CHU HON KWONG v. YIP KA WOO RICKY AND OTHERS

DCCJ 5702/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 5702 OF 2002

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Judgment

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1. In this claim the Plaintiff claims against the 1st, 2nd and 3rd Defendants for the sum of $200,000.00. The claim against the 1st and 2nd Defendants is based on fraudulent misrepresentation which induced the Plaintiff to sign an Investment Agreement and issue a cheque No. 180636 dated 31st May 2001 in the sum of HK$200,000.00 to the 3rd Defendant. The claim against the Defendant was based on breach of the Investment Agreement.

2. The misrepresentations pleaded in the Amended Statement of Claim were:-

(a) That the Plaintiff will be allotted or transferred 12.5 per cent of the shareholdings of the 3rd Defendant after he had invested HK$200,000.00 in the 3rd Defendant;

(b) That the Plaintiff will be registered as a member of the 3rd Defendant after investing the said HK$200,000.00;

(c) That the plaintiff will be appointed as a Director of the 3rd Defendant.

3. It was pleaded that the 1st and 2nd Defendants at the time when they made or caused to be made the said representations knew them to be false and untrue, or made them recklessly not caring whether they were true of false.

4. In the Defence of the Defendants it was admitted that the 1st and 2nd Defendants made the representations on or about the 30th May 2001. It was denied that such representations were fraudulent misrepresentations.

5. In the course of the trial, it came out in the evidence of the 1st Defendant that he had been adjudged bankrupt and the proceedings were stayed against the 1st Defendant by consent. However the 1st Defendant gave evidence on behalf of the 2nd and 3rd Defendants. The 2nd Defendant did not attend Court to answer the claim personally.

6. It is undisputed that although the Investment Agreement was signed on the 30th May 2001, the transfer of the 125,000 shares in the 3rd Defendant were only completed on the 13th September 2002 and it was on that date that he was appointed a Director of the 3rd Defendant. This date was after the issue and service of the Writ herein.

7. It is the Plaintiff's pleaded case that after the date of the Investment Agreement, the Plaintiff had made requests and demands by himself and his solicitors to effect the formal transfer of the shares, registration as member and appointment of the Plaintiff as a Director of the 3rd Defendant with no response from the Defendants. The Plaintiff also pleaded in the Amended Statement of Claim that by way of these proceedings the Plaintiff had accepted the 3rd Defendant's repudiation of the Investment Agreement. The Plaintiff's claim as against the 3rd Defendant is based on the 3rd Defendant's breach of the Investment Agreement aforesaid.

8. The Plaintiff's evidence-in-chief is contained in his witness statement which had been adduced into evidence. The Plaintiff gave evidence that he was told by the 1st and 2nd Defendants before he signed the Investment Agreement at page 50 of the Bundle of Documents that the $200,000.00 paid by him would be invested in the 3rd Defendant. After the signing of the Agreement, the Defendants would register him as a Director of the 3rd Defendant in the Companies' Registry. After that he would have the right to inspect the accounts of the 3rd Defendant. They explained to him that a Director had the authority to run the Company apart from having the right to inspect the accounts. He stated that if they had told him that they would not register him as a Director of the 3rd Defendant, he would not have invested in the 3rd Defendant as he specifically wanted to have the right to inspect the accounts of the 3rd Defendant.

9. After the signing of the Investment Agreement, the Plaintiff was brought to the office of the 3rd Defendant's Accountants where he signed the Bought Note in relation to the 125,000 shares in the 3rd Defendant and the Instrument of Transfer of the said shares at pages 70 and 71 of the Bundle of Court Documents. The Plaintiff said that a photocopy of these documents were subsequently given to him.

10. Shortly after his investment of $200,000 into the 3rd Defendant, on the 5th, 20th September and 30th October the Plaintiff invested three sums respectively totaling $60,000 into a subsidiary company of the 3rd Defendant in Guangzhou. The 1st and 2nd Defendants told him that the 3rd Defendant was losing money. They told him that the 3rd Defendant's subsidiary company in Guangzhou was the vehicle through which the 3rd Defendant operated its business of selling photo-printing machines that the further injection of capital was required.

Case against the 2nd Defendant

11. The onus of proof is on the Plaintiff to establish that at the time when the representations were made, the 2nd Defendant knew them to be false and untrue or made them recklessly not caring whether they were true or false.

12. In examination-in-chief, the Plaintiff stated that he trusted the 1st and 2nd Defendants when they said to him that they would attend to the formalities of the transfer of shares, the registration of himself as a member and the appointment of himself as a Director. He stated that when the Sold Note and the Bought Note all dated 12 July 2001 were handed to him around that date, he was informed that the formalities of registration had been done.

13. However, he did not know that they had not been done until when his former solicitors did a Company Search before 14th March 2002 and he then discovered that. It is not in dispute that despite the letter from Messrs. Gary K.W.Tam & Co dated 14th March 2002, the registration formalities had not been done until after the issue of the Writ. However, the 1st Defendant stated that the Defendants had not received the letter of Gary K.W.Tam & Co. The Plaintiff gave evidence that his former solicitors made another company search in about July 2002 and found that the formalities had still not been done. He enquired of the 1st and 2nd Defendants who told him that it was not required to enter into the formality of registration in the Companies' Registry.

14. There is no evidence from the 2nd Defendant as regards his personal knowledge related to the requirement of the Companies' Ordinance. However when the 1st Defendant resigned from the post of a Director, the 2nd Defendant signed a Notification of Changes of Secretary and Director dated 2nd August 2001, shortly after the 1st Defendant's resignation and this was filed in the Companies' Registry. The 1st Defendant gave evidence to say that in relation to the 1st Defendant's resignation as a Director, the 2nd Defendant had to present the relevant documents to the Companies' Registry. He stated that he had told the 2nd Defendant to do that. The 1st Defendant said that both he and the 2nd Defendant in discussions between them knew that there were procedures that had to be done in the appointment of a Director. The 1st Defendant stated that these procedures were to be done through accountants. However in his witness statement which had been adduced into evidence he stated that he did not know the requirements under the Companie's Ordinance related to the registration of the notification of transfer of shares, the appointment of a Director.

15. The 1st Defendant stated that the Plaintiff did not chase him related to the completion of the procedures. He further stated that he did not receive the letter from Messrs. Gary K.W. Tam & Co. to the 3rd Defendant because the 3rd Defendant no longer used the accountants office as the registered office. However he received the Writ served on him because he was also a Defendant. He stated that the Plaintiff had been acting in the role of a Director in that the 3rd Defendant had given him a name card that stated that the Plaintiff was a Director of the 3rd Defendant Further the Plaintiff had visited the office of the subsidiary in Guangzhou and had given supervision and directions to the staff there. The Plaintiff had also assisted in the negotiation of the tenancy agreement of the office of the Guangzhou subsidiary of the Defendant. The Plaintiff also designed and made a mould to punch holes which was used by the subsidiary company in Guangzhou.

16. The Plaintiff denied that he had acted in the role of a Director of the 3rd Defendant. He stated that he had used the name card given to him and distributed that to only 3 or 4 persons. Otherwise he did not help or assist in the management of the 3rd Defendant or its subsidiary in Guangzhou. In relation to whether the Defendants had given the Plaintiff the role of a Director, it is clear, that the Plaintiff had not been able to inspect the accounts of the 3rd Defendant until now. The 1st Defendant stated that there were no accounts of the 3rd Defendant as the business was done through the subsidiary. That could not be true for there must be account of how the capital injection into the 3rd Defendant had been used. These must be accounted for in the accounts of the 3rd Defendant. Despite the dispute of facts in relation to whether the Plaintiff had been accorded the role of a Director in the 3rd Defendant, it is clear that he could not have been if he had not been given the rights to inspect the accounts of the 3rd Defendant or to make decisions related to the running of the 3rd Defendant. Where there is dispute of facts related to the whether the Plaintiff acted in the role of a Director, I prefer the evidence of the Plaintiff to that of the 1st Defendant. I find that the Plaintiff had not acted in the role of a Director on the evidence of the Plaintiff accepted by me.

17. As regards the standard of proof related to serious or criminal allegations in civil cases, it is stated in Phipson on Evidence at para 4-36 that,

"Where a serious allegation is made in a civil case, such as an allegation of criminal conduct, the standard of proof remains the civil standard. Otherwise, where there was a claim for fraudulent misrepresentation and breach of warranty the court might hold that the warranty claim was proven and the fraud claim was not proven on the same facts. However, the more serious the allegation the more cogent the evidence required to overcome the unlikelihood of what is alleged and thus to prove it."

18. Although the Investment Agreement recited a meeting of the Board of Directors wherein a resolution was made to appoint the Plaintiff and Cheung Yuk Sang as new Directors, no Minutes of Meeting have been produced. There is no Minutes of Meeting of the existing Directors containing a resolution of the Board of Directors to appoint the Plaintiff as a Director of the 3rd Defendant at any time prior to the 11th September 2002.

19. Is it possible to infer from events subsequent to the time of the signing of the Investment Agreement what the state of mind and intention of the 2nd Defendant was when the Plaintiff signed the Investment Agreement?

20. In Derry v. Peek (1889) 14 App.Cas 337, at page 374 it states,

"I think the authorities establish the following propositions:

First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, carelessly whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth."

21. Weighing the evidence aforesaid, having regard to the requirement of cogent evidence of deceit, I find that there is insufficient evidence of deceit that is that the 2nd Defendant at the time when he made or caused to be made the said representations knew them to be false and untrue, or made them recklessly not caring whether they were true or false. I find that the evidence of the events after the signing of the Investment Agreement is not sufficient to establish the state of mind of the 2nd Defendant at the time of the signing of the Investment Agreement as pleaded by the Plaintiff. I find that the Plaintiff has not established his case against the 2nd Defendant.

The Case against the 3rd Defendant

22. The Plaintiff's Counsel referred to the well-established legal principle that where a party to a contract undertakes to do an act, the performance of which depends entirely on himself, and the contract is silent as to the time of performance, the law implies an obligation to perform the act within a reasonable time having regard to all the circumstances of the case. Without doubt this principle of law is correct as can be seen in the authorities relied on:

Castlegate Shipping Co. Ltd. Dempsey [1892] 1 Q.B. 854 at 859 and 863; Hick v. Raymond [1893] A.C. 22 at page 32;

Re Longlands Farm [1968] 3 All ER 552 at page 556.

23. The Extraordinary General Meeting was only held after the repudiatory breach of the Investment Agreement had been accepted by the Plaintiff by the issue of these proceedings. It was not performed within a reasonable time having regard to all the circumstances. I find that the Plaintiff has established his case against the 3rd Defendant. The Plaintiff having accepted the repudiation of the agreement by the 3rd Defendant, the Plaintiff is entitled to damages. If the contract had been performed by the 3rd Defendant, the Plaintiff would have been a registered shareholder and a member of the 3rd Defendant shortly after the execution of the Investment Agreement. He would have been able to exercise the rights of a Director, including the perusal of the accounts of the 3rd Defendant. Para 25-049 of Chitty on Contract Vol. 1, 28th Edition at page 1249 states;

"Where the innocent party is entitled to, and does, treat himself as discharged by the other's breach, he is thereby released from future performance of his oblgations under the contract. . .After such discharge he is not bound to accept, or pay for, any further performance by the other party. If he has paid money under the contract to the party in default, he will be entitled to recover it by an action for money had and received, but only if the consideration for the payment has totally failed. A deposit paid by him to secure performance is, however, recoverable."

24. Again, para 30-49 of Chitty on Contracts states;

"The role of the contractual specification means that it is not true to say that there can be a total failure of consideration only where the payer received no benefit at all in return for the payment. The concept of total failure of consideration can ignore real benefits received by the payer if they are not the benefit bargained for and despite significant detrimental reliance by the payee. Thus, in cases of the sale of a car by a non-owner, the price paid has been recovered despite substantial intermediate enjoyment of the car by the purchaser even where the vendor is subsequently able to perfect his title and where the value of the car has depreciated considerably. Again, if the purchase of an estate pays the purchase money and enters into possession of the land, but before the conveyance is executed he is evicted in consequence of a defect in the vendor's title, he can recover the purchase money. Again, an instalment under a film distributorship agreement was said to be recoverable despite the receipt of films because the relevant bargain was the opportunity to earn a share of gross receipts with the certainty of recouping the advance."

25. In view of the aforesaid, I find that despite the Plaintiff having had some involvement in the 3rd Defendant company as stated in the evidence, he did not get what he bargained for which was to be registered as a shareholder and member and Director of the Defendant with the resultant rights and interests. I find that there has been a total failure of consideration in respect of what the Plaintiff had bargained for. I therefore find that the Plaintiff is entitled to recover the sum paid to the 3rd Defendant.

26. I therefore grant judgment for the Plaintiff against the 3rd Defendant in the sum of $200,000.00 together with interest thereon from date of Writ to date of judgment at judgment rate and thereafter until payment at judgment rate. I grant an order for costs of the action against the 3rd Defendant to the Plaintiff to be taxed if not agreed with Certificate for Counsel. The claim against the 2nd Defendant is dismissed. I grant an order nisi for costs of the action as against the 2nd Defendant to the 2nd Defendant to be taxed if not agreed.