was no need for any receipts.

6.  The defendant did not produce any documentary evidence of either the meeting of the plaintiff’s directors or the agreement of the directors or how, when and where any of the money was spent, except for about $45,000 on the defendant’s American Express Card.  Nor did the defendant produce any evidence of the level of expenses incurred by the plaintiff prior to the agreement or any bank statements showing previous payments for expenses incurred or cash payments made out after the agreement which would substantiate his claim that he had spent substantial amounts in cash in China during his frequent visits there.

7.  The judge made a finding that no meeting or agreement as alleged by the defendant ever took place.  Therefore no money could have been paid over pursuant to such an agreement.  He also rejected the defence of an “understanding” advanced in the Re-amended Defence in August 2007.  The judge set out detailed reasons under seven subparagraphs for his findings in, inter alia, § 13 of his judgment.

This appeal

8.  The appeal sought to challenge the judge’s findings of fact.  Mr Mok SC who appeared for the defendant stated at the outset of this appeal that he was asking this court to reverse the judge’s finding that there had been no “arrangement” between the parties that the defendant would be paid a fixed sum by the company for the purposes of reimbursing the defendant for expenses incurred by him on a ‘no questions asked’ basis.  It was said that sometimes the defendant would spend more than $100,000 a month and sometimes less.

9.  Mr Mok highlighted what he said were undisputed facts:

·  17 consecutive monthly payments of $100,000

·  the cheques were signed by two of the four directors of the plaintiff

·  in making the payments, the plaintiff did not require the defendant to document expenses

·  there was no evidence that the defendant resorted to any other means to seek reimbursement of his expenses.

It was said that those facts supported the de facto practice or arrangement between the plaintiff and the defendant that he was to obtain reimbursement in that way and that the only evidence relied on by the plaintiff was the hearsay evidence of Vincent Lo, one of its directors, who said he had no knowledge of the arrangement.  It was submitted that the only natural inference from the practice put into effect by the parties was that the plaintiff had made an arrangement with the defendant as alleged.

10.  As to the judge’s reasons given in § 13 of the judgment, Mr Mok sought to demonstrate that they were wrong.  I propose to highlight below his criticisms of the more important of the findings.

Inconsistent explanations by the defendant

11.  The liquidators were initially only aware of three payments of $100,000 each for the months of February to April 2002.  On behalf of the plaintiff, by letter dated 10 September 2003, they sought explanations from the defendant.  More than six weeks later, Barlow, Lyde & Gilbert (“BLG”) who were then acting for the defendant provided a substantive reply.  The judge identified at least five material respects in which that reply differed from the defendant’s evidence at trial.  For present purposes, it is unnecessary to go into the specific details of the discrepancies.  Suffice it to say that the judge rejected the defendant’s explanation that the discrepancies were attributable to a misunderstanding between him and his former solicitors, observing that there had been numerous opportunities “by correspondence, by pleading amendments, by court appearances, in affirmations and in witness statements to state that it was a misunderstanding and to explain it, but none were taken”.

12.  Mr Mok took issue with the judge’s criticism on the ground that by 10 December 2003 (i.e. within 6 weeks of BLG’s letter) the defendant had made an affirmation and in § 16 of that affirmation he had exhibited a copy of his draft defence setting out his “defence”.  Mr Mok submitted that therefore there were no circumstances calling for any “explanation”.  However in § 15 of that same affirmation, not only did the defendant exhibit a copy of BLG’s letter of 30 October 2003, he specifically adopted its contents as setting out his “defence to this action”.  In those circumstances, the draft defence exhibited in the subsequent paragraph, the contents of which differed in material respects from the “defence” set out in BLG’s letter, plainly required an explanation.  That could have been, but was never, given in the defendant’s affirmation of 10 December 2003 or, indeed, in any later document.  It only arose in cross-examination.  In those circumstances, Mr Mok’s criticism of that part of the judgment appears to me to be misplaced.  In my view, the judge was perfectly entitled to view the defendant’s evidence with some scepticism.

The alleged participation of Vincent Lo

13.  In § 13(2) of his judgment, the judge noted the different versions advanced by the defendant and his financial director, Ms Kelly Cheng, as to date and manner of Mr Lo’s alleged participation in the agreement/arrangement.  He noted the respects in which modifications to the evidence in support of the defence had been made, contrasting it with the liquidators’ evidence that Mr Lo had informed the liquidators that he had no knowledge of any such arrangement ever having been made.  Importantly, when evaluating that evidence the judge did bear in mind its hearsay nature.

14.  It is not for this court to interfere with the weight the judge saw fit to attach to the evidence of the respective witnesses where there is no suggestion that he did not correctly understand the evidence and the circumstances surrounding the giving of such evidence.  It was open to him to take the view that the defendant’s evidence in this regard was unreliable and, for that, he cannot be faulted.

Pre-arrangement regime

15.  The defendant had portrayed the arrangement as one of convenience, reflecting what had in fact been happening.  The new regime (which required no receipts) would relieve the accounting staff from having to deal with a large number of invoices.

16.  Mr Mok sought to take the judge to task for commenting on the absence of invoices and reimbursement cheques to the defendant from the pre-arrangement regime.  It was said that there was no evidence that the defendant had possession custody or control of the same and, further, the invoices and cheques had not formed part of the plaintiff’s unsuccessful discovery application.

17.  The point of the judge’s comments was simply that nothing had been produced to substantiate the pre-arrangement regime, it being the defendant’s case that the new arrangement was to replace a system for reimbursement of expenses that had existed previously.  I can see nothing inherently wrong with that approach.  The existence of the previous regime could have been substantiated in a number of ways, for example, by the production of invoices and cheques or the defendant’s bank statements.  Presumably, there would have been entries in those statements reflecting reimbursement amounts and large cash withdrawals from the defendant’s own account every month, a fact the defendant accepted in cross-examination.  The absence of evidence to substantiate the defendant’s case is a legitimate matter for the judge to take into account when evaluating the evidence and I see no basis for any criticism on that score.

Conclusion

18.  In short, I do not consider that the defendant has begun to demonstrate that this court ought to reverse the judge’s findings.  I would not disturb any of the findings made.  For my part, I would dismiss this appeal.  I would also propose that there be an order nisi of costs in favour of the plaintiff.

Hon Sakhrani J:

19.  I agree.