ELEGANCE TEXTILE (HONG KONG) LTD. v. FUNG OI IP, ALFONSO

DCCJ1007/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1007 OF 2002

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JUDGMENT

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1. The plaintiff applies for summary judgment under Order 14 Rule 1, or in the alternative for an interim payment under Order 29 Rule 10(2) of the Rules of the District Court.

2. The plaintiff's case is that it was the 100% shareholder of one Talentsoft Singapore Pte. Ltd. ("Talentsoft"), formerly known as Finchberg Trading Pte. Ltd. ("Finchberg") and eMerchant 2000 Pte. Ltd., a private company incorporated in Singapore. In about November 1999 the plaintiff's director and shareholder, Mr. Paul Chow Poung-Hwa ("Mr. Chow") entered into an oral agreement with the defendant in Hong Kong for the sale to him of 50,000 shares in Talentsoft at S$1.00 per share. Mr. Chow then procured Talentsoft to pass a resolution of its directors approving the transfer. The parties executed a Deed of Transfer of the shares, dated 2 December 1999. Ad valorem stamp duty was paid thereon and a certificate of stamp duty issued by the Inland Revenue Authority of Singapore. However in spite of numerous informal requests and a formal demand made through solicitors in January 2001, the defendant has never paid the S$50,000.00. The plaintiff now claims that sum or its equivalent in Hong Kong dollars, i.e. about HK$214,145.00.

3. The defendant has filed a defence. He says that in early 1999 Mr. Chow proposed to him that they use Finchberg as the vehicle for a joint development of internet business in Singapore. He made various representations about Finchberg. The defendant signed an incomplete Note of Transfer of shares in Finchberg, and a consent to act as director of Finchberg. However this was done in escrow on various conditions and the Note was not to be completed or to take effect until the conditions had been fulfilled. Once they were fulfilled the defendant would pay S$50,000 for the 50,000 shares.

4. The conditions, says the defendant were that Mr. Chow would obtain authorisation from the directors and shareholders of Finchberg, to authorise him to develop internet business with the defendant; he and the defendant would then work out a budget for funding for the business; Mr. Chow and/or the existing shareholders of Finchberg would pay off a loan that Finchberg owed to the plaintiff and would then inject S$100,000.00 into Finchberg; and Mr. Chow would provide proof of these matters and of the valuation of Finchberg to the defendant's satisfaction. Only then would the defendant put in his S$50,000.00 for the 50% shares in Finchberg.

5. The conditions, says the defendant, were never fulfilled. However, without the knowledge of the defendant Mr. Chow wrongfully caused the registration of the transfer of shares in the Singapore Companies Registry. The defendant was never involved in management or administration of the company, had no knowledge of its daily operations, and never received any dividends. He was never asked to pay for the shares, before the formal demand in January 2002.

6. Mr. Chow's evidence in brief is that he and the defendant were schoolmates and kept in touch after they grew up. At the defendant's suggestion in 1999 he invested in an internet start-up company in Hong Kong of which they both became shareholders and directors. He and his family had emigrated to Singapore in the early 1990s and they had established Finchberg there but by 1998 it was no longer active. In 1999 the defendant told the plaintiff that he had been granted permanent residence in Singapore. In order to keep that status he needed to show the immigration authorities some meaningful investment or employment in Singapore. It was therefore agreed that the plaintiff would acquire a 50% shareholding in Finchberg and they would together use it to develop internet business in Singapore. Because of their good relationship, they did not enter into any written agreement for the transfer of shares. On 2 December 1999 the directors of Finchberg, i.e. Mr. Chow, his mother and his cousin, passed a resolution to approve the transfer. He and the defendant went together to the office of an accountant. Mr. David Yeung where they signed an instrument of transfer. The signature of Mr. Chow's mother was added later. The defendant was appointed a director and the transfer was duly registered. It was agreed that Finchberg would arrange for the defendant's provident fund payments as a director and a payment was made on 31 December 1999.

7. The defendant proposed the change of Finchberg's name to eMerchant 2000 Pte. Ltd. and this was done with the necessary resolutions of directors and shareholders, including the defendant, by means of paper meetings. The same happened later with the change of name to Talentsoft., which was proposed by the defendant who was trying to set up a project with an American company of the same name.

8. In fact the project with the American company never materialised; the internet venture boom came to an end; and the proposed growth of business through Talentsoft also did not materialise. Mr. Chow reminded the defendant to pay for his shares, and the defendant said he would pay, but never did. Ultimately they fell out over another business matter, and after this the defendant ignored further requests for payment for the shares and a claim was made through solicitors in January 2002.

9. As to the defence Mr. Chow says that there was no agreement for the note of transfer to be held as an escrow pending the fulfilment by him of the conditions pleaded. Nothing of this sort was ever mentioned to the accountant, who went ahead and registered the transfer. (The accountant in his affirmation confirms this.)

10. Mr. Chow has exhibited some of the company's documents. The first set is dated 2 December 1999. There is a set of minutes of a directors' meeting of Finchberg at which the directors, namely Mr. Chow, his mother and his sister, authorised the sale of shares to the defendant. The share transfer document was signed on 2 December 1999 and on the same date the defendant signed a form of consent to act as director under the Singapore Companies Act and the directors signed a resolution appointing him a director.

11. The next document is dated 6 December 1999. It is a resolution of the directors of Finchberg to hold an extraordinary general meeting on 28 December 2000 and to pass a resolution for change of name of the company to eMerchant 2000 Pte. Ltd. It is signed by the defendant as a director.

12. The next document, in chronological order shows that on 14 December 1999 paid the stamp duty of $S1,000 on the note of transfer. There is no dispute that the transfer was duly registered.

13. Then there appears a set of minutes of an extraordinary general meeting of Finchberg, on 28 December 1999, at which the shareholders, namely Mr. Chow as representative of the plaintiff, and the defendant resolved to change the company's name to eMerchant 2000 Pte. Ltd. It is not in dispute that this was done and on 10 January the directors, including the defendant, signed a resolution to adopt a new Common Seal following the change of name.

14. On 9 May 2000 the directors, including the defendant, signed a resolution convening another extraordinary general meeting on the same date, this time for changing the company's name to Talentsoft. Minutes of the meeting of the shareholders on the same date, signed by Mr. Chow and the defendant show that the shareholders resolved on this change the name. On the same date, the directors including the defendant signed a resolution to adopt at new Common Seal following this further change of name.

15. The defendant's evidence, in brief, is that his relationship with Mr. Chow was by 1999 closer than Mr. Chow says. In 1999 they agreed to market an internet business in Singapore and Mr. Chow suggested that they do it through the existing company, Finchberg. This was agreed.

16. As to immigration the defendant says that in order to take up permanent residence in Singapore he had to show that he had an employer. Mr. Chow therefore offered him a post as Chief Technical Executive of Finchberg at a salary of S$4,000.00 per month; he signed an employment contract, which he produces. Later however Mr. Chow said that he wanted to change the defendant's position to that of a director so that, instead of a fixed salary, he would be paid director's remuneration according to the profits. This he could not resist, but after discussion it was agreed that he would only become a director and shareholder on the fulfilment of the conditions pleaded.

17. The defendant says that he did indeed sign the incomplete note of transfer, but only as a matter of convenience. He agreed to sign it and give it to Mr. Chow as an escrow pending the fulfilment of the conditions. He did indeed sign it at the office of the accountant, and Mr. Chow assured him that he would not be asked to pay before the conditions were met. However, unknown to him, Mr. Chow went ahead and transferred the shares without his prior consent or notice.

18. He says that he was not involved in the management of the company. He was only involved in changing its names. All the meetings for those reasons were paper meetings and he was only required to sign the various documents.

19. Mr. Chow filed an affirmation in reply in which he answers various of the allegations made by the defendant. In particular he says that although there was an arrangement for the defendant to be employed by Finchberg, to fulfil Singaporean immigration requirements this was temporary because the company "was not prepared to become an accomplice in any scheme of arrangement to cheat the Singapore immigration." I have to say that I do not know what else had been done, by the signing of the employment contract. Mr. Chow has also conveniently found a copy of a demand letter dated 28 December 2000 which he says was faxed to the defendant. I allowed this to be admitted, against the objections of the plaintiff, but it obviously has to be viewed with some suspicion;

Order 14 Principles

20. Order 14 places the threshold onus on the defendant to show that there is a triable issue. The Court will test the credibility of an affidavit asserting a triable issue against the conduct of the defendant and contemporary documents. See Murjani v. Bank of India [1990] 1 HKLR 586.

21. In Ng Shou Chun v Hung Chun San [1994] 1 HKC 155 Godfrey J.A. said:

"...I would sound a note of caution about Murjani which has come to be cited in almost every case under O 14 or O 86 to justify the plaintiff in asking the court to embark on a mini trial of the action on affidavit evidence. That is not a proper course for the court to take. It will in future be sufficient for the court to ask itself the simple question: 'Is what the defendant says credible?'. If so, he must have leave to defend, if not, the plaintiff is entitled to summary judgment. The issue is not whether the defendant's assertions are to be believed, it is whether those assertions are believable."

22. Godfrey J.A. again put the matter in a nutshell in Man Earn Limited v Wing Ting Fong [1996] 1 HKC 225:

"Unless it is obvious that the defence put forward by the defendant is 'frivolous and practically moonshine', Order 14 ought not to be applied": see Codd v Delap (1905) 92 LT 510 per Lord Lindley at 511.

23. However, this does not mean that the court must disregard the background. To the extent that it can look at the defendant's own conduct and the contemporaneous documents, without embarking on a mini-trial on affidavit evidence, Murjani is still good law. Or, as Bokhary JA put it in Re Safe Rich Industries Limited, Civil Appeal No.81 of 1994, unreported, 3rd November 1994 :-

"The test at the summary stage is indeed as simple as whether the defendant's assertions are believable. But it must be recognised - because failure to recognise it would create a debt-dodgers' charter - that whether the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute."

This last passage was relied on by Ma J more recently in S.A. International Inc. v. Ang Tai Hoi t/a Hoi Fung Hong, HCA 1664 of 2002.

Application of principles

24. The question, then, is "Are the defendant's allegations believable". Now it is clear from the documents that from December 1999 to May 2000 the defendant on several occasions purported to act as a director and shareholder of the company. It does not matter that the meetings were paper meetings, or that they dealt with change of names rather than with business. In any event, on both accounts, the company does not seem to have done any business. The point is that the defendant could not sign documents as a shareholder and director, unless he knew that he was a shareholder and director and had consented to become one. These documents, under his own hand, quite simply give the lie to his story of signing the transfer document as an escrow pending the fulfilment of conditions. It is the classic Order 14 situation where the defendant's allegations are contradicted by his own contemporaneous documents.

25. It is also difficult to understand why, if Mr. Chow had agreed to the conditions which the defendant claims, but had not fulfilled them, he would have gone ahead and registered the transfer of shares, because it is difficult to see what advantage there would have been to him in so doing.

26. Counsel for the defendant argues that the defendant's assertions are believable when viewed against the background of the case, and has set out various matters for consideration. I have considered them but I still cannot see how the defendant can get past the simple fact that, notwithstanding his assertions, he purported to act as a director and shareholder.

27. It is also argued that though payment would have to be made within a reasonable time, there is no allegation that such time had elapsed and no particulars of how such time should be arrived at. Therefore, a trial is necessary. I have to say that I cannot accept this either. If the defendant's assertions are not believable, then he simply agreed to buy the shares. There would be no need for any long delay in paying for them. In any event this is not the defendant's case. He does not say that he bought the shares, and agreed to pay for them at some unspecified time and that therefore the plaintiff must show that in all the circumstances, a reasonable time for payment has elapsed and he is entitled to demand payment. What he says is that he never agreed either to take the shares or pay for them until his conditions were fulfilled, which they were not. That, in the light of his own signatures on contemporaneous documents, is not believable.

28. It follows that the plaintiff must have judgment. There will be judgment for the plaintiff for S$50,000.00 or its equivalent in Hong Kong currency with interest thereon at the best lending rate plus 1% from the date of the writ until judgment and thereafter at the judgment rate until payment, and costs of the action, including costs (nisi) of this summons, to be taxed if not agreed, with certificate for counsel.