LI WING FUNG v. LI CHUN

HCA12694/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.12694 OF 1996

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J U D G M E N T

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1. By a contract in Chinese ("Joint Venture Contract") dated 29 April 1994 made between Baoding Petrochemical Factory of Hebei Province China (中國河北省寶定石油化工廠) ("Party A") of the one part and Best Wide Development (Chemicals) Limited (錦宏發展(化工)有限公司) ("Party B") of the other part , the two parties agreed to form a joint venture in the name of Boading Jinhong Petrochemical Company Limited (寶定錦宏石油化工有限公司) ("Joint Venture").

2. Clause 10 of the Joint Venture Contract provided that Party B should inject registered capital up to US$1,149,400.00 in one month from the date of issuance of the business licence of the Joint Venture. Party B was incorporated on 26 April 1994, that is to say, three days before the date of the Joint Venture Contract, with an authorized capital of HK$1,000.00 divided into 1,000 shares of HK$1.00 each. From the date of Party B's incorporation up to at least 26 April 1996, only two shares had been issued. The two subscribers' shares were transferred to the defendant and Best Wide Development Limited ("BWDL").

The plaintiff's case

3. The plaintiff's case is that by an oral agreement made between the plaintiff and the defendant in or about May 1994, it was agreed by the plaintiff and the defendant that the plaintiff and the defendant would jointly invest in the Joint Venture through Party B ("the Investment Agreement"). The Investment Agreement contained the following express terms :-

(1) The plaintiff and the defendant would invest in Party B through a BVI company, which was later made known by the defendant to the plaintiff to be Best Shine Resources Limited ("Best Shine");

(2) Best Wide would be wholly-owned by the BVI company;

(3) the plaintiff would have 20% interest and the defendant would have 80% interest in Party B indirectly by the plaintiff and the defendant respectively holding 20% and 80% of the shares in the BVI company;

(4) the defendant would procure in favour of the plaintiff the matters set out in (1) to (3) above; and

(5) the payments to be made by Party B under the Joint Venture Contract would be borne and paid by the plaintiff and the defendant in the ratio of 20:80 to reflect their respective shareholding in the BVI company.

4. Pursuant to the Investment Agreement, the plaintiff applied for and was allotted 2,000 shares of nominal value of US$1.00 of and in Best Shine on or about 30 August 1994.

5. The plaintiff's pleaded case of representation in paragraph 4A of the Amended Statement of Claim is as follows :-

"4A. Further or alternatively, prior to the entering of the Investment Agreement in or about May 1994, the Defendant represented to the Plaintiff, inter alia, that the Defendant intended to procure that the Plaintiff would be entitled to a 20% interest in (Party B) by means of a holding 20% of the shares in the said BVI company ('the Representation'). In reliance upon the Representation, the Plaintiff entered into the Investment Agreement and paid the sums of US$229,800 and US$319,120 referred to below."

6. By a letter dated 15 July 1994, the defendant was told that the business licence for the Joint Venture had been issued. Pursuant to the Joint Venture Contract, Party B would be required to pay the initial payment of US$1,149,400.00 within one month, that is to say on or before 15 August 1994, and pursuant to the Investment Agreement, the plaintiff would bear 20% thereof in the sum of US$229,880.00 and the defendant would bear the remaining 80%.

7. About a week before 15 August 1994, the plaintiff was requested by the defendant to pay in US$549,000.00 being the plaintiff's 20% share as well as a sum of US$319,120.00 for and on behalf of the defendant. The defendant promised that he would repay the sum of US$319,120.00 to the plaintiff as soon as possible, or alternatively such sum would be set off against the plaintiff's payment of the second installment of Party B's injection of capital to the Joint Venture ("the Loan Agreement").

8. Wrongfully and in breach of the Investment Agreement and the terms thereof, the defendant has failed to procure the plaintiff a 20% interest in Party B by means of a holding of a 20% interest in Best Shine or to procure that Party B be wholly-owned by Best Shine. In fact, the shares in Party B were, at all material times, held by or in trust for the defendant and of his wife via the defendant's company or companies. The plaintiff then accepted the defendant's repudiation and demanded the money back. The plaintiff put forward pleas of total failure of consideration and misrepresentation.

The defendant's pleaded case

9. The defendant's case as pleaded in his Amended Defence is as follows :-

"2. The Defendant is and was at all material times one of the directors and shareholders of (Party B) and has full and complete control thereof.

...

6. By a fax message dated 15th July 1994, (the Joint Venture) informed the Defendant qua the representative of (Party B) that the Business Licence had been issued. Save as aforesaid, paragraph 5 of the Statement of Claim is denied.

7. Save as admitted that (Party B) would be required to pay the initial deposit of RMB10,000,000 to (the Joint Venture) within one month from the day of issuance of Business Licence. Paragraphs 6 and 7 of the Statement of Claim are denied. The Defendant avers that the Business Licence referred to in paragraph 4 herein has been issued on 11th July 1994.

8. On or about 12 August 1994, (Party B) invested US$200,000 in (the Joint Venture) by telegraphic transfer as its partial investment in accordance with the (Joint Venture Contract).

9. In or about August 1994, it was orally agreed between the Plaintiff and (the Joint Venture) that the Plaintiff shall invest US$549,000 in (the Joint Venture) ('the 1st Oral Agreement').

PARTICULARS

The agreement was orally made between the Plaintiff and Mr.Tsui for an on behalf of (the Joint Venture) over telephone."

10. I interject here to say that under the Particulars supplied pursuant to a request, the Joint Venture directors to the oral agreement by telephone are said to be Mr Tsui Sun Fuk (徐順福) ("Mr Tsui") and Mr Ma Chun Wah (馬振華).

11. I return to the Amended Defence :-

"10. On or about 15th August 1994, the Plaintiff invested directly US$549,000 in (the Joint Venture) by telegraphic transfer in accordance with the 1st Oral Agreement.

...

12. The Defendant has never requested the Plaintiff to lend US$319,120 to the Defendant or to other person(s) as may be nominated by the Defendant. In the premises, the Defendant is under no obligation to repay the said sum of US$319,120 or any part thereof to the Plaintiff. Save as aforesaid, paragraph 9 of the Statement of Claim is denied.

...

14. (a) The Defendant was at all material times one of the directors and shareholders of Best Shine holding 10,000 shares therein.

(b) In or about late August 1994, it was orally agreed between the Plaintiff and the Defendant that the Defendant shall sell and transfer 2,000 shares of nominal value of US$1.00 each in Best Shine to the Plaintiff, and that subsequent to the said transfer the Plaintiff and the Defendant would make investment in stock and real property market through Best Shine ('the 2nd Oral Agreement').

(c) In pursuance of the 2nd Oral Agreement, the Defendant did sell and transfer 2,000 shares of nominal value of US$1.00 each in Best Shine to the Plaintiff on or about 30th August 1994.

(d) The said transfer of shares is unrelated to the joint venture involving (Party B), (Party A), (the Joint Venture) and (the Joint Venture Contract).

(e) Save as pleaded in paragraphs 14(a) to (d) hereof, paragraph 4(b) of the Statement of Claim is denied."

The defendant's version in his testimony at trial

12. His version is that the defendant and the plaintiff came to know each other when they were living at Dynasty Court. In May 1994, the plaintiff went with the defendant to Hebei. By that time, the defendant had already signed the Joint Venture Contract and he agreed that the plaintiff could take part in the investment. The plaintiff suggested that the plaintiff and the defendant formed a company, and the company could then be used to make investments and they agreed that the defendant would have 80% and the plaintiff would have 20%. After that, the plaintiff said he would need time to raise money and so on, and the defendant provided documents including those at pages 72-74 of the agreed bundle to the plaintiff for him to raise money. The plaintiff knew that they had to inject capital of about US$1,000,000.00 to the Joint Venture.

13. When they knew that the business licence had been issued, the defendant told the plaintiff about the matter and how much the plaintiff needed to pay, and asked the plaintiff how much he decided to pay.

"I told him how much he needed to pay under contract. I asked him how much he decided to pay. Between him and I, I paid my share whereas he paid his share. We did not talk about how much he paid for me and how much I paid for him. We did not talk about that. He did not know how much I paid, nor did I know how much he paid. Afterwards, he told me that comparatively speaking, he borrowed a loan from the bank comparatively too much he could pay for me. There is a time restriction from the bank and so on, and so he eventually did pay about US$500,000. I paid about US$200,000. Then we went to attend the opening ceremony of Baoding Factory."

14. In 1996, the Chinese party unilaterally terminated the Joint Venture Contract. The defendant did not borrow any money from the plaintiff.

15. It was correct that the defendant's intention and the plaintiff's intention was to have Best Shine to be the holding company of Party B - "that was the arrangement at the time".

Analysis and assessment

16. This version is not quite the same as the pleaded version.

Assessment of the defendant's pleaded case

17. Be that as it may, I shall deal first with the pleaded version.

18. His pleaded case that the plaintiff's transfer of US$549,000.00 had nothing to do with him because it was pursuant to an agreement made between the plaintiff and the Joint Venture is one which I have no hesitation in rejecting.

19. I reject it because there is no evidence in support.

20. I reject it also because on the defendant's pleaded case, he had full and complete control of Party B; Party B was to be 55% owner of the Joint Venture and Party A was the only other party to the Joint Venture. It is simply impossible for the plaintiff to invest in the Joint Venture without any agreement on the part of the defendant. After all, it was Party B's Joint Venture with Party A, and Party B was in the defendant's full and complete control. That the plaintiff could not invest in the Joint Venture without the defendant's agreement is supported by clauses 1, 2, 13 and 35 of the Joint Venture Contract.

21. Further, if the plaintiff's remittance had nothing to do with the defendant, if Best Shine had nothing to do with the Joint Venture, and if Best Shine was merely a company formed pursuant to an agreement made between the plaintiff and the defendant to invest in stock and real property, then there is no reason why the defendant himself should or would have executed an Instrument of Transfer of BWDL's one share in Party B to Best Shine. But this is precisely what he did by an Instrument of Transfer dated 18 June 1994 at page 72 of the agreed bundle. There is also no reason why he should or would have signed the Bought and Sold Notes dated the same date at page 73 of the agreed bundle. There is no reason why he should or would have made a Declaration of Trust declaring that the share standing in his name in Party B was held on trust for Best Shine (see page 74 of the agreed bundle). There is no reason why the defendant himself should or would have appointed the plaintiff to be a director of the Joint Venture, as stated in a Letter of Appointment signed by him at page 88 of the agreed bundle. It was a letter of appointment dated 7 September 1994 signed by him on behalf of Party B. He appointed the plaintiff and Mr Tsui to be directors of the Joint Venture. According to this letter of appointment, Mr Tsui was not appointed a director of the Joint Venture until 7 September 1994. On the defendant's evidence, Mr Tsui did not work for the Joint Venture until September 1994. Thus, Mr Tsui could not possibly have agreed on behalf of the Joint Venture in or about early August 1994 to agree to the plaintiff's investment in the Joint Venture. In my judgment, the case put forward by the defendant in the Amended Defence fails.

Assessment of the defendant's version at trial

22. On the version put forward by the defendant in his oral testimony, it was crucial that Party B should become wholly-owned by Best Shine. The defendant accepted that that was the arrangement and he said that that was why the Instrument of Transfer and the Bought and Sold Notes at pages 72-73 of the agreed bundle were signed on behalf of BWDL to transfer the one share in Party B to Best Shine. That is also why he declared himself to hold the other share on trust for Best Shine at page 74 of the agreed bundle.

23. Searches made of the Companies Registry of Party B revealed that Best Shine has never been said to have become a shareholder of Party B. On the contrary, according to an annual return signed by the defendant himself filed on 8 May 1995, BWDL's one share in Party B was said to be transferred to a company called Harkonnen Investments Ltd. ("Harkonnen"). 18 June 1994 is precisely the date when this one share of BWDL in Party B is said to have been transferred to Best Shine according to the documents at pages 72-73 of the agreed bundle. The same one share could not be transferred to two different parties on the same date. It has got to be one or the other. By this return, the defendant represented to any and all who make company searches that this one share was transferred to Harkonnen. Party B's annual return for the following year filed on 14 May 1996 was also signed by the defendant stating that Harkonnen and he were the only shareholders.

24. In respect of the defendant's share, the defendant himself disclosed a Declaration of Trust made by him dated, again, on 18 June 1994, declaring that he held the one share in Party B on trust for Harkonnen. On the basis of the two annual returns signed by him and on the basis of the Declaration of Trust in favour of Harkonnen, Party B would seem to have become a wholly-owned subsidiary of Harkonnen, as opposed to Best Shine. This is wholly inconsistent with the defendant's evidence version. He had had ample opportunity to explain how it came about that, instead of implementing the arrangement to make Party B wholly-owned by Best Shine, what had in fact been implemented apparently made Party B a wholly-owned company of Harkonnen. The defendant professed surprise and claimed that he was unable to tell me anything about Harkonnen. Up to the end of his submission, he had offered no explanation. I reject his professed surprise for the simple reason that the declaration of trust in favour of Harkonnen at page 125 of the non-agreed bundle was a document disclosed by him, not the plaintiff.

25. Another reason why I reject his evidence version is that it is simply incredible that when they were to contribute to the capital of the Joint Venture, the plaintiff volunteered to pay more than his share and neither the plaintiff nor the defendant asked the other how much he was going to pay. The defendant, in my judgment, was too shrewd a businessman for that sort of thing to happen. For all one knows, the plaintiff might be remitting US$1.00 or a few million US dollars. The position could not be that neither knew precisely how much the other was going to remit, and thus had no idea what the total remittance to the Joint Venture would turn out to be. I find the defendant's version incredible.

26. In any event, the defendant does not impress me as a credible witness or a person having any respect for the truth. I reject his evidence.

The plaintiff's claims

27. Having also rejected the defendant's evidence version, I turn now to the plaintiff's evidence. I accept his evidence on the oral agreement in May 1994 and on the request for a loan of US$319,120.00. I find that the plaintiff has proved the Investment Agreement and the Loan Agreement.

28. On the evidence before me, not only has the defendant taken no step to implement the agreement to make Best Shine the legal and beneficial owner of all the shares in Party B, the defendant has apparently made Party B a wholly-owned subsidiary of Harkonnen. I draw the inference, which in my judgment is irresistible, that the defendant has never intended to let the plaintiff have any interest in Party B or in the Joint Venture. Whether as total failure of consideration or as misrepresentation or as breach of the Investment Agreement, the plaintiff is, in my judgment, entitled to have US$229,880.00 back.

29. He is also entitled to be repaid the loan to the defendant of US$319,120.00.

30. However, I am not satisfied that the plaintiff has proved the Settlement Agreement as pleaded in paragraph 12(a) of the Amended Statement of Claim.

31. I order that judgment be entered in favour of the plaintiff against the defendant for :-

(1) US$229,880.00;

(2) US$319,120.00;

(3) interests on (1) and (2) at 9.5% per annum from 15 August 1994 until the date of judgment; and

(4) costs of this action.