FUNG WAI SZE GRACE v. CHAN WAI CHAK NOEL C/O ASSOCIATED CAPITAL LTD

DCCJ108/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 108 OF 2003

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J U D G M E N T

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1. In this matter, the plaintiff claims against the defendant for repayment of the balance of three loans extended to the defendant by the plaintiff in the total sum of $261,000.

2. The defendant denies he is liable to the plaintiff. He claims that the plaintiff had placed the sums of money with him for the purposes of investment into a Long Island Golf and Country Club membership in Dongguan, Guangdong in the PRC at the price of $350,012.

3. The defendant counterclaims against the plaintiff for the monthly subscription fee from April 1997 to February 2003 in the proportion of her share calculated at $26,220.82. He further counterclaims against her for his periodical cash loans to her between February 1998 and August 2002, amounting to a total of $79,000.

Background

4. The plaintiff is a marketing executive. She was working at an estate agency company in 1994 to 1997. In 1998 she worked as a marketing executive at a building materials company and she had an income of between $15,000 to $17,000 at the relevant period of time.

5. The defendant, on the other hand, is and was the managing director of Associated Capital Limited, an associated company under the Hong Kong Monetary Authority. He has monthly income of approximately $80,000 to $90,000 in the relevant period of time.

6. The plaintiff, Miss Fung, and the defendant, Mr Chan, came to know each other in 1994. Subsequently, Miss Fung became Mr Chan's girlfriend. Their relationship finished after a while, but they remained on friendly terms with each other. It is not disputed that in 1996 and 1997, Miss Fung would seek investment and financial advice from Mr Chan from time to time. She at times took up his advice and traded in stocks and shares during the 1996 and 1997 period, and she had found his advice useful.

The Plaintiff's Case

7. Miss Fung claimed that her relationship as the girlfriend of Mr Chan lasted only six months in 1995. She alleged that in or about July 1996, after their relationship terminated, they remained friends and she sought his investment advice. Mr Chan had talked to her about investing in a mutual fund that would give her a guaranteed return of investment of 10 per cent over a period of 18 months. It is considered a low risk investment, for upon maturity she would be paid the principal, together with a 10 per cent return on the investment. It was also her understanding that the timing of this investment was between July 1996 and the maturity date, eight months later, would be in January 1998.

8. She decided to take Mr Chan's advice and invested HK$200,000 in the so-called mutual fund suggested by him. She accepted what Mr Chan told her: that her investment, being a mere $200,000, would only form a part of a much larger investment in the mutual fund; consequently, the investment would not be made in her name, and she was told to pay the money into his Hong Kong and Shanghai Banking Corp. account, which she duly deposited on 30 July 1996. I shall hereinafter refer to it as "the said investment".

9. In early April 1997, Miss Fung, upon the request of Mr Chan, lent to him a loan of HK$40,000. He promised to repay her when the said investment of $200,000 matured in January 1998, I shall refer to it as "the first loan". She deposited a cheque of $40,000 into his bank account on 10 April 1997. In October 1997, she was approached by Mr Chan again for a further loan of $80,000 ("the second loan"). The repayment date agreed was the same as the first loan. She then deposited the sum of HK$80,000 into his bank account on 24 October 1997 after she borrowed it from Sinotop Resources Limited, a company in which she owned 40 per cent shareholdings and that she had been using to invest in a number of properties in 1996 and 1997. At the time, Sinotop Resources was making a profit in property transactions, according to Miss Fung.

10. Upon maturity of the mutual fund (the said investment) in late January 1998, according to Miss Fung, Mr Chan deposited the sum of $20,000 into her bank account on 2 February 1998. It was the interest on the said investment in the mutual fund. However, Mr Chan failed to repay the capital of the said investment, the sum of $200,000. Instead, he asked her for a loan of the same amount of $200,000 for a few months for the purpose of a personal investment. He promised to pay her back within two or three months, or at the latest, three months from 3 February 1998, and he further requested her to postpone the repayment of the first and second loans, promising to repay all three loans at the same time in April of 1998. She agreed to his request.

11. Upon Miss Fung's repeated demands for the repayment of her three loans to Mr Chan in April 1998 and in the months that followed, Mr Chan repaid her a total of $59,000 between 14 April 1998 and 29 August 2002, but Mr Chan failed to repay the balance of the three loans in the sum of $261,000.

The Defence Case

12. Mr Chan alleged that Miss Fung was his girlfriend between 1996 and 1999. He had been giving her advice on investments, and he also claimed that he had invested in stocks on the Hong Kong Stock Exchange on her behalf and he was able to make profits of over $100,000 for her benefit, but he did not ask her to pay any of the investments at the time.

13. It was against this background that Mr Chan said that in July 1996 Miss Fung sought his advice on investment opportunities and he suggested the investment in a mainland golf club membership. It was supposed to be a quick and profitable investment. She agreed to his suggestion and requested Mr Chan to make the arrangements for her. He said she further agreed that her interest in the golf club membership would be proportional to her actual paid-up investment. She then deposited $200,000 into his bank account. He claimed that the further sums of $40,000 and $80,000 paid in April and October 1997 were Miss Fung's further deposits for the payment of the golf club membership.

14. In March 1997 Mr Chan acquired an individual club membership at the Long Island Golf and Country Club at Dongguan in the People's Republic of China at a price of $350,012, which I will refer to as "the club membership". Unfortunately, due to the Asian financial crisis, in late 1997 the value of the club membership fell, both Mr Chan and Miss Fung agreed it should not be sold before the economy recovered. Meanwhile, Mr Chan alleged that he incurred out of pocket sums for the payment of monthly subscription charges on Miss Fung's behalf. Up to February 2003 the amount came to $26,220.82. In the same period, Mr Chan claimed he had lent various sums of money to Miss Fung. The total came to $79,000 lent between 1998 and 2002. He is seeking for the repayment of these two sums of money in his counterclaim.

The Issues

15. The issues are:

(1) Was the money that Miss Fung gave to Mr Chan loans to Mr Chan, or were they for an investment into a golf club membership?

(2) Was the $79,000 paid by Mr Chan to Miss Fung loans from him to her, or was it repayment of her loans to him?

Findings

16. In the present case, evidence in support of the plaintiff's case came from the plaintiff, Miss Fung, herself, and the defendant, Mr Chan, gave evidence in person. There were no independent witnesses except for the documentary evidence provided by Miss Fung on her own financial position at the time, and the evidence of her payments to Mr Chan; and, as far as Mr Chan is concerned, the golf club membership statements from Long Island Golf and Country Club.

17. The documentary evidence and the evidence given by Miss Fung in court, together with her witness statement, showed that she financed the said investment by mortgaging the property she obtained from her parents in July 1996. From the $1.2 million that she borrowed from a mortgage of the property, she applied $200,000 into the said investment that she placed with Mr Chan. She was able to explain that on the salary of something between $15,000 to $17,000 a month she was able to spare this $200,000 for the said investment. As to the balance of her loan from the mortgage, she applied a part of it in her property transactions through the company Sinotop Resources Limited which she owned 40 per cent. The rest of the money, she invested in stocks and shares trading. Both the property transactions and share trading undertaken by Miss Fung were active in 1996 and 1997, and the activities slowed down and came to a virtual stop after late 1997, probably due to the Asian financial crisis.

18. Miss Fung claimed that she did not lose money in her trading in shares, and these tradings she had regarded as high risk investments. She admitted, however, she had lost some $200,000-odd in her last property transactions in late 1997 and she had regarded these property transactions as medium risk investments. Miss Fung insisted that the $200,000 placed with Mr Chan was a low risk investment for it had a guaranteed return of 10 per cent.

19. Miss Fung was cross-examined extensively over this so-called low risk investment into a mutual fund. Mr Chan, counsel for the defendant, criticised this investment as an unreasonable investment because Miss Fung had obtained the $200,000 from the mortgage of her parents' flat, paying mortgage interest rate at over 8.5 per cent per annum, while the actual return for the said investment into mutual fund was 6.66 per cent per annum. Miss Fung's own explanation was that in March 1997 the property was sold at a profit, and the mortgage was redeemed, therefore the high interest rate was paid only for a short period of 81/2 to 9 months.

20. Mr Chan submitted that for someone with Miss Fung's income of between $15,000 to $17,000 per month, the sum of $200,000 is a huge amount of money. However, compared with the large turnover of share trading by Miss Fung in the months of June and July 1997, which came to something like $2 million of turnover a month, one might consider the amount of $200,000 placed in a mutual fund not such a large sum of money to Miss Fung after all. The $200,000 that Miss Fung placed with Mr Chan was about one-sixth of the mortgage loan she obtained from the bank. Clearly, at the time she was determined to make some money when she decided to mortgage her parents' flat, put them in rented accommodation, and started to trade aggressively in stocks and shares and real properties.

21. This may be considered a big gamble for someone earning $15,000 a month, but in the pre-handover days of 1996 and 1997 it is not difficult to understand.

22. It was Mr Chan's evidence that he and Miss Fung decided to invest in a golf club membership, and they were looking at a good profit return of between $400,000 to $600,000.

23. It is not disputed that Miss Fung trusted Mr Chan. She admitted she never saw a scrap of paper of the mutual fund investment. Knowing the money would be placed in someone else's name, she did not even find out the name of the mutual fund she was supposed to have put her money in, relying on Mr Chan. At the same time, Mr Chan admitted Miss Fung had trusted him with the money. He admitted he had not shown her any statements of accounts in the purchase of the golf club membership. Furthermore, according to him, she knew the membership was purchased in his name and was used by him alone. She had no right to use it, not being his wife or nominee. He claimed that she knew of the golf club purchase because she had visited the club as his guest, and she knew he had used it all this time. Mr Chan claimed, however, that he had played golf in many other clubs in Hong Kong and overseas. He admitted he is not a member of any of these clubs except for this one, the Long Island Golf and Country Club in Dongguan.

24. I find Mr Chan's evidence on the purchase of this golf club membership investment to be unconvincing and unreliable. In both his witness statement and in the amended defence and counterclaim, Mr Chan claimed that Miss Fung's interest in the golf club membership would be proportional to the actual amount of her paid-up investment. This can be found in paragraph 3 of his witness statement. In paragraph 5 of his witness statement he further said:

"The plaintiff and I agreed that the club membership was purchased jointly by us and that the plaintiff's interests were proportional to the actual amount of her investment."

25. It was similarly pleaded in the amended defence at paragraph 5. However, in his evidence in court Mr Chan claimed the golf club membership was purchased on Miss Fung's behalf. He explained the reason he said in his witness statement that it was a joint purchase was because he had used his own credit to pay for the membership, while Miss Fung supplied the cash, and that was considered a joint purchase of a golf membership.

26. The membership fee instalment statement of account on page 90 of the bundle showed that there was a payment of deposit of $87,500 in March 1997 by Mr Chan. Thereafter, a monthly instalment of $10,938 was paid each month between April 1997 and December 1997. Therefore, up to December 1997, a total payment of $185,942 had been paid. According to Mr Chan, he paid these by post-dated cheques together with the initial deposit, and therefore, apart from the initial deposit of $87,500, the monthly instalments were not paid until the post-dated cheques were due and cashed. This statement further showed that from January 1998 there were monthly instalment payments by Mr Chan of $10,938 to settle the remaining 10th to 24th instalments. These payments were made usually in the first week of each month, but not always on the same day of the month. I suppose these instalment payments for the defendant's golf club membership was what Mr Chan meant by "joint purchase": she pay for his club membership.

27. I find Mr Chan's explanations completely incredible. If the investment of a golf club membership was joint, it is usually understood to be a joint investment in the full sense of the word. It would usually be in joint names, for a start, and one would expect a joint investment to be funded by both parties equally, rather than one party paying the cash with the other party enjoying the full club membership benefits with the individual membership in his name only. Neither does it make sense that Miss Fung's interest was to be increased from time to time when she paid him more cash. At the same time, she was getting nothing in return for the club membership that she paid for.

28. I find the timing of the payment by Miss Fung of her $200,000 to Mr Chan does not coincide with the purchase of the golf club membership. Neither does it support Mr Chan's allegation that it was for this clubhouse membership. There was an eight month delay between Miss Fung's payment and Mr Chan's paying the initial deposit of $87,500. If, as Mr Chan claimed, Miss Fung was his girlfriend between 1996 and 1999, he would be expected to know the source of her income and the funding of her investments. He would have some knowledge that she had to borrow the $200,000 from the mortgage of her parents' flat; that she had to pay, as Mr Chan, counsel for the defendant, put it, over 8.5 per cent per annum for the loan; yet Mr Chan waited for over eight months before he purchased the golf club membership, when he paid only an initial deposit of $87,500 in March 1997, while the rest of Miss Fung's money was sitting in his savings account earning 3.7 per cent to 4 per cent and, in 1998, 5.25 per cent per annum. Meanwhile, she paid him further sums of $40,000 and $80,000 respectively in April and October 1997. If their relationship was as close as Mr Chan claimed, would he not have told her she need not pay him all of the $200,000 in July 1996, while she was paying high interest on the mortgage?

29. Mr Chan admitted the golf club membership was supposed to realise a good profit and it was expected that the profit would be realised in a short time. They had not expected to wait for years on end for the profit to realise. For a person experienced in financial investments, who had been the managing director of a credit company, playing an important and influential role in the Hong Kong banking community, Mr Chan should no doubt possess the expertise and knowhow in finding the right investment for his girlfriend.

30. The golf club membership was Mr Chan's own choice. It is therefore expected that he would have found out everything about this investment. It would not have been difficult for him to find out that 50 per cent of the transaction fee penalty would be levied by the club on transfer of membership before the investment into this golf club membership.

31. It is inconceivable that he would have lent his own credit in the purchase of such a golf club membership on behalf of his then girlfriend and that they would agree that her interest would be proportional to her actual investment, when he alone enjoyed the club's benefits, and that he should expect her to pay the monthly subscription fees, the golf bag storage fee, the caddies, the golf carts, etc., when she had never even played on the course during these years.

32. It is incredible that for any investment expecting a high yield Mr Chan would leave Miss Fung's $200,000 in his own savings account for over eight months before investing the money, and in fact, for a high yield investment, the money could have turned over many times during that period of time. Miss Fung could have saved some interest payments had she put the $200,000 in her own bank account, enjoying a 5.55 per cent per annum or more for those eight months, or she could have paid the money back to the bank where she got the mortgage loan. In fact, by March 1997, she had sold the flat at a profit of $350,000 and redeemed the mortgage.

33. It is further inconceivable for Miss Fung, who had been trading aggressively in shares and in property, that she would have agreed to pay two further sums of $40,000 and $80,000 into the golf club membership in April and October 1997 knowing the golf club membership was not in her name and that the full payment was not due, and it was to be paid on Mr Chan's account by 24 instalments. And at the same time, it had taken Mr Chan eight months to find this investment on her behalf. She could have asked Mr Chan to delay the payment of the balance during this time if she was in such financial difficulties, as Mr Chan represented, that during this time she repeatedly asked Mr Chan for loans.

34. The undisputed evidence was on no less than 10 occasions between 1998 and 2002, Mr Chan paid her sums ranging from $4,000 to $10,000; yet all this time Miss Fung never insisted that the golf club membership should be sold. It is difficult to understand particularly that if Miss Fung knew about the golf club membership all this time, Mr Chan has the membership in his own name, and he had been enjoying the club facilities while she had to pay the monthly subscriptions. Furthermore, it is inconceivable that she did not demand Mr Chan to pay her any membership rental when he had the use of the membership and he had been playing in the club, while she enjoyed none of the benefits.

35. According to Mr Chan, the membership rental was worth $3,000 to $3,500 per month in 1996 and is still worth something like $1,300 to $1,400 per month today. All this time, Miss Fung had to ask him repeatedly for loans of $4,000, $5,000, $6,000 a time.

36. For the aforesaid reasons and on the balance of probability, I reject completely Mr Chan's evidence. It is obvious that Mr Chan had borrowed the $200,000, the $40,000 and the $80,000 from Miss Fung for his own investment purposes. She lent the money to him interest free only because it was supposed to be for a short term of two months, and that was why when the two months period expired in April 1998 and he failed to repay her, she kept up her requests for repayment. The 10 payments between April 1998 and 2002 are evidence in support that these were his repayments of her loans to him.

37. I find Mr Chan's evidence and his reasons for his own financial position to be less than frank. He had a salary of $90,000 a month, and he admitted to owning one property at Pok Fu Lam Gardens for which he paid a mortgage instalment of $10,000 a month; yet he admitted to have a liquidity problem, blaming it on the Asian financial crisis. On the other hand, he admitted to have been involved in other business ventures. He admitted it was these personal investments into which Mr Chan had to channel his funds, and after October 1997, the banks' restriction in lending had made it more difficult for Mr Chan's investments.

38. On this basis, Mr Chan looked to Miss Fung for loans upon maturity of Miss Fung's $200,000 investment in January 1998. In fact, before then he had already asked her for two loans of $40,000 and $80,000 in April and October 1997. This shows that he was in no position to repay her, particularly when he knew he had her trust at the time. Mr Chan admitted that at the time between 1998 and 2002 those sums of $4,000, $5,000 and $6,000 were what he could spare to pay Miss Fung, although he explained that these were the sums that he was prepared to give her without demanding their return. I find that incredible. If that was so, why is he counterclaiming for their return now? It was obvious that he was hard up for cash at the time. He was unable to repay the loans she extended to him.

39. On the balance of probability, the defence of the golf club membership is totally unacceptable. It is probably the only item Mr Chan can peg the $200,000 Miss Fung placed in his trust. But the timing of this purchase of the golf club membership does not tally with the time of payment by Miss Fung. Neither does the ownership of the club membership tally with the investment Mr Chan claimed. If Miss Fung was the owner of the membership, why was it not bought in her name? She would then be liable to pay all the club subscription fees and not he.

40. I find the evidence adduced by Miss Fung overwhelmingly proved that she had given a total of $320,000 to Mr Chan and he had repaid $79,000.

41. He is therefore liable to pay back to her $261,000.

42. On the reasons given above, I dismiss the defendant's counterclaim.

(Submissions re interest)

43. Interest of judgment sum at 4 per cent per annum from date of writ to date of judgment and thereafter at judgment rate until full payment. Costs to the plaintiff to be taxed if not agreed, with certificate for counsel. The plaintiff's own costs to be taxed in accordance with Legal Aid Regulations.