DING SHU JU v. CHU SAI KEUNG

CACV 185/2016

[2021] HKCA 626

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 185 OF 2016

(ON APPEAL FROM HCA NO 835 OF 2013)

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(By Original Action)

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(By Counterclaim)

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J U D G M E N T

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Hon Kwan VP:

1.  I agree with the judgment of Yuen JA.

Hon Cheung JA:

2.  I agree with the judgment of Yuen JA.

Hon Yuen JA:

3.  This is the appeal of Chu Sai Keung (“Mr Chu”)[1] from a Judgment of DHCJ Manzoni SC (“the judge”) given on 11 August 2016 (“the Judgment”) determining the disputes between Mr Chu, Wong Shiu Tong (“Mr Wong”)[2] and Mr Wong’s wife Ding Shu Ju (“Madam Ding”).

4.  Madam Ding had first started proceedings against Mr Chu for repayment of an alleged loan of $1.5m[3]. 

5.  Mr Chu denied Madam Ding’s claim, and counterclaimed against:

-  both Madam Ding and Mr Wong, for a total sum of RMB953,170.57[4] as personal loans he made to them; and

-  Mr Wong solely, for RMB607,622.05[5] and RMB1,526,153.84[6] as payments he made on Mr Wong’s behalf to a PRC company based in Dongguan (“DG Ltd Co”) in which they (and Ho Yue Tang[7]) had interests.

6.  Mr Wong then filed a counterclaim against Mr Chu, in which he alleged:

-  he had overpaid DG Ltd Co a total sum of RMB15,109[8];

-  he had paid total sums of $1,100,000[9], RMB286,7401[10] and $300,000[11] as personal loans to Mr Chu; and

-  Mr Chu owed him $431,202[12] as his share of proceeds of sale of a flat (“Lohas Park”) that they had jointly invested in.

After giving credit for various payments made by Mr Chu, Mr Wong counterclaimed against Mr Chu for the balance of $1,535,662.66[13] and RMB251,849.41[14].

7.  After a 6-day trial, the judge ordered:

(1)  Mr Chu to pay Madam Ding $1,488,940 with interest at judgment rate from the date of the Judgment until payment;

(2)  Mr Chu to pay Mr Wong $1,593,472.66 and RMB160,039.95 with interest at judgment rate from the date of the Judgment until payment;

(3)  that Mr Chu’s counterclaim be dismissed, and

(4)  that Mr Chu pay Madam Ding’s and Mr Wong’s costs.  

8.  Mr Chu appealed.  There was no respondent’s notice from either Mr Wong or Madam Ding.

9.  Although Mr Chu was legally represented before the judge, and the Judgment was written in English, he appeared at the appeal without legal representation, his submissions were written in Chinese, and he has challenged the Judgment on a number of grounds but in various degrees of specificity.  This has made the preparation of this judgment more difficult than usual.  (As the Judgment was written in English, this judgment will also be written in English but Mr Chu may ask for interpretation from a court interpreter if he needs it). 

Background

10.  As the facts are complex, it is necessary to set out the background first in some detail.

The HK Ltd Co

11.1.  In or prior to 2007, Advance Coating Tapes & Products Co Ltd (“the HK Ltd Co”), a company incorporated in Hong Kong, was established by Mr Chu, Mr Ho and Mr Wong (“the 3 persons”).  According to the Annual Return made up to 3 July 2008[15], their shareholdings were as follows:

Chu	70%
Ho	20%
Wong	10%.

11.2.  The HK Ltd Co was de-registered in January 2009[16].  There is no evidence before the court that the above shareholding proportion had changed before de-registration.

The Partnership

12.1.  In the meantime, the 3 persons also set up a partnership in Hong Kong called Advance Coating Tape & Product Company (“the Partnership”) on 28 July 2008. The BR form was received by the Inland Revenue Department on 30 July 2008[17]. 

12.2.  It would be noted that unlike the name of the HK Ltd Co, which refers to “tapes” and “products” in the plural, the name of the Partnership refers to “tape” and “product” in the singular.  Of course, for the Partnership, the word “limited” did not appear.  

12.3.  Pausing here, no written partnership agreement relating to the 3 persons’ respective “shares” in the Partnership was produced.  Generally, in a partnership, as distinct from a limited company, a “share” means a partner’s entitlement to a proportion of the net proceeds of sale of the assets [18].  In the absence of agreement, all partners have identical and equal interests in the assets[19], and equal rights to manage the business[20]. There are no “shareholders” or “directors” as such. 

13.1.  However, in Chu’s AD&CC, it was pleaded (§3) that the 3 persons

“were and are the shareholders and directors of Advance Coating Tape & Product Company” (hereinafter referred to as ‘Advance Coating Hong Kong’) since 30^th July 2008" (Emphasis added).

This was repeated in §6 of Mr Chu’s Witness Statement.

13.2.  It can be seen from the name of the company referred to in §13.1. above (with “tape” and “product” in the singular) and the reference to the date (being that of the receipt of the BR form by the Inland Revenue Department), that what was being referred to in Mr Chu’s pleading and Witness Statement was the Partnership, and not the HK Ltd Co.  That is confirmed in his Reply and Defence to Counterclaim (in §4).  

13.3.  Moreover, in Mr Chu’s AD&CC (in §4), it was pleaded:

“[Mr Chu] owns 65% of the shares in Advance Coating Hong Kong while Mr Wong and Mr Ho own 15% and 20% of the shares respectively”.

Since this “shareholding” proportion is different from that in the HK Ltd Co, clearly this is a reference to the Partnership, and not the HK Ltd Co. 

13.4.  The use of words like “shareholders” and “directors” when referring to a partnership such as this, which is comprised of only individuals, is confusing and misleading and appears to betray an ignorance of the law.  Although the pleadings were initially drafted by solicitors, it is the duty of counsel, as soon as they are instructed, to correct such errors.  Unfortunately, this was not done.

[14.  However, what is important for the purposes of this appeal is the common ground between the parties on the shareholding of the PRC company DG Ltd Co.  

DG Ltd Co

15.1.  DG Ltd Co was incorporated on 4 January 2009[21]. 

15.2.  The “Enterprise Legal Representative Business Licence”[22] of DG Ltd Co showed that its sole shareholder was the Partnership.  If one were to look at this document only, then under Hong Kong partnership law[23], the entire shareholding of DG Ltd Co fell within partnership assets. 

15.3.  Under partnership law, “as between themselves, partners are not entitled individually to exercise proprietary rights over any of the partnership assets”[24].  On dissolution of the partnership, all the assets would be realised, and it would only be then that the surplus would then be distributed according to their “shares”.  

16.1.  In the present case however, it is significant that it was common ground between Mr Chu and Mr Wong that, right from the start of DG Ltd Co in 2008/9 (well before the dissolution of the Partnership in 2012[25]), the 3 persons treated themselves individually as severally[26] entitled to aliquot shares in DG Ltd Co.  This common ground is shown by the following.

16.2.  In §5 of Chu’s AD&CC, he pleaded the following:

“In 2008, [Mr Chu], Mr Wong and Mr Ho set up another company in Dongguan, China known as Dongguan Advance Coating Tape & Product Company (hereinafter known as ‘Advance Coating Dongguan’) [DG Ltd Co] with the same ratio of shareholding as in Advance Coating Hong Kong [the Partnership]”. (Emphasis added).

16.3.  In Mr Chu’s Witness Statement, he said the following in §8:

“7. I own 65% of the shares in Advance Coating Hong Kong [the Partnership] while Wong owns 15% and Ho owns 20% of the shares respectively.

8. In the same year, Wong, Ho and I set up another company in Dongguan, China known as Advance Coating Tape & Product Company Limited (hereinafter known as ‘Advance Coating Dongguan’) [DG Ltd Co]. At this time, our shareholding ratio was the same as the ratio in Advance Coating Hong Kong [the Partnership].

9. In fact, there is no business dealings in Advance Coating Hong Kong [the Partnership]”. (Emphasis added).

16.4.  This was also stated in the Revised Opening Submissions of Mr Chu’s counsel[27]:

“17. It is not disputed that:

(2) They [Wong and Chu] were two of the three shareholders of the Company ‘Advance Coating Dongguan’ [DG Ltd Co]”. (Emphasis added).

17.  This was also Mr Wong’s case, as he also pleaded the following in §3(d) of Wong’s D&CC:

“... The shareholding among Chu, Mr Ho and Wong in Advance Coating Dongguan [DG Ltd Co] was 65%, 20% and 15%.” (Emphasis added).

18.  Thus, it was common ground between Mr Chu and Mr Wong at trial that the 3 persons treated themselves individually as separately owning aliquot shares in DG Ltd Co.  This is material to one of the issues (the “liability as a partner issue”[28]) which will be discussed later in this Judgment[29].

19.1.  Coming back to the facts, the paid-up capital of DG Ltd Co on incorporation was RMB5 million, with Mr Chu having paid RMB3.25 million for his (65%) share, Mr Ho RMB1 million for his (20%) share, and Mr Wong RMB750,000 for his (15%) share.  

19.2.  Mr Chu was DG Ltd Co’s legal representative[30] and ran the company’s day to day operations.  He also controlled companies called Ever Well Industrial Ltd and Ever Bright (HK) Development Ltd (which were collectively referred to in the Judgment as “Everwell”).

Restructuring Agreement of DG Ltd Co

20.1.  By 30 June 2010, DG Ltd Co’s assets were only worth RMB1,173,824.12[31].  It was decided that what was needed was an increase in share capital of RMB4 million. 

20.2.  Unlike Mr Chu and Mr Wong, Mr Ho (whose equity was now worth only RMB234,764.82[32]) did not intend to invest any more funds.

20.3.  The restructuring exercise was set out in a Chinese document called “[DG Ltd Co] Instructions of Alteration of Equities” dated 30 June 2010 and signed by the 3 persons (this document is referred to in the Judgment as “the Restructuring Agreement”)[33].

20.4.  Two documents were appended to the Restructuring Agreement:

-  a document headed “Shares of each shareholder of [DG Ltd Co]”[34], and

-  DG Ltd Co’s Balance Sheet as at 30 June 2010[35].

20.5.  These three documents are significant in respect of two important issues in this case:

(a)  What was the real relationship between the 3 persons in respect of DG Ltd Co?  This ties in with the “liability as a partner issue” discussed later in this judgment[36];  

(b)  What did Mr Chu and Mr Wong agree in the Restructuring Agreement[37]?  Was it only to pay 65% and 30.47% respectively of the RMB4 million increase in share capital? Or did they agree that, besides their respective proportions of the RMB4 million, they would also contribute to defray DG Ltd Co’s liabilities (eg operating expenses) in the same proportion?

20.6.  The Restructuring Agreement was in these terms:

[DG Ltd Co]

Instructions[38] of Alteration of Equities

[“In accordance with”] the principle of voluntariness, equity and fairness, and after friendly negotiation between the three shareholders [Mr Chu], [Mr Wong] and [Mr Ho], alteration of equities of DG Ltd Co are as follows.

I.  The paid-up capital RMB5,000,000 has been input as of January 4, 2009 the date the company was established and each shareholder’s proportion is as follows.

1.  [Mr Chu]	65% [“share ownership”]
2.  [Mr Wong]	15% [“share ownership”]
3.  [Mr Ho]	20% [“share ownership”].

II.  Due to [“business development”] demand, the company requires an additional investment and paid-up capital of RMB4,000,000.  Such capital increase is totally [“to be”] completed by each of [Mr Chu] and [Mr Wong] while [Mr Ho] waives [“participation in”] such capital increase, which results in equity variation in the company.  Through friendly consultation between the three [“persons”], and [“according to”] financial statements in June 2010, the share [“ownership”] of each shareholder after capital increase is varied as follows. See appendix for details:

1.  [Mr Chu] owns 65% shares of [DG Ltd Co];

2.  [Mr Wong] owns 30.47% shares of [DG Ltd Co];

3.  [Mr Ho] owns 4.53% shares of [DG Ltd Co].

III.  Such equity variation takes effect as of June 30, 2010.  Creditor’s right and liabilities of the company as of the effective date shall be [“shared by”[39]] the investors respectively according to their share proportion in [DG Ltd Co]”[40].  [三、本次股权变更从2010年6月30日起始生效。公司的债权、债务自股权变更生效之日起，由投资各方按所占东莞市雅浩胶带制品有限公司股权比例分担。] (Emphasis added).  

21.1.  Pausing here, in relation to the issue at §20.5(a) above, it can be seen that:

-  the Restructuring Agreement refers throughout to the 3 persons individually as “shareholders”.  There is no reference at all to the Partnership;

-  the appended “[‘Explanation for’] Shares of each shareholder in DG Ltd Co” also had a column headed “shareholder” under which there were 3 names, viz. Mr Chu, Mr Wong and Mr Ho.

21.2.  Thus, the contemporaneous documentary evidence of the Restructuring Agreement and its appendix are consistent with Mr Chu’s and Mr Wong’s common ground, acknowledged and accepted by the judge in §9 of the Judgment, that the 3 persons treated themselves as “direct shareholders” of DG Ltd Co.  

22.  Further, in relation to the issue set out at §20.5(b) above, it can be seen that:

-  as Mr Chu would maintain his 65% share in DG Ltd Co, taking into account the worth of his original investment, he was required to contribute, for the increase in share capital, a sum of RMB2,600,000[41];  

-  as Mr Wong would increase his 15% share in DG Ltd Co to 30.47%, taking into account the worth of his original investment, he was required to contribute, for the increase in share capital, a sum of RMB1,400,390.59[42] (“Wong’s Contribution for Increase in Share Capital”);

-  Mr Ho was not required to make any further contribution for the increase in share capital[43];

but importantly,

-  in (at least) its literal construction, clause III stipulates that starting from the date when the alteration of equities takes effect, the 3 persons should be entitled to DG Ltd Co’s rights (as creditor) and contribute to DG Ltd Co’s liabilities according to each person’s share proportion in that company. The issue of construction will be discussed in §§44-45 of this Judgment.    

23.  In this litigation,

-  Mr Chu contends that he paid on behalf of Mr Wong not only Wong’s Contribution for Increase in Share Capital, but also Wong’s share of the Company’s liabilities such as operating expenses (“Wong’s Contribution for Liabilities”);

-  Mr Wong denied that Mr Chu paid his (Wong’s) Contribution for Increase in Share Capital, and denied that he (Wong) had any obligation to pay the Contribution for Liabilities.

24.1.  Both before and after the Restructuring Agreement, there were many monetary transactions between Mr Chu and Mr Wong within a 45-month period from 29 September 2008 to 7 June 2012 (listed in a schedule prepared by Mr Chu’s counsel and referred to in the Judgment). 

24.2.  The judge had to decide on the nature of these monetary transactions (ie whether, as Mr Chu alleged, he paid on Mr Wong’s behalf Wong’s Contribution for Increase in Share Capital and Wong’s Contribution for Liabilities; if so, the quantum of those sums and how much Mr Wong repaid; if not, what was the nature of the monetary transactions between them; and what was the purpose of Madam Ding’s payments to Mr Chu) and the result of these decisions in terms of money.

Monetary transactions and other events

25.1.  The monetary transactions and other events that the judge had to consider may be listed as follows: 

(1)  3.2008  A unit in Lohas Park was purchased by a company controlled by Mr Chu.

(2)  5.2.2010  According to Mr Wong, on this date, he made the 1^st of 23 payments[44] (“Wong’s 23 payments”) totalling RMB 1,415,500 for his Contribution for Increase in Share Capital[45].

(3)  30.6.2010  Restructuring Agreement.

(4)  1.7.2010  According to Mr Chu, he started making payments of Wong’s Contribution for Increase in Share Capital to DG Ltd Co.

(5)  30.12.2010  Madam Ding transferred $150,000 to Mr Chu.

(6)  3.5.2011  Madam Ding transferred $950,000 to Mr Chu.

(7)  6.2011  According to Mr Chu, by this time, Mr Wong owed him RMB1,526,153.84 for Wong’s Contribution for Increase in Share Capital[46]. 

(8)  4.6.2011  Madam Ding mortgaged a flat in her sole name for $1,500,000.

(9)  7.6.2011  Madam Ding transferred $1,500,000 to Mr Chu.

(10)  15.6.2011  Mr Chu started paying the mortgage interest.

(11)  16.8.2011  According to Mr Chu, on this date, he made the 1^st of 18 payments[47] (“Chu’s 18 payments”) as “personal loans” to Mr Wong and Madam Ding, totalling RMB953,170.57.

(12)  29.9.2011  According to Mr Wong, on this date he finished paying “Wong’s 23 payments”, overpaying RMB15,109.41.

(13)  11.11.2011  According to Mr Wong, on this date, he made the 1^st of 6 payments[48] (“Wong’s 6 payments”) as loans to Mr Chu.

(14)  19.11.2011  Madam Ding extended her mortgage for another 6 months at an increased interest rate.

(15)  28.11.2011  Mr Chu started paying the increased mortgage interest.

(16)  16.1.2012  According to Mr Wong, this was the last of “Wong’s 6 payments”.

(17)  16.3.2012  Lohas Park sold.

(18)  15.5.2012  Madam Ding sold the mortgaged property to repay the mortgage loan.

(19)  7.6.2012  According to Mr Chu, this was the last of “Chu’s 18 payments”.

(20)  31.12.2012  According to Mr Chu, Mr Wong owed him RMB607,622 by this date[49] when DG Ltd Co ceased business.

25.2.  As the judge noted, “the parties each allege that a different interpretation should be put upon each transaction”[50], and “the real difficulty which exists in relation to this action is that the parties have transferred money as between each other without any accurate records of what was transferred or any record of the purpose of that transfer”[51]. 

Legal proceedings

26.  On 14 May 2013, Madam Ding started proceedings against Mr Chu.

Trial

27.1.  As recorded by the judge, there were 60 individual transactions between the various parties between 29 September 2008 and 7 June 2012, and the situation was further complicated by the imposition of DG Ltd Co and Everwell.

27.2.  Madam Ding and Mr Wong gave evidence at trial.  Mr Chu gave evidence and also called as a witness Madam Ren Lai, who was the financial supervisor of DG Ltd Co. However, she accepted she did not know anything about any personal loans between Mr Chu and Mr Wong[52] and she had recorded transactions as per Mr Chu’s instructions without confirming them with Mr Wong.

The judge’s Judgment

28.1.  In the Judgment, the judge noted that not only did the case suffer from lack of proper records relating to both what was transferred and the purpose of each transfer, discovery was not complete[53], and what documents that were produced were discredited to various extents by the parties[54].

28.2.  The upshot of this unsatisfactory situation as stated by the judge was as follows:

“The court is therefore left not only with diametrically opposed views as to the nature of each of the 60 transactions, but also no agreement, and in many cases no contemporaneous evidence, as to the precise amounts, dates or indeed currency for many of the transactions”[55].

28.3.  Doing his best given the incomplete and unsatisfactory state of the evidence before him, the judge first analysed the evidence concerning the disputed “overarching agreements”.  These were the disputes over what was agreed:

(1)  between Madam Ding and Mr Chu regarding the transfer of $1,500,000; and

(2)  between the 3 persons regarding what each was liable to contribute to DG Ltd Co (which would inform what Mr Chu had paid DG Ltd Co allegedly on Mr Wong’s behalf – was it only Wong’s Contribution for Increase in Share Capital?  Or was it also Wong’s Contribution for Liabilities)? 

29.  The judge found the following facts:

29.1.  Madam Ding’s transfer exceeded Wong’s Contribution for Increase in Share Capital -  

-  Mr Chu’s case in both his pleadings and witness statement[56] was that as at 3 May 2011, Mr Wong had repaid a total sum of RMB923,921 out of the RMB1,400,390.59 required for Wong’s Contribution for Increase in Share Capital as quantified in the Restructuring Agreement.  Accordingly, as at that date, the balance remaining was only RMB476,470 (rounded up)[57]. Therefore, the sum of $1,500,000 (about RMB1,250,550) transferred by Madam Ding to Mr Chu on 7 June 2011 would have exceeded the sum needed for Wong’s Contribution for Increase in Share Capital[58].

29.2.  Mr Wong had no continuing obligation beyond the capital injection -

-  Mr Chu sought to explain the above excess by saying that besides the figures set out in the Restructuring Agreement for increase in share capital, there was a continuing obligation by the 3 persons to make contributions for liabilities.  However, the judge did not accept this explanation.  This was because he considered that there was no written evidence of this obligation, in contrast with the obligation to pay the increase in share capital set out in the Restructuring Agreement[59]. This was an important point and will be discussed in §§44-45 of this Judgment. The judge also noted that Mr Chu’s contention of a continuing obligation did not appear expressly in his witness statement[60].  The judge took the view that “such a continuing obligation would represent a completely unlimited liability of Mr Ho, Mr Chu and Mr Wong to contribute to a company in the PRC that they were not in fact shareholders of”[61].

29.3.  Auditor’s Report of DG Ltd Co -

-  Mr Chu had sought to support his case by relying on the Auditor’s Report for DG Ltd Co as at 31 December 2012[62]. However, the judge found that he was unable to rely on the Report because of various difficulties which the judge listed[63].

29.4.  General Ledger attached to 21.8.2012 email -  

-  In an email Mr Chu sent to Mr Wong on 21 August 2012[64], there was an attachment of 6 pages of an account between Mr Wong and Mr Chu[65] (which the judge referred to as the “General Ledger”). The General Ledger concluded with a statement that up to the date 30/3/2014, Mr Chu owed Mr Wong (principal and interest) of RMB2,194,154.77.  The judge considered that the post-dating did not “invalidate the general ledger spreadsheet as a useful tool in analysing the position as between the parties”[66] and found that it did not assist Mr Chu’s case of Mr Wong’s unlimited liability to contribute to the expenses of DG Ltd Co.  The judge found that it was “simply a record of the amounts that were paid as between himself and Mr Wong”[67]. 

The judge’s conclusion on the extent of Mr Wong’s obligations

30.1.  The judge found that Mr Chu had failed to show that the 3 persons “took on an unlimited liability to pay for [DG Ltd Co’s] expenses”, in other words, that there had been no agreement on Wong’s Contribution for Liabilities.  He found that the 3 persons’ total liability was only limited to the figures set out in the Restructuring Agreement for increase in share capital.  “Any further money which they contributed to [DG Ltd Co] was a voluntary contribution made on an ad hoc basis”[68].  

30.2.  The judge found that Mr Chu did pay DG Ltd Co RMB1,400,000 (or to be precise, RMB1,400,390.59) being Wong’s Contribution for Increase in Share Capital, and thus Mr Wong had a personal obligation to repay that specific sum to Mr Chu, which the judge took into account in assessing the money owed by either party[69].

30.3.  As for the rest of the monetary transactions, the judge found:

“I also have little doubt that as a matter of fact much of the money which was passed between Mr Wong and Mr Chu was actually used for the expenses of DG Ltd Co. But I do not accept that this was done as an absolute obligation of Mr Wong, as Mr Chu has contended. I accept that Mr Wong did in fact make loans to Mr Chu, and whilst I have not seen any specific evidence demonstrating this, it may well be that Mr Chu (either directly or through his company Everwell) then made loans to [DG Ltd Co] to pay many of its operating expenses. However given the nature of the obligations which the shareholders owed to [DG Ltd Co] I do not consider that the money paid by Mr Wong to Mr Chu can be considered as the repayment of a loan, to the extent that it exceeded the RMB1.4 million which I have already concluded was lent by Mr Chu to Mr Wong. As a result, I will take all amounts paid as between Mr Wong and Mr Chu to be personal payments made between the two of them and I shall account for them as part of a running account”. (Emphasis added).

The judge’s conclusion on Madam Ding’s transfer of money to Mr Chu

31.1.  It followed from the judge’s finding above that as Mr Chu only paid for Wong’s Contribution for Increase in Share Capital (RMB1,400,000), which balance was only RMB476,470 at the date of Madam Ding’s transfer of $1,500,000, this latter sum could not have been intended by Madam Ding as a repayment to Mr Chu. Accordingly, the judge found that this latter sum was intended as a personal loan from Madam Ding to Mr Chu, for which he found Mr Chu to have agreed to repay the principal and interest[70]. 

31.2.  However, the judge found that Madam Ding did not have to sell the property as a result of Mr Chu’s failure to repay the principal on time, and rejected her claim for legal expenses for the sale in the sum of $2,800[71].  The judge therefore gave judgment to Madam Ding in the sum of $1,488,940 only, taking into account her liability to the mortgagee for interest, and Mr Chu’s payments to her, as per the calculations set out in the Judgment[72].

32.1.  Having made those findings of facts on the limited extent of Mr Wong’s contribution obligations, and its impact on the character of the transfer of funds from Madam Ding to Mr Chu, the judge then carved out the Lohas Park account between the parties, and then proceeded to examine each of the monetary transactions between the parties in what was referred to as the “running account”. 

32.2.  The end result, after taking the running account, was that Mr Chu was ordered to pay Mr Wong $1,593,472.66 and RMB160,039.95 with interest at judgment rate from the date of the Judgment until payment, and that Mr Chu’s counterclaim be dismissed.

Appeal

33.  Mr Chu appealed.

Applications to adduce fresh evidence

34.1.  Mr Chu first applied for leave to adduce fresh evidence.  The new documents consisted of the following:

(by summons of 26 March 2018)

(1)  a judgment of the Dongguan Intermediate People’s Court (“the DG Intermediate Ct”) in Case No.6233 of 2016 dated January 2018, on Mr Wong’s appeal from a judgment of the Third People’s Court of Dongguan City (“DG 3^rd Ct”) in Case No.139 of 2014 dated 2 December 2015;

(by summons of 19 June 2019)

(2)  the transcript of the hearing before the judge;

(3)  the opening submissions of Mr Chu’s counsel at trial;

(4)  an email of 14 June 2012 from Mr Wong to Mr Chu relating to a loan regarding a business called Yong Heng Feng, which document had been adduced before the judge.

34.2.  Mr Wong and Madam Ding did not object to (2) - (4) being adduced at the hearing of the appeal. 

34.3.  As for (1), as the judgment of the DG 3^rd Ct had been placed before the judge, and as the judgment of the DG Intermediate Ct came after the date of the Judgment in this action (HCA835/2013), we considered it de bene esse, although the issue of its relevance will be discussed below[73]. 

Grounds of Appeal

35.1.  Mr Chu’s Notice of Appeal contained 8 grounds, which may be summarized as follows:

(A)  the judge was subjective and did not determine the action in accordance with legal grounds or objectivity;

(B)  the judge should have found that Mr Wong was bound by res judicata and/or issue estoppel arising from the DG 3^rd Ct’s judgment (“the PRC Judgment”);

(C)  the Judgment contained inconsistencies, matters were taken out of context, and facts were “strung together”;

(D)  the judge did not consider the main issues of “loan” and “repayment”, and did not assess whether funds were “public” or “private” in accordance with the evidence;

(E)  the judge “strung together” facts and took matters out of context to avoid documentary proof and witness(es) from the Mainland;

(F)  the judge was too tolerant towards lies and contradictions in the evidence of Madam Ding and Mr Wong, and ignored the evidence of Mr Chu;

(G)  Madam Ding and Mr Wong had supplied false English translation(s) in the evidence and the judge had a preconceived approach;

(H)  the judge adopted double standards leading to an unfair judgment against Mr Chu.

35.2.  Mr Chu and counsel for Madam Ding and Mr Wong respectively made oral submissions at the hearing of the appeal.  Pursuant to directions from the court, all parties also provided further written submissions on the construction issue referred to in §45.4 below.  

Discussion

36.1.  As noted above, the grounds of appeal were in varying degrees of specificity, to which were added further materials in the written submissions. 

36.2.  As for the first ground of appeal, it is clear from the Judgment and transcript that there is absolutely nothing in the suggestions that the judge was subjective, or had a preconceived approach, or applied double standards.  The judge had to struggle with a case which was poorly pleaded and prepared, for which all parties must be held responsible.

36.3.  The remaining grounds and submissions may be encapsulated as follows:

(1)  the judge was wrong to have ignored the fact that the shareholding in DG Ltd Co was owned by the Partnership (“liability as a partner issue”);

(2)  the judge was wrong to have ignored the judgment of the DG 3^rd Ct (now upheld on appeal) which Mr Chu contends should be binding on the Hong Kong courts under the principles of res judicata or issue estoppel (“PRC Judgment issue”);

(3)  the judge had misunderstood, or failed to take into account, evidence when deciding that Wong had no obligation to contribute to liabilities; the construction issue is related to this issue (“Wong’s Contribution for Liabilities issue”);

(4)  the judge was wrong in his findings of fact, and wrong to have accepted Mr Wong and Madam Ding’s evidence when they had been shown to have given incorrect evidence and had provided incorrect translations to the court (“credibility issue”).  

(1)  Liability as a partner issue

37.1.  Mr Chu submitted that because all the shares of DG Ltd Co were owned by the Partnership (as per the Enterprise Legal Representative Business Licence), Mr Wong had an obligation to contribute to its liabilities. 

37.2.  Although Mr Chu did not refer to any legal materials, it is presumed that his submission is based on partnership law.  Section 11 Partnership Ordinance Cap. 38 provides that every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm, and s.26(b) provides that subject to any express or implied agreement, the firm must indemnify every partner in respect of payments made by him in the ordinary and proper conduct of the business of the firm, or in or about anything necessarily done for the preservation of the business or property of the firm. 

37.3.  In other words, applying Hong Kong partnership law to DG Ltd Co, Mr Wong (and Mr Ho) would be jointly liable with Mr Chu; and if Mr Chu paid third party creditors of the partnership, then (subject to any express or implied agreement), the firm would have to indemnify him.

38.  However, this submission should be rejected for the following reasons.

38.1.  First, this submission had not been advanced by Mr Chu’s counsel in either her opening or closing submissions at trial.  The relationship of the parties as shown by their conduct is a matter of fact and law, and it is too late to advance it now, as it fails the well-established Flywin test[74]:

“Where a party has omitted to take a point at the trial and then seeks to raise that point on appeal, the position is as follows. He will be barred from doing so unless there is no reasonable possibility that the state of the evidence relevant to the point would have been materially more favourable to the other side if the point had been taken at trial”.

38.2.  More importantly, DG Ltd Co was not treated as a partnership asset (with all the partners’ interests as per §12.3 above).  On the contrary, it was common ground that Mr Chu and Mr Wong had treated themselves as being direct shareholders of aliquot shares of DG Ltd Co:see (a) the pleadings; (b) Mr Chu’s witness statement; and (c) Mr Chu’s counsel’s opening submissions, discussed above[75] and (d) Mr Chu’s counsel’s closing submissions[76].

38.3.  Although the judge unfortunately fell into error when he referred to DG Ltd Co as a 100% subsidiary of HK Ltd Co (rather than the Partnership as per the “Enterprise Legal Representative Business Licence”), the passage (emphasized in italics below) in §9 of the Judgment was correct:

“... the PRC company was a 100% subsidiary of Advance Coating Hong Kong [HK Ltd Co]. Notwithstanding that, throughout the period to which this action related, the parties have treated themselves as being direct shareholders of Advance Coatings[77] [DG Ltd Co]. I do not think anything turns on this issue for the purposes of this action, and therefore I shall proceed on the assumption that, notwithstanding the legal inaccuracy, Mr Wong, Mr Chu and Mr Ho were indeed shareholders of Advance Coatings [DG Ltd Co], and that anything which they have purported to do as shareholders was indeed legitimately done as shareholders”. (Emphasis added).

38.4.  The best proof of this convention[78] whereby the 3 persons treated themselves individually as direct shareholders of DG Ltd Co was the Restructuring Agreement itself, the important contemporaneous document signed by all 3 persons who referred to themselves as “shareholders”, not as partners in the Partnership as the sole shareholder of DG Ltd Co.

38.5.  Further, Mr Chu’s evidence in his Witness Statement quoted above[79] was that the Partnership had no business dealings.  No accounts of the Partnership were produced at trial.  Indeed, the Partnership ceased or dissolved on 1 July 2012[80], but DG Ltd Co carried on in the same way (until it too ceased business on 31 December 2012). 

39.  From the above discussion, the judge was entitled to conclude that the 3 persons’ real relationship in respect of DG Ltd Co was as individual direct shareholders,and that in any event, they did not conduct themselves as partners (with ramifications such as those under general partnership law as discussed above).  Mr Chu therefore fails on the “liability as a partner” issue.

(2)  PRC Judgment issue

40.  This leads to the PRC Judgment issue.  Mr Chu sought to argue that the judge should have been bound by the judgment of the DG 3^rd Ct (as upheld by the DG Intermediate Ct) to hold that the Restructuring Agreement was an agreement of the Partnership, and not of the 3 persons as individual direct shareholders of DG Ltd Co. 

41.1.  Briefly, the background to the litigation in Dongguan is as follows. 

41.2.  On 7 July 2014, Mr Wong issued proceedings in Dongguan against DG Ltd Co and Mr Chu.  Mr Wong alleged in his pleadings[81] that since he was not a shareholder of DG Ltd Co (the sole shareholder of which was the Partnership), and since the Partnership had not been a party to the Restructuring Agreement, under certain provisions of PRC law, he was under no obligation to contribute to the increase in share capital, and he therefore claimed against DG Ltd Co and Mr Chu for the return of RMB1,415,500[82].

41.3.  On 2 December 2015, the DG 3^rd Ct rejected Mr Wong’s claim for reasons set out in the PRC Judgment[83]. In summary, it held that the Restructuring Agreement should be deemed as an agreement among the 3 persons to increase share capital in the Partnership, which in turn increased the share capital in DG Ltd Co.  Hence, the DG Court considered that Mr Wong had not made any contribution for increase in share capital in DG Ltd Co, and rejected his claim.  

41.4.  On 23 December 2015, Mr Wong appealed[84].

41.5.  On 6 December 2017, the DG Intermediate Ct gave judgment[85] upholding the PRC Judgment.  In summary, it held that although the Restructuring Agreement was expressed as an increase in share capital of DG Ltd Co, in substance it was an increase in the share capital of the Partnership.

41.6.  Mr Chu submitted that the PRC Judgment was binding on the judge by way of res judicata and/or issue estoppel. 

42.  That submission should also be rejected for the following reasons. 

42.1.  First, it was not pleaded by Mr Chu that the PRC Judgment was binding on the Hong Kong court by way of res judicata and/or issue estoppel.  If it had been so pleaded, directions would have to be given for expert evidence on PRC law.  This is because the PRC and Hong Kong have different legal systems, and as such, PRC law is regarded as foreign law which has to be proved by expert evidence[86].

42.2.  Second, the application of res judicata and/or issue estoppel was not raised before the judge at trial, and it cannot be raised for the first time on appeal.  The Flywin principle referred to above applies similarly to the attempt to raise this new point on appeal.

42.3.  Third, whilst it may be said that Mr Wong’s position in the DG 3^rd Ct was inconsistent with his position as pleaded in this case[87], it would appear from the transcript that he was not cross-examined on it in the trial of the present case.  That is not surprising, as it had also been Mr Chu’s case that the 3 persons treated themselves as direct shareholders of DG Ltd Co[88].

42.4.  Fourth, in any event, the judge would not have been bound under res judicata and/or issue estoppel because the PRC Judgment was not conclusive (which is one of the prerequisites for res judicata and/or issue estoppel to apply[89]) for even on Mr Chu’s own case, under the PRC legal system, the hearing before the Intermediate court is by way of a complete re-hearing[90].

(3)  Wong’s Contribution for Liabilities issue

43.1.  On a fair and objective reading of Mr Chu’s pleadings (see §§10-13 of Chu’s AD&CC), the impression given was that Mr Wong was obliged to contribute to the increase in share capital and this was what Mr Chu had done on his behalf.  It was not pleaded that Mr Wong also had an obligation to contribute to DG Ltd Co’s liabilities, and that Mr Chu had also done so on his behalf.

43.2.  The same can be seen in §§17- 18 of Mr Chu’s witness statement.

43.3.  Accordingly, the judge would have been entitled during the trial to hold Mr Chu to his case as formulated in his pleadings and verified in his witness statement.  In other words, the judge would have been entitled to disallow Mr Chu from advancing a case based on Wong’s Contribution for Liabilities (in addition to Wong’s Contribution for Increase in Share Capital). 

44.1.  However, the judge permitted Mr Chu to do so.  Thus, at §12 of the Judgment, the judge set out Mr Chu’s evidence that “there was an agreement between him and Mr Wong (and Mr Ho) that they would pay for all the expenses incurred by [DG Ltd Co]”. The judge also examined Mr Wong’s evidence in opposition[91].

44.2.  More significantly, the judge said this (§26):

“There are two predominant overarching agreements said to have been reached between the parties, and which will inform the overall position as between them:

(1)  The payment of HK$1,500,000 made by Madam Ding to Mr Chu on 8 June 2011.  Was that a loan made by Madam Ding to Mr Chu (as Mr Wong and Madam Ding say) and if so what were its terms, or was it the repayment of money owed by Mr Wong (as Mr Chu says)? [“overarching agreement (1)”]

(2) The liability of Mr Wong to [DG Ltd Co]. It is agreed that by virtue of the restructuring agreement reached between the shareholders, Mr Wong owed at least RMB1,400,390.59 to [DG Ltd Co], that he says he paid off by making payments to Mr Chu. Mr Chu however contends that there was a wider agreement by which Mr Wong agreed to be responsible for his aliquot share of all expenses of [DG Ltd Co]” [“overarching agreement (2)”] (Emphasis added).

44.3.  The judge discussed overarching agreement (2) above in §37 which is crucial:

“In fact, although it does not appear expressly in his witness statement, I have understood Mr Chu to contend that there was a continuing obligation on the three shareholders to contribute whatever was needed by [DG Ltd Co] in order to run its business. Such a continuing obligation would represent a completely unlimited liability of Mr Ho, Mr Chu and Mr Wong to contribute to a company in the PRC that they were not in fact shareholders of. In addition it would require Mr Ho and Mr Wong to make unlimited contributions to a company which was as a matter of fact controlled and operated by Mr Chu on their behalf. Whilst I accept that such an agreement is possible, and indeed could have been entered into, I would expect that the parties would have recorded this agreement in some manner. However there is no record of this further unlimited liability agreement. The only contemporaneous document is the restructuring agreement, which indicates a limited liability to contribute an additional investment of RMB4 million in total. That document is therefore inconsistent with Mr Chu’s case”. (Emphasis added).

45.1.  Unfortunately, it would appear that clause III of the same document (the Restructuring Agreement) was not drawn to the judge’s attention.  To repeat, this clause read as follows:

“Such equity variation takes effect as of June 30, 2010. Creditor’s right and liabilities of the company as of the effective date shall be [“shared by”] the investors respectively according to their share proportion in [DG Ltd Co]”. [三、本次股权变更从2010年6月30日起始生效。公司的债权、债务自股权变更生效之日起，由投资各方按所占东莞市雅浩胶带制品有限公司股权比例分担。] (Emphasis added).

45.2.  Had this clause been drawn to the judge’s attention, it would clearly have affected his decision on overarching agreement (2) above, for it was a contemporaneous record of an agreement which (at least arguably) gives rise to an obligation on Mr Wong’s part to pay Wong’s Contribution for Liabilities, which the judge thought did not exist.

45.3.  Put another way, the judge’s construction of the Restructuring Agreement as “indicating a limited liability to contribute an additional investment of RMB4 million in total” would appear to be erroneous, as he had failed to consider clause III of that document.

45.4.  In relation to the judge’s construction of the Restructuring Agreement omitting clause III (“the construction issue”), the court invited further written submissions from the parties which were received and considered. 

45.5.  The following submissions were made on behalf of Madam Ding.

(a)  The construction issue had nothing to do with her:

  This will be discussed at §48.1 below.

(b)  The judge was right in his construction because the total amount of capital (with a breakdown of each shareholder’s investment) was stated as RMB4 million:

  This submission does not answer the construction issue.  The issue here is the shareholders’ express obligation under clause III to contribute to DG Ltd Co’s liabilities as from 30 June 2010, not their obligation to add to the capital which had already been quantified and agreed.  It is general commercial knowledge that apart from raising capital for a company by means of paid-up shares, shareholders can and often do defray a company’s liabilities, as and when they occur, by making shareholders’ loans.  Besides, once funds are invested as capital, they become the company’s own money, and its use of the money (eg to pay business creditors) has no connection or relation to individual shareholders.  Thus clause III (under which the 3 persons agreed to contribute to DG Ltd Co’s liabilities according to their share proportion in that company) could not have referred to the capital.

(c)  Mr Chu’s counsel did not seek to rely on clause III and it was not put to any witnesses at trial:

  This will be discussed at §46.1 below.

45.6.  The following submissions were made on behalf of Mr Wong.

(a)  Clause III was “no more than a generic statement stating the rights and liabilities of (not contributions towards) the limited company is reflected by the change of capital contribution since 30 June 2010 (i.e. the additional RMB4 million)” and the only shareholder of DG Ltd is the Partnership:

The reference to a “generic statement” must be rejected because clause III was a specific clause drafted by the parties.  As for the “reflection” related to the change in capital, see the discussion in §45.5(b) above.  As to the Partnership being the sole shareholder of DG Ltd Co, see §§15-18 above as to the convention of the parties in treating aliquot shares in DG Ltd as their own separate assets.  This submission also does not answer the construction issue.

(b)  Mr Chu’s case was only that he paid “continuing capital injection and/or daily operation costs” on Mr Wong’s behalf, not DG Ltd Co’s liabilities.

This submission does not assist Mr Wong.  Daily operation costs are obviously liabilities of the company. They are not necessarily paid from capital, and can be defrayed by funds from shareholders’ loans.  If it only referred to capital, this submission does not explain why the shareholders’ obligation in clause III is to contribute to liabilities “according to their share proportion”: §45.5(b) above.

(c)  The liabilities of a company is “not tantamount to capital injection (or advancement of operation expenses) to a company, that capital injection may only increase assets or decrease liabilities subject to different accounting treatments.  Moreover, upon the closing down of DG Ltd Co in about end of 2012 as a limited company, there is no liability of the HK Company vis-a-vis the DG Ltd Co., let alone the 3 parties which were not shareholders thereof”:

Insofar as that submission accepts that a company may pay its liabilities by means other than capital injection, that is correct but it does not help Mr Wong. 

Further, it is not understood what is meant by “the liability of the HK Company”. Insofar as it means the Partnership, the submission appears to be that as DG Ltd Co was a limited company, the shareholder (be it the Partnership or the 3 persons) would not be liable anyway when DG Ltd Co closed down at the end of 2012. 

However, that submission does not answer the construction issue.  DG Ltd Co was still in operation at the time of the Restructuring Agreement. Mr Chu and Mr Wong were obviously still trying to keep it in operation by agreeing to invest further funds (the dispute being whether funds were limited to the capital increase of RMB4 million only).  As for the meaning of Clause III, the parties being business people must have intended it to have a meaning.  It would be absurd for them to agree that from that day forth, they should contribute (in proportion of their shares) to nothing.  The alternative construction, which would make more commercial common sense, is that they agreed that they should contribute (in proportion of their shares) to DG Ltd Co’s liabilities in the course of its operation. 

(d)  None of the parties referred to or relied on clause III in submissions or during examinations of witnesses at trial:

This will be discussed at §46.1 below.

45.7.  As for Mr Chu, some of his submissions strayed far beyond the construction issue, and accordingly have not been taken into account.  He indicated his “agreement that the Restructuring Agreement did not clearly indicate that the 3 of them had a continuing obligation to contribute to [DG Ltd Co]”. 

46.1.  It is noted that Mr Chu’s counsel had not referred to clause III in either her opening or closing submissions, or in her cross-examination of Mr Wong. However, there was no express or implicit disavowal of that clause.  Similarly, Mr Chu’s view of the sufficiency or otherwise of the clarity of that clause is neither here nor there in this Court’s examination of the Judgment on the construction issue.

46.2.  It is well-established law that the court’s task is to ascertain the objective meaning of the words in a written agreement according to their ordinary and natural meaning, and to ascertain what a reasonable person, with the background knowledge reasonably available to the parties at the time of the agreement, would have understood the parties to have meant.  The court is not concerned to identify the subjective understandings of the parties.

46.3.  It is of course the duty of counsel to assist the court by pointing out material evidence, not the other way round, and we sympathize with the judge for not noticing evidence to which counsel had not drawn to his attention in the course of this complicated and ill-prepared case.  But it has to be pointed out that clause III was crucial to the construction issue.  This clause was not buried somewhere in another document within the bundles.  It was in the same document which the judge described as one which “represented the total liability of the shareholders to make a contribution to [DG Ltd Co]”[92], a document the construction of which was significant to his finding on the main issue.  The findings in §37 of the Judgment were pivotal in the judge’s decision to reject Mr Chu’s case of Wong’s Contribution for Liabilities, once he allowed him to run it. 

47.  Further, it is difficult to reconcile the judge’s finding that the 3 persons would not have been prepared to assume unlimited liability “to contribute to a company in the PRC that they were not in fact shareholders of” with his finding at §9 of the Judgment that they “were indeed shareholders of [DG Ltd Co], and that anything which they have purported to do as shareholders was indeed legitimately done as shareholders”. 

48.1.  Moreover, the judge had also expressly stated that his decision on the issue of Wong’s Contribution for Liabilities impacted his decision on overarching agreement (1) as well, i.e. the nature of Madam Ding’s transfer of $1.5 million to Mr Chu[93].

48.2.  The judge’s conclusion on the overarching agreements also expressly impacted his analysis of the many other monetary transactions between Mr Chu and Mr Wong[94], as shown in the list in §25.1 above.  In this connection, there is also the issue of the accuracy of the General Ledger.   

49.  Given the significance of clause III to the construction issue, with the impacts set out above, and albeit with great reluctance given the time and costs ramifications, there is no alternative open to this court but to order a re-trial, not only of the issue of Wong’s Contributions for Liabilities, but also of Madam Ding’s claim and the result of the running account between Mr Chu and Mr Wong.

(4)  The credibility issue

50.  Finally, Mr Chu submitted that the judge was wrong in his findings of fact, and wrong to have accepted Mr Wong and Madam Ding’s evidence when they had been shown to have given incorrect evidence and had provided incorrect translations to the court.  In particular, Mr Chu criticized the judge for accepting Mr Wong’s evidence explaining why he had written three emails[95] to Mr Ho asking for the latter’s contribution to DG Ltd Co, when on Mr Wong’s own case, the 3 persons had no obligation to contribute to that company’s liabilities, and Mr Ho had no obligation to contribute to increase in share capital.  

51.  Given the order for a re-trial, it would not be appropriate to discuss this ground. However, it must be pointed out that while the translations provided in the bundles (which were apparently not certified) were inaccurate in some respects, it was the duty of the legal representatives of all the parties (which included Mr Chu’s legal representatives) to ensure that translations were accurate.

Order

52.  For the reasons set out in §§ 43 -49 above, the appeal is allowed and the judge’s order set aside, with an order for re-trial before another judge, and directions for a pre-trial review to ensure that the case is properly prepared for the re-trial. 

53.  The parties have agreed that costs should follow the event of the appeal and that there should be a summary assessment of costs.  Having in mind the unsatisfactory manner in which Mr Chu’s case was pleaded and run below, we consider that he should only be allowed half of the costs he has claimed on appeal, i.e. $16,000.