CHEUNG CHUNG NAM v. LAU HOI KIU AND ANOTHER

HCA 203/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 203 OF 2000

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REASONS FOR DECISION

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1. This is an application for summary judgment by the Plaintiff against the 2nd Defendant for a dishonoured cheque for about $2.9 million, or alternatively, against both Defendants for the same amount as the first instalment payment under an agreement for the sale and purchase of a partnership business.

2. The Defendants are husband and wife. The Plaintiff, the 2nd Defendant and a Ms Ha Chun Nam were the registered partners of Sunrex Clocks Enterprise Co. ("Sunrex")

3. There is no dispute that the 2nd Defendant and Ms Ha were acting for their respective husbands, namely the 1st Defendant and a Mr Lee Chun Chung.

4. The partnership business of Sunrex included the Fumin Sunrex Clocks (Shenzhen) Co. Limited ("Fumin") and the Hon Yuen Industrial Co. Limited ("Hon Yuen").

5. It is also agreed that the Plaintiff, the 1st Defendant and Mr Lee Chun Chung were the only directors of Fumin and Hon Yuen, as well as the only shareholders of Hon Yuen.

6. By an agreement dated 29 November 1999, the Defendants agreed to purchase the shareholdings of Plaintiff and that of Ms Ha and Mr Lee Chun Chung in Sunrex for the total price of $10,600,000.00.

7. Pursuant to the agreement, the Defendants paid the cheque deposit of the $2.9 million to the Plaintiff, post-dated to 7 September 1999 drawn upon the 2nd Defendant's account with the Wing Heng Bank.

8. It is not disputed that the cheque was dishonoured upon presentation for payment as "payment had been countermanded by the drawer". Hence, the Plaintiff commenced the present proceedings against the Defendants.

9. The Defendants claimed to be entitled to rescind the contract and had indeed rescinded the contract in early February 2000 on misrepresentation and failure to disclose material facts by the Plaintiff and Mr Lee Chun Chung concerning the assets and the financial affairs of the Sunrex.

10. The Defendants suggest that the Plaintiff and Mr Lee Chun Chung had represented to them that the assets of the business were about $15,900,000.00 and the price of their two-third shares was based on such figures. But in fact, that was not so.

11. In particular, it is alleged that the books and accounts of Fumin, purported to record a stock-in-trade up to the value in excess of RMB23 million when in fact it was only in the region of RMB1.5 million.

12. There is also an allegation of substantial irregularities in the account of Fumin when the account payable was alleged to have been falsely made up.

13. The Defendants also allege that the Plaintiff and Mr Lee Chun Chung had withheld from them that the Shenzhen Local Tax Authority had given notice to Fumin that a tax investigation against Fumin would be commenced and that Fumin had to make available all books and accounts for the purpose of such investigation.

14. In the circumstances, the Defendants claim that Fumin faces a serious risk of substantial tax penalties or even a suspension or revocation of the business licence.

15. As I have observed in the course of counsel's submission, the allegation raised by the Defendants against the Plaintiff is indeed very serious. Such allegation if substantiated, in my view, no doubt will cast shade on the validity and the enforcebility of the agreement in question.

16. Mr Yuen on behalf of the Plaintiff suggests that the contract in question is not a contract of unberrimae fidei and there is no duty on the part of the Plaintiff to make full and the frank disclosure.

17. Mr Yuen also suggested that the allegation of misrepresentation is inherently impossible as the agreement was the result of a lengthy negotiation between the parties during which the Plaintiff and Mr Lee Chun Chung had offered to buy out the Defendants' share in the business on more or less the same terms.

18. It is also suggested that the Defendants and Mr Lee Chun Chung had also once made an offer to buy out the Plaintiff's share of the business jointly for the sum of about $5.25 million and there was then never any suggestion of any misrepresentation or material non-disclosure.

19. But it is not disputed that Mr Lee subsequently changed his mind and refused to complete that particular transaction to acquire the Plaintiff's share in the business together with the Defendants. The reason for this change of mind is not apparent.

20. The Defendants suggest that they were not at the initial stage aware of the misrepresentation and the material non-disclosure in question. They claim not to have any direct knowledge on the value of stock-in-trade and they had relied entirely on the Plaintiff on such matter.

21. The suggestion simply is that the Defendants' primary duties and responsibility in the business were confined to marketing and dealing with clients instead of the sourcing of raw materials and/or the manufacturing process.

22. Obviously, it is not appropriate for the Court at this stage of the proceeding to resolve the allegations raised by the Defendants. But I cannot ignore the fact that the business in question is extremely substantial. The suggestion is that not less than 600 to 700 employees are employed and the business is described as one of the biggest clock manufacturers in the region.

23. There appears to be no dispute that the parties to the agreement had different duties and responsibility. Each of the partners might not be in a position to have a complete and full picture of every aspect of business.

24. Partners of a firm, of course, have the duty to act in utmost good faith to one another. Whether the same principle applies to a situation whereby one partner offers to sell his shares in the partnership to another is not a matter over which I wish to express an infinite view at this stage.

25. To some extent, it depends on the partners' respective duties in the business as well as the representations or promises made by one to an other in the course of the partnership business or in the course of the negotiation.

26. Whether the contract in question is a contract of unberrimae fidei will also depend, to some extent, on the knowledge of each of partners acquired in the course of the partnership business and various other aspects of the business in question.

27. There appears to be no dispute on the Defendants' contention that the 1st Defendant was only responsible for handling customers and the general marketing and was not involved on matters of sourcing or production or finance.

28. The Defendants said they have no knowledge about the books and accounts and the stock-in-trade of Fumin and they relied heavily on the Plaintiff and Mr Lee Chun Chung.

29. There are the allegation by the Defendants that the stock-in trade of Fumin had been substantially inflated and that the tax investigation in Fumin had been withheld from the Defendants.

30. I do not accept the suggestion that those matters are not relevant to the validity and the enforcebility of the agreement in question.

31. The allegations raised by the Defendants, in my view, if substantiated will certainly render the agreement in question wholly unenforceable, in which event, the cheque in question will not be supported by any consideration.

32. I have considered the background of the case as well as counsel's submission carefully, I am not persuaded that this is a proper case to grant summary judgment in favour of the Plaintiff.

33. In my view, the matters raised by the Defendants clearly give rise to an arguable defence. In any event, the matter should proceed to trial before the right and obligation of the parties can be properly resolved.

34. The Plaintiff suggests that the Defendants had by conduct confirmed the contract and they are therefore not entitled to claim to have rescinded the contract.

35. The Defendants' counsel in the course of his submission produces a without prejudice letter dated 8 February 2000, in which the Defendants offered to appoint a representative to operate the business and to take up the management of the Shenzhen factory.

36. Despite the letter being a without prejudice letter, Mr Wong on behalf of the Defendants has unequivocally waived any privilege that the Defendants may be entitled to.

37. In the circumstances, I feel able to refer to the letter. The Plaintiff had not responded to the offer. Such attitude is perhaps understandable because his position is that the contract is valid and enforceable and to respond to the letter will be a departure from that position.

38. He is of course entitled to take such an attitude. But if the Court, at least for the purpose of the present proceedings, finds against him, then he will have to take the consequence.

39. It is open for the Plaintiff to take such step as may be necessary to safeguard his own interest in the light of the Defendants' position that the contract had been rescinded.

40. But I do not consider the matters before the Court supports an affirmation of the agreement by the Defendants.

41. I do not consider, in the circumstances, the continuation of the partnership business by the Defendants after the alleged recission of the contract should prejudice the Defendants' position.

42. As I have said, it is for the Plaintiff to take such step as may be necessary to safeguard his interest. On the other hand, irrespective of what the Plaintiff does, the Defendants do have the duty to make a proper account in due course to the Plaintiff and Mr Lee on whatever profit he may derive from the business.

43. On the issue before this Court, I am satisfied that this is not a proper case for the granting of summary judgment and that Defendants should be given unconditional leave to defend and I so order.