YEUNG GA WAI formerly known as YEUNG PUI WAH v. LAU MING SHUM

HCA 798/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 798 OF 2004

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J U D G M E N T

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1. The plaintiff is a businessman with much experience in some aspects of the financial world. Through a friend of his, Mr Kwong Yick Chor, he was introduced to the defendant, a man with business interests on the Mainland, but also with an interest in a Hong Kong Company called Treasure Spot Limited. Mr Kwong was also a friend of the defendant and it is clear that Mr Kwong, as a mutual friend of the parties, was in fact the person who created a sense of trust by the plaintiff in the defendant.

2. The plaintiff also had an interest in and some limited experience in running gymnasia as a business.  The defendant was intending to establish and gradually did so, a hotel business in Cheung Sha, Hunan province, on the Mainland.  The project was to be managed by Treasure Spot (Chang Sha) Hotel Management Company Limited which, as its name suggests, was linked with the Hong Kong Company bearing the same name.

3. As a result of one or more meetings between the plaintiff Mr Kwong, the defendant and others, the defendant encouraged the plaintiff and Mr Kwong to “invest” and I use that term in its most general sense, in the project.  Initially the defendant was looking to raise 20 million HKD capital for the project, and eventually revised this to 30 million HKD.

4. The plaintiff and Mr Kwong were to provide 2 million HKD initially and then on the revision of the required capital, 3 million HKD, which of course was equivalent to 10 per cent of that capital.  Eventually Mr Kwong repaid 1.2 million HKD to the plaintiff leaving the plaintiff’s interest in the project at 1.8 million HKD.  His principal interest in the project was the gymnasium business.  He had a friend Danny, (Mr Gei Wai Tong), who had some experience of the gymnasium business.

5. The plaintiff’s case is that he expected and was promised shares in the project to reflect his payment.  The Management Company was, in fact, wholly owned by the Hong Kong Company Treasure Spot Limited which is recorded on some Capital Examination Reports as having paid sums of money into the capital account of the Chang Sha Management Company.

6. Although the promise and expectation of a shareholding to reflect the money paid by the plaintiff did not, according to the plaintiff, crystallise until after the first payment, when the defendant sought a further payment because the project was in effect underfunded, his expectation throughout was that a shareholding was promised.  Given the amount of money advanced by the plaintiff, commonsense dictated that there would be or should be some guarantee or recorded account of his “investment”.  Mr Kenneth Chan, for the defendant, had to concede at the outset that there is no record in any books of account, accounts, or any other record, of the sums paid by the plaintiff.  However it is agreed that the cheques provided by the plaintiff were paid into the defendant’s bank account, being made payable to him.  The defendant has not produced any bank record to show how that money, mixed with his own was used. I will deal later with the inevitable inferences to be drawn from this state of affairs, and the findings of fact which consequently have to be made.

7. The return on the investment promised by the defendant in the discussions prior to any payment by the plaintiff, was a share of the profits in proportion to the investment he made i.e. 10%.  The first payment, of 2 million HKD was made on 23 September 2002.  The second, following the defendant’s request for a further payment in the light of the increased budget for the project, of 1 million HKD was made on 13 November 2002.

8. He says he persisted in asking for the certificates when they were not forthcoming, and an attempt appears to have been made by the defendant to “fob him off” with an assurance (it it be such) that he and the defendant were the only two shareholders and that he should have confidence in the defendant.  Thereafter the plaintiff declined to make any further payment and explained that his involvement with the company as Vice‑Chairman was limited to some peripheral matters but he persisted because he wanted to find out more about the financial aspects of the company for his own protection but was thwarted or simply ignored or obstructed when he endeavoured to do so.

9. At some stage the defendant’s cousin (or some such relative) asked him to sign some documents allegedly for the purpose of registering his shareholder status in the project – no doubt in the Management Company. They never materialised.  It is conceded by the defence that there is no document which suggests that the plaintiff became a shareholder.

10. The trading life of the Management Company, and thus the project, was shortlisted.  By April 2003 it had virtually ceased business.  The plaintiff tried to get information on its financial position, and on the assets when they were eventually disposed of.  He failed.  There is a paucity of documentation relating to this collapse and liquidation.  As indicated by the defendant, he was running this business as a sole proprietorship and I am satisfied that the plaintiff’s appointment to the Board – which never seems to have met – was a sop to give the plaintiff the impression that he was directly involved with the running of the Management Company.

11. At some stage he appears to have tried to salvage some aspect of the business by trying to run a gymnasium on some part of the premises.  But he was baulked in this too by proceedings taken against him in China by the Hong Kong Company, which as far as I can ascertain, was also being run by the defendant.

12. The defendant’s case is equally simple though unnecessarily complicated or perhaps confused temporarily by reliance on a large number of irrelevant circumstances and documents.

13. It is that the plaintiff was not promised that he would be a shareholder or would be given a share certificate in respect of the money handed over.  That money, the defendant asserts, was simply a general cash investment in the business – and by that he appears to mean the Management Company – which would entitle him to profits in proportion to the money “invested” but, he would be liable to losses pro rata.  There was some confusion in the defendant’s evidence as to whether that proportion was 10% of the whole investment or 10% of the defendant’s 90% investment in the business.  He tried to create a picture of the plaintiff as Vice-Chairman of the Management Company, helping to run the business on a day-to-day basis and being closely involved in the fundamental decisions.  He prayed in aid a few company records bearing the plaintiff’s name and signature, and some vouchers for expenses of the business which the plaintiff signed as approving them.  The plaintiff explained that, in fact, the payments had already been made and approved by three senior signatories to the vouchers.  His approval he explained was superfluous.

14. According to the defendant, the plaintiff could have had access to the accounts and financial departments, at any time during the existence of the business.  The plaintiff said that he was always prevented from have such access.  Since no accounts or financial reports have been produced, and it is virtually accepted that they do not exist, it is difficult to know how, even if he had been permitted access, he could have learned anything relating to the money advanced by him to the defendant.  That money had gone into the plaintiff’s account and it had not been reflected in any accounting record of the company, or even, in the defendant’s accounts, after it was mixed with his money.  The defendant simply says that the plaintiff’s payments formed part of a fund which was used to run the business and as it collapsed without enough assets to repay even the shareholders’ investment – i.e. those of The Treasure Spot Hong Kong Company, and/or the defendant and a shadowy Mr Ngai – the plaintiff simply lost his money.

15. I found the defendant a most evasive witness, more often than not failing to give an answer to the questions put to him by Mr John Swaine, and sometimes pausing significantly before answering a simple question which required the answer ‘yes’ or ‘no’.  He gave me the clear impression that he was prepared to temper his evidence according to the prevailing wind.  The story he put forward is so contrived as to be lacking in reality.  He ran this business as his own fiefdom.  He had had the money from the plaintiff and simply used it as he thought fit without any regard to the plaintiff’s interest.  He seems to have had no conception of how to treat properly an “investment” of the proportions made by the plaintiff.  His contrived picture of a properly run business with the plaintiff employed at the hub of affairs was a charade. An effort was made to suggest that a bundle of documents – some of which clearly had the official mark of some record office or registry on the Mainland – which had come into the plaintiff’s possession most properly, as I find, from his Mainland lawyers involved on his behalf in the litigation on the Mainland, concerning the tenancy of part of the premises used for the hotel project ‑ indicated that he was heavily involved with the running of the Management Company.  I reject that contention as unreal.

16. It is not necessary for me to identify individually these documents which were adduced in the course of the trial and put to the plaintiff. My earlier comments are composite and comprehensive.

17. In Mr Kenneth Chan’s final submissions which he put forward to seek to change my mind about the firm views I had formed as to the credibility, or lack of it, of the two protagonists, he referred, inter alia to some Capital Examination Reports and Financial Statements, the latter prepare by a Mr Wong Siu Fai.

18. The Capital Examination Reports start on 27 June 2002.  This was well before the plaintiff agreed to advance or in fact advanced any money.  That of 10 October 2002 makes no mention of any payment by the plaintiff, and concerns what appear to be capital payments by The Hong Kong Treasure Spot Limited Company.  The same position applies to the reports of 6 December 2002.  None had any evidential value in relation to the plaintiff’s claim.  They have not been proved as to their source, creation or authenticity but that matters not in the absence of any relevance.

19. The Financial Statements fall into the same category.  They have not been proved by the maker.  They are without relevance to this claim.  They were not prepared until October 2005, 2½ years after the collapse of the hotel project.  They purport to cover the period 10 June 2002 to 30 November 2004.  The plaintiff had commenced proceedings in the early part of 2004.  The purpose of the statements seems to be to demonstrate the total loss over that 2½ year period, breaking it down into the loss of each year or part year of the trading, and finally the net asset value.  Of mere academic interest is the reference to “amount due to a shareholder”.  The shareholder is not identified but is likely to be The Hong Kong Treasure Spot Company.  It is certainly not the plaintiff.  It indicates payments which diminish the debt from 12.386 million RMB to 3.601 million RMB at the end of the period.

20. The only other witness called was Mr Liu Ming Jian who was The General Manager of the hotel project at the relevant time.  He was also a director of the Management Company.  He spoke of the appointment of the plaintiff as Vice-Chairman of the Management Company and produced documents, which the defendant also later relied upon, as examples of the plaintiff’s “hands-on” involvement in the running of the project.  These are as I have found, illusory.

21. He alleged that The Management Company resolutions were made at meetings and that someone circulated minutes.  No minutes ever emerged in the mass of largely, inconsequential documentation.  Oddly enough no meeting took place when it was decided to close the business.  They simply acted upon a directive from Hong Kong.  The concession by Mr Kenneth Chan on behalf of his client is worth recording:

“It is not suggested that he [the Plaintiff] signed all or any accounts, financial reports or statements of financial policy of the Management Company.”

What is most interesting about Mr Liu’s statement however is his bold assertion:

“He [the plaintiff] was also a shareholder.”

As the outset of his evidence, Mr Liu sought to clarify or amend this in some way to “so-called shareholder” or “unofficial shareholder”, explaining that on the Mainland the definition of “shareholder” was somewhat different.  The “official” shareholder was The Hong Kong Treasure Spot Company, and the Management Company was a subsidiary of it.  He was asked by Mr John Swaine why he found it necessary to raise this matter at the start of his evidence.  He was quite unable to give a satisfactory explanation as to why, now some 4 1/3 years after he had made his statement (11 December 2008) he should have this point foremost in his mind.

22. He resisted any suggestion that someone had directed his mind recently to it and had invited him to reconsider or define it.  Despite what he says, the reasonable and logical explanation is that someone had recently re-directed his attention to that assertion because it could be seen as capable of lending support to the plaintiff’s claim.

23. He later went on to explain that he understood that the plaintiff, Mr Kwong Yick Chor, Mr Ngai Shek Kung and the defendant were all “unofficial” i.e. non-registered shareholders.  They had contributed money “so they were bosses – so-called share-holders.”

24. This important evidence finds some parallel in an answer in part of the cross-examination of the defendant by Mr Swaine:

“The intention was to give them [Plaintiff and Mr. Kwong], shares from the interest in my name.”

There was then some convoluted reference to the shares being not in his name [i.e. the Defendant’s] but in the name of T. S. Finance (or T. S. Limited in Hong Kong.)

The evidence went on:

“Q. Your intention was to give shares to Mr. Yeung and Mr. Kwong from the interest that was in your name.

A.   Correct.”

After a reference to the Chang Sha Company being a “sole proprietor company limited”, the defendant’s evidence went on:

“Q. …… your intention was to give the shares to Mr. Yeung and Mr. Kwong from the interest that was in your name? ……

A.  That was the agreement I made with Mr. Yeung and Mr. Kwong at that time.  I agreed that that would be carried out, using the interest in my name.”

Later on came another gleam of light:

“A. Looking back from now …… we should have used our new company instead of an existing company. If we had used a new company, there would be less complication. There would be no trouble if we had used a share holding company instead of a sole proprietorship company.

Q. So in that event, shares would have been issued to all four of you, is that right, if you had established a new company?

A.  Yes, that’s right, when I look back on that, that is using a shareholding company.”

Those exchanges and the evidence of Mr. Liu afford substantial corroboration of the plaintiff’s case.

25. In his closing written submission Mr Chan set out (§71) ‑ “This case turns eventually on the credibility of the respective witnesses”.  He is entirely correct.  He went on to say ((§72):

“‑ on a balance of possibility. D’s case is far more credible than that of plaintiff who fails to explain why he would had entered into the investment under such peculiar terms and manner.”

On that I part company with Mr. Chan.  I find the plaintiff entirely credible and the defendant, for the most part, just not credible save where he confirms expressly or by implication in his evidence that the plaintiff was to have shares to represent his investment.

26. I am satisfied that he was promised shares by the defendant and that the defendant failed to honour this promise.  If matters not whether there were obstacles to the defendant in fact securing shares for the plaintiff.  He at no time suggests that he informed the plaintiff that he could not arrange the shareholding for which he had been paid.  The plaintiff made persistent oral requests and he was ignored.  The fact that he did not put such requests into writing is immaterial.  There was a total failure of consideration and the money went into the defendant’s bank account, and from there we know not where it went, despite what the defendant says.  Even if there had been no specific request until after the first payment, I am satisfied that the second payment was made on the strength of the defendant’s promise, and related to the full amount paid.  Furthermore the plaintiff declined to make any further payment when informed that the project was still underfunded.  He had still not received a share certificate to reflect his financial payments to date.  It was suggested though not with real force, that because Mr. Kwong had not pursued the same course as the plaintiff that should be seen as some evidence against the plaintiff’s case.  That is not logical.  The Defendant breached the agreement.

27. Of some significance is the defendant’s reaction to the plaintiff’s solicitors’ letter of the 14 January 2004.  That letter may not have been as precise as the punctilious  lawyer would have liked but it was clear enough:

“We act for Mr. Yeung Piu Wah who advanced the sum of HK3 m to you by way of two payments [identified by amounts and date]. Our client has requested return of the monies advanced to you but you have delayed or refused to return them.”

The defendant’s solicitors’ reply of 15 January said:

“We are instructed to deny all of your clients’ allegations mentioned in the said letter.”

That was an unequivocal denial of the receipt of any money as identified.  Those are other points upon which the plaintiff relies emerging from pleadings and statements of evidence.  It is not necessary to rehearse these in this judgment.

28. Mr Swaine has put the plaintiff’s claim on a number of additional legal bases.  I will deal with them.

29. The defendant received the sums of money from the plaintiff, as agent with the express purpose and intent of securing shares for him.  He failed to do so. He is therefore liable to account for the money and return it.

30. In receiving that money for the agreed purpose and paying it into his own bank account he was a trustee of those monies.  He failed to honour the promise he made and the agreement reached.  He is in breach of the trust.  He is therefore liable to account for, and repay the money entrusted to him for the failed purpose.

31. There will therefore be judgment for the plaintiff for the sum of $1.8 million HKD, with costs to be taxed if not agreed.  Mr Kenneth Chan has argued that by reason of the protracted proceedings – commenced in 2004, tried in 2013 – there should be some sanction in relation to the plaintiff’s costs.  In my view the plaintiff would have had a strong argument for indemnity costs but Mr Swaine wisely did not put that forward being conscious no doubt that there had been delay in proceeding with this action.

32. Having considered the file and the history of this litigation, it is clear that it was not progressed expeditiously.  There were significant periods of delay.  It has taken 9 years to come to trial.  That cannot be justified.  In my view this should properly be marked not by a penalty in relation to costs but a reduction in the amount of interest recoverable before judgment.  In normal circumstances the rate would be prime rate plus 1 per cent.  That  much  is  agreed.  However  I  consider  that, for  the reasons set out above, the plaintiff should have interest up to the date of the judgment at only half the rate otherwise regarded by the parties as, in normal circumstances, appropriate.