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DCCJ 1950/2019
[2021] HKDC 1393
IN THE DISTRICT COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
CIVIL ACTION NO 1950 OF 2019
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| BETWEEN |
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CYBER INSURANCE BROKERS LIMITED |
Plaintiff |
and |
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RELEVANT MARKETING (HK) LIMITED |
Defendant |
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Before: Deputy District Judge Liza Jane Cruden in Court
Dates of Hearing: 3, 4 and 11 August 2021
Date of Judgment: 2 December 2021
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JUDGMENT
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Introduction
1. The plaintiff claims against the defendant in debt, evidenced by a written acknowledgement of indebtedness from the defendant to the plaintiff of HK$2,017,803.50, dated 9 February 2018 (“Acknowledgement”).
The pleadings
2. The Amended Statement (“ASOC”) of claim pleads that:
(1) The plaintiff and the defendant are companies incorporated under the laws of Hong Kong in 1999. The plaintiff was a wholly-owned subsidiary of the defendant until 18 May 2016. Lien Hong Kong Limited (“Lien”) is a company incorporated in Hong Kong on 18 May 2016.
(2) From at least 2015 monies were advanced by the plaintiff to the defendant and shown in the audited financial statements of the plaintiff.
(3) On or about 18 May 2016 Lien acquired 49% of the issued share capital of the plaintiff with the remaining 51% held by the defendant. As at 31 December 2016 there was an amount of HK$1,632,852 outstanding from the defendant to the plaintiff.
(4) On or about 25 August 2017 Lien acquired the balance 51% of the issued share capital of the plaintiff from the defendant. As at 31 December 2017 there was an increased amount of HK$2,043,440.49 outstanding from the defendant to the plaintiff according to the audited accounts of the plaintiff.
(5) By written acknowledgement dated 9 February 2018, signed and chopped on behalf of the defendant and sent to the plaintiff, the defendant requested the plaintiff to confirm the amount outstanding from the defendant to the plaintiff as at 31 December 2017 amounted to HK$2,017,803.50 (“Acknowledgment Sum”). The plaintiff countersigned and chopped the document in agreement to the defendant being liable to pay the Acknowledgment Sum to the plaintiff.
(6) Despite demands from the plaintiff the Acknowledgment Sum remains wholly outstanding.
(7) The Prayer claims the Acknowledgment Sum, interest and costs.
3. The defendant does not challenge the fact of the Acknowledgement. To defend the claim the defendant relies on the following facts and matters pleaded in the Amended Defence:
(1) Lien only bought all the shares in the plaintiff, not the rights and liabilities attaching to those shares [para 8];
(2) Lien agreed to write off HK$2,043,440.89 due from the defendant to the plaintiff “after the Sale Transaction” which sum appeared on unaudited balance sheet of the plaintiff as at 31 July 2017 [para 10(iv)];
(3) It was never intended that consideration would include the outstanding of HK$2,109,418 (“Outstanding”) [para 11];
(4) It was agreed between John Ronald LaRoche (“JRL”) and Amelie Dionne-Charest (“ADC”) that the Outstanding was not collectable by the plaintiff [para 12];
(5) The Outstanding was a non-collectible/forgiven amount for book-keeping purposes [para 13];
(6) JRL and ADC were colleagues who discussed this agreement [para 14];
(7) Alternatively, the defendant relies on unilateral mistake/oversight at time of the agreement around August 2017 [para 10] and asks for rescission and for parties to be restored to pre-contract position [para 15];
(8) The Acknowledgement was not in accord with the plaintiff’s own record in financial statements [para 17].
4. The defendant’s Answers to Request for Further and Better Particulars of Defence included that directors of RMI International Group Limited (“RMI”) as at April 2017 were JRL, Lim Shyang Guey (“SG Lim”) and Lau Wai Ming Raymond (“R Lau”).
5. The Request for Further and Better Particulars of ASOC requested that the plaintiff explain the discrepancy between the Audited Financial Statement of the plaintiff as at 31 December 2017 that showed the amount due from former immediate holding company was HK$1,748,615 and the corresponding amount in the ASOC that was HK$2,109,418. The plaintiff explained that the figure of HK$2,109,418 comprised HK$1,748,615 due from former immediate holding company and HK$305,744 due from a related company.
6. The Reply pleads that monies advanced to the defendant and outstanding reflected in the audited financial statements of the plaintiff as at 31 December 2017 was the amount of HK$2,109, 418.
Witnesses
7. The plaintiff served two witness statements. Those of Amelie Dionne-Charest (ADC) and Julien Pierre Matthieu (“JPM”). Both ADC and JPM attended the trial and gave evidence for the plaintiff.
8. The defendant served one witness statement. That of John Ronald LaRoche (JRL). JRL is the sole director and a shareholder of the defendant. Yvonne Lai (“Ms Lai’) was appointed as the defendant’s alternate director to act on behalf of the defendant. At the PTR hearing on 14 July 2021, Ms Lai had informed the court that JRL would not attend to testify at trial. Immediately before the trial, by letter, and on the first morning of trial Ms Lai made a late application for JRL to give evidence remotely. JRL was in Thailand, where he had been for a considerable time.
9. The plaintiff proceeded to open its case. However, notwithstanding the unexplained delay by the defendant in making the application and that no regard was had to the Guidance Note for Remote Hearings for Civil Business Phase 3 – Wider Video Conferencing Facilities, the earlier Guidance Notes and Practice Direction 29, enquires were made to determine if it was even possible to make the necessary arrangements for JRL to give evidence from Thailand during the 3 days fixed for the trial. It was not. The application was dismissed. JRL did not attend the trial. In the circumstances his witness statement was inadmissible (O. 38, r. 2A, Rules of the District Court, Cap 336H).
10. The plaintiff called the witnesses ADC and JPM. They each confirmed the truth of the matters in their witness statements, which then stood as their evidence in chief.
ADC’s evidence
11. ADC is a director and shareholder of Lien, the sole shareholder of the plaintiff. JPM is her husband. ADC and JPM are directors of the plaintiff. They moved to Hong Kong in June 2013. ADC is a law graduate with 3 degrees who had worked in a law firm in Canada. JPM was previously an investment banker in Hong Kong.
12. In Hong Kong ADC set up AD MedilLink Limited (“AD Medilink”) to provide healthcare consulting services. By 2015 it was providing healthcare related information to expatriates relocating to Hong Kong and hosting an annual maternity Conference. ADC was a registered Technical Representative working under the insurance brokerage firm Groveland Financial Services Limited (“Groveland”) where she advised on medical insurance policies. She was self-employed receiving a percentage of the gross commission generated through medical insurance policy sales. As ADC built up her own book of clients she appreciated it could produce a recurring revenue stream. She looked into acquiring an insurance brokerage licence to work independently.
13. RMI owned an insurance brokerage licence through its subsidiary, the defendant. RMI was then 50.1% owned by a Hong Kong listed company e-Kong Group (“e-Kong”) (stock code 524). At that time SG Lim was a director of companies in the group including the plaintiff. ADC made non-binding offers to acquire part of the plaintiff business. SG Lim refused the offers but put her in touch with JRL who was the CEO and managed the defendant. ADC and JRL met and discussed collaboration and partnership avenues.
14. On 10 March 2016 ADC and JRL agreed the basis of purchase of 49% of issued share capital of the plaintiff by email, namely:
(1) ADC would buy 49% of the shares of the plaintiff for a consideration of HK$1,000,000;
(2) The consideration be divided (i) HK$500,000 in cash, and (ii) HK$500,000 by providing the defendant a 25% interest in AD MediLink.
15. The objective was for the plaintiff to run 3 main businesses:
(1) Perform an existing servicing contract for Convoy Limited (“Convoy”);
(2) Speedinsurance, general insurance brokerage generating around HK$500,000 revenue yearly;
(3) Grow a healthcare and health insurance business with ADC and her existing clients.
16. On 23 March 2016 a Term Sheet for Restructuring of Insurance Brokerage Operations of Relevant Marketing Group of Companies was signed by JLR for the defendant and ADC for purchase of 49% of the shares in the plaintiff (“2016 Term Sheet” and “2016 Agreement”).
17. Financial Statements of the plaintiff as at 31 December 2015 signed by directors SG Lim and R Lau on 30 March 2016 showed monies outstanding from the defendant to the plaintiff were HK$1,222,536.
18. In April 2016 ADC moved from the Groveland office to the plaintiff’s office with the title of Managing Director. On 18 May 2016 Lien was incorporated in Hong Kong. ADC was the sole shareholder of Lien.
19. The 2016 Agreement was supported by the following shareholders agreements:
(1) 13 June 2016 Shareholders’ Agreement between the defendant and Lien (“Lien Shareholders Agreement”);
(2) 1 November 2016 shareholder agreement between the defendant and ADC in her personal capacity.
20. On 16 June 2016 ADC paid HK$500,000 and Lien acquired 49% of the share capital of the plaintiff from the defendant pursuant to the 2016 Agreement. The total consideration was HK$1,000,000. The balance was a 25% shareholding in AD MediLink.
21. ADC did not sign cheques on behalf of the plaintiff, see the bank accounts or have access to the monthly management accounts.
22. Ms Lai cross-examined ADC on the audited financial statements of the plaintiff for the year ended 31 December 2015. ADC said that she had not seen them before she purchased the 51% shareholding, although she had asked for management accounts of the plaintiff they were not forthcoming. Questioned about the accounts receivable of HK$1,150,691 as at 31 December 2014, ADC repeated that she did not receive these financial statements when the 49% shareholding was purchased. She believed it was after the purchase of the 51%.
23. The directors of the plaintiff were then SG Lim and R Lau. Although the Lien Shareholders’ Agreement allowed ADC to appoint a director she was never given the opportunity to do so (Clause 4.2). No one from the defendant was a director of AD MediLink, it was only her.
24. In January 2017 JPM decided not to return to work in the banking industry and instead build a family enterprise with ADC. They wanted to buy back RMI’s 25% stake in AD Medilink. As a result of February and March 2017 discussions JRL agreed to sell back RMI’s stake in AD Medilink for HK$392,500, to be paid in three instalments.
25. During this period ADC was aware other transactions were under discussion at the RMI and e-Kong level requiring funds short term to complete, according to JRL, but she was not privy to these discussions.
26. The Financial Statements of the plaintiff at 31 December 2016 signed by SG Lim and R Lau on 30 March 2017 showed monies outstanding from the defendant to the plaintiff of HK$1,632,852.
27. Ms Lau asked ADC about her email dated 31 May 2017 to Peter Ho, CFO of the plaintiff copied to JRL querying whether dividends would be payable by the plaintiff. JRL replied the next day that there was unlikely to be a dividend that year because the “performance hasn’t been strong”. There was a reference to the 2016 P&L. ADC repeated she had not seen the audited accounts saying there was very little visibility about the financial position. Her impression reading the email was that JRL did not want to pay any dividends. Ms Lai referred to the difference between solvency and profitability and that a profit was required for dividends, then suggested JRL was saying he had not yet assessed all the overheads of the plaintiff for June and July 2017. ADC knew the salaries and that the plaintiff was not paying rent.
28. In July 2017 JRL informed ADC that RMI would be restructuring focusing on business outside Hong Kong. JRL would be winding down the defendant’s activities in Hong Kong and e-Kong will go through changes. This would have repercussions for the plaintiff and AD Medilink business that shared resources and overhead with the defendant.
29. JRL agreed that they could remain in the office until at least May 2018 and have accounting and Human Resources Officer support from Shirley Choi until end of 2017. On 30 July 2017 Shirley Choi resigned. This came as a bombshell to ADC as Shirley Choi held the information key to all 3 businesses and was among the few who saw management accounts.
30. JRL mentioned he was open to selling the defendant’s 51% stake in the plaintiff. The plaintiff then consisted of:
(1) the Speedinsurance business;
(2) the health insurance book;
(3) the registered broker license to conduct these brokerage activities.
31. Ms Lai wanted ADC to confirm that those 3 items were the 3 main assets owned by the defendant in the plaintiff but ADC replied that these were the 3 businesses undertaken, not the assets. When ADC bought the shares of the plaintiff, it was not just the brokerage licence.
32. On 15 July 2017 ADC commenced negotiations with JRL for the purchase by Lien of the balance 51% shareholding in the plaintiff from the defendant.
33. ADC received the plaintiff’s undated Balance Sheet at 30 June 2017 showing an amount then due from the defendant of HK$2,101,156.89 from Shirley Choi by email dated 1 August 2017. ADC had not asked Shirley Choi any questions about these figures because this was the first time she had received the management accounts. ADC never discussed them or the retained loss of HK$3,537,853.93 with JRL. The plaintiff’s undated Balance Sheet at 31 July 2017 showed an amount then due from the defendant to the plaintiff of HK$2,043,440.49.
34. On 3 August 2017, after first considering the remaining 51% of the plaintiff and the Speedinsurance business, ADC told JRL that she was only interested in purchasing the brokerage license to keep her medical insurance book and did not want to acquire the Speedinsurance business operating under the plaintiff’s license. There were discussions between ADC and JRL for purchase of the remaining 51% shareholding.
35. JRL needed to find a buyer for the Speedinsurance business as e-Kong required transactions be completed by early September 2017. Ultimately Asia Pacific Investment Advisors Limited (“APIA”) was the purchaser of Speedinsurance.
36. The term “CE” stood for Chief Executive, in charge of compliance, now called the Responsible Officer by the Professional Insurance Brokers Association (“PIBA”). To be approved as a Responsible Officer by the PIBA 5 years’ experience is required. ADC did not then qualify so it was necessary to continue to employ Flora Keung (“Flora”). ADC knew that Flora had worked for the plaintiff for over 10 years and her salary. Flora was to move to APIA after ADC was a CE. APIA agreed to pay her salary to the end of 2017. ADC said that as at today, she is a Responsible Officer under the plaintiff and Flora is CE.
37. On 16 August 2017 AD Medilink changed name to Healthy Matters Limited. ADC kept the trade name AD Medilink. She intended to own 100% of the plaintiff through Lien with 2 businesses: (1) AD Medilink focusing on health insurance advisory and brokerage; and (2) Healthy Matters delivering healthcare content.
38. The following transaction was approved between the defendant and Lien and formalised in a written Summary of Terms dated 25 August 2017 signed by JRL for the defendant and ADC for Lien at the end of August 2017 (“2017 Summary of Terms” and “2017 Agreement”):
(1) Lien shall acquire the balance 51% issued share capital of the plaintiff from the defendant, becoming the sole shareholder;
(2) The plaintiff shall dispose of the Speedinsurance book to a third party for HK$550,000.
(3) Lien shall pay a 1st instalment upon completion, August 2017, of HK$300,000 and a 2nd Instalment on 28 February 2018 of HK$100,000, being a total of HK$400,000.
39. It was further agreed between ADC and JRL that (1) the plaintiff would receive accounting support from APG Business Services Limited (“APG”); and (2) Flora would remain CE of the plaintiff until ADC qualified by summer 2018.
40. ADC says the 2017 Agreement negotiations were tense and rushed. She paid HK$500,000 in June 2016 for 49% of the plaintiff, HK$392,500 to buy back the 25% stake in AD Medilink, and then purchased the 51% remaining shares of the plaintiff for HK$400,000 while not receiving any money for the disposal of the Speedinsurance book, which she also owned. This was more money during a short period of time than planned, for which they had to use personal savings.
41. When ADC had made the offer to purchase the plaintiff’s licence in 2016, she had sought advice from a law firm who told her that any legal or financial due diligence in Hong Kong would cost a lot more than the transaction’s purchase price.
42. For ADC the essence of the transaction was the acquisition of the plaintiff’s insurance brokerage licence to fully own, manage and grow the health insurance book she had built up with the help of 4 other Technical Representatives whom she had hired and trained.
43. An essential condition was that the plaintiff was solvent and able to continue owning the licence. This was crucial as both the PIBA and the Insurance Authority required a paid up share capital of not less than HK$100,000 and a net asset value of not less than HK$100,000. This is verified annually as brokerage firms must submit their audited accounts to renew their brokerage licence.
44. Based on what JRL represented at the time of negotiations and the transaction ADC believed the plaintiff had always complied with regulations. At no time during negotiations and the transaction did JRL bring up the topic of the HK$2,017,803.50 owed by the defendant to the plaintiff. ADC said that Lien would not have consented to waiving such sum. That would have directly compromised the essence of the transaction; that is the ability of the plaintiff to be solvent, and to hold and to renew the insurance brokerage licence. She simply would not have agreed to the transaction. Based on her personal knowledge of the plaintiff’s business she had every reason to believe that it was solvent. By “solvent” ADC meant that the plaintiff would be able to comply with the requirements of the insurance brokerage licence, with net capital assets of HK$100,000.
45. Ms Lai referred ADC to the balance sheet as at 30 June 2017 asking her to confirm that at 30 June 2017 the plaintiff was solvent. ADC agreed that the plaintiff was solvent based on that account. She agreed that her belief that the plaintiff was solvent was right. She never discussed with JRL, mentioned or even eluded to waiving any sum due to the plaintiff. Ms Lai asked whether Lien would take on the liabilities after the purchase of the shares. ADC replied Lien purchased the shares of the plaintiff. That involved all the benefits and burdens, taking up liabilities as well as assets.
46. On 31 October 2017 ADC became director of the plaintiff, with SG Lim and R Lau resigning.
47. At the beginning of 2018 as 100% owner of the plaintiff, ADC asked for the management accounts to be circulated by APIA and Ms Lai at APG, who were handling accounting for the plaintiff, in view of the 2017 audit, which had to be completed and sent to PIBA by 30 June 2018.
48. ADC’s evidence on the Acknowledgment was that the plaintiff received a signed letter from JRL that was a Request for Confirmation of Balances dated 9 February 2018 whereby the defendant confirmed it owed the plaintiff the sum of HK$2,017,803.50 as at 31 December 2017. This was the written acknowledgement, signed and chopped on behalf of the defendant, which was chopped and countersigned in agreement by ADC on behalf of the plaintiff.
49. Ms Lai suggested ADC received the Acknowledgment in March or April 2018. ADC could not remember the date but after signing their practice was to return it to the auditors.
50. ADC considered this claim could jeopardise the solvency of their brokerage licence. JPM eventually spoke to JRL who told him that this claim should have been waived.
51. Upon ADC’s request JRL wrote to PIBA on 11 April 2018 for her to qualify as a CE. ADC was not granted the CE title as she had not then attained the requisite 5 years’ experience.
52. In the spring of 2018, the plaintiff decided to hire Mazars CPA Ltd (“Mazars”), the defendant’s auditors, to audit the accounts of the plaintiff as they had prior knowledge of the business of both companies.
53. On 16 April 2018 they finally received the management accounts from Ms Lai at APG for the year ended 31 December 2017 and the period 1 January to 31 March 2018. It was the first time ADC had seen management accounts of the plaintiff since acquiring the 51% shareholding. ADC said it was very challenging to operate without management accounts since the August 2017 Agreement. This was further complicated by the departure of Shirley Choi.
54. Ms Lai asked ADC to confirm that an email she had written dated 8 May 2018 attached management accounts. ADC said the email did not imply am attachment. She did not think she had received the draft financial statements of the plaintiff for the period from January to December 2017 by that time.
55. They had to submit the audited financial statements for the period ending 31 December 2017 to the PIBA. Between April and May 2018, in the course of the audit and having access to the financial details, JPM noticed multiple transactions that raised questions and concern, for which no documentary proof could be found.
56. Past transactions of concern were: (1) For several years the defendant owed sums to the plaintiff shown in its audited financial statements. At YE 2017, the amount was over HK$2 million. Without this receivable, the plaintiff was insolvent. The Request for Confirmation of Balances dated 9 February 2018 confirmed the defendant owed the plaintiff the sum of HK$2,017,803.50 as at 31 December 2017; (2) There were regular bank transfers, for amounts between HK$20,000 and HK$50,000, from the plaintiff’s operating bank account to the defendant and RMI, without explanation, after a transfer from the plaintiff’s client account to operating account, when transactions from brokers’ client accounts are prohibited; (3) A transaction of HK$267,000 in July 2017 using the plaintiff’s bank account between JRL and Peter Ho, RMI’s former CFO. When asked, JRL said this was a private transaction between him and Peter Ho, and he will sign whatever letter the auditor needs to confirm that the plaintiff does not owe anything to Peter Ho; (4) Between 2016 and 2017 cash was regularly transferred from the plaintiff’s client account to its operating account then a transfer for a similar amount was made to the defendant’s account. Transferring out of or handling monies from a client account was prohibited by the regulators PIBA, Insurance Authority unless these correspond to a commission or premium payment, which was not the case.
57. ADC was not aware of these matters during negotiations in August 2017. They were only discovered after the transaction was completed, by JPM in 2018. ADC tried to obtain written explanations from the defendant. She believed both the claim and the questionable transactions, could jeopardise the plaintiff’s ability to hold an insurance brokerage licence.
58. ADC emailed JRL and SG Lim on 8 May 2018 to discuss audit queries, including the outstanding amount due to the plaintiff. On 17 May 2018 ADC and JPM met with JRL and SG Lim to discuss the various transactions, including the outstanding amount. JRL and SG Lim explained that the claim is an “inter-company loan” but that no agreement exists. Regarding all the other transactions, they wanted to see their questions in writing before they reply.
59. On 28 May 2018 ADC emailed JRL and SG Lim asking them to explain various transactions and audit queries, including the outstanding amount due to the plaintiff from the defendant. While the plaintiff tried to understand these transactions JRL gave no explanation. ADC followed up between 28 May 2018 and 13 September 2018. At no time did JRL or anyone from the defendant or RMI answer the questions.
60. At a meeting on 11 July 2018 JRL said that there could be an arrangement in regards to the claim, but not specifying the details. ADC emailed on the same day to ask what his suggestion was for the claim. They exchange emails until 13 September 2018, but he did not answer the questions, There was no further communications with JRL on the issue until commencement of proceedings.
61. The Financial Statement of the plaintiff at 31 December 2017, signed by ADC on 29 June 2018, show monies outstanding from the defendant to the plaintiff of HK$1,748,615.
62. In the 25 March 2019 letter before action from Hart Giles to the defendant the plaintiff claimed the Acknowledgment Sum.
JPM’s evidence
63. JPM gave evidence that he is a director of the plaintiff, the husband and business partner of ADC. He confirmed the truth of ADC’s evidence to the extent that it was within his personal knowledge.
64. Ms Lai asked JPM about the Acknowledgement and whether he checked the books of the plaintiff. JPM said he checked with the auditor and asked them some questions, who had confirmed the amount, which had reflected the previous sums that appeared in the financial statements of the plaintiff for the years ending 31 December 2015 and 2016, but it had gone up. JPM could not recall when the auditor was appointed, only that the plaintiff chose Mazars because they had been the auditor for the previous financial years. JPM could not recall when or how the Acknowledgement was sent back to the auditors but he knew that they did receive it.
65. JPM said an email dated 8 May 2018, saying they would reply to financial queries separately, appeared to have been written by Ms Lai.
66. Ms Lai asked JPM whether he had seen an audit confirmation dated 7 May 2018 from the plaintiff to Relevant Marketing Group Limited (“RMG”), signed and chopped by JRL on behalf of RMG, that stated zero balance between the plaintiff and RMG as at 31 December 2017. JPM could not recall, nor whether JPM’s staff added the plaintiff’s chop to it. He pointed out that this document was addressed to a different company, Relevant Marketing Group Limited, not the defendant.
67. Asked whether accounts were mostly handled by him and if he was in charge of financial matters for the plaintiff, JPM said not specifically, that he helped out on some accounting aspects, although he was not an accountant.
68. JPM confirmed that the 28 May 2018 email to JRL and SG Lim was written because of the queries raised by the auditor to which he did not know the answers. JPM did not recall whether he had seen the general ledger of the plaintiff as at 28 May 2018, for the period from January to December 2017. He did not ever receive a satisfactory answer to the queries, he was not able to contact Peter Ho and there was no explanation from anyone at the defendant. JPM knew Peter Ho was the CFO of RMI Group but did not know when Peter Ho left.
69. JPM’s understanding of “solvency” was that a company was a going concern and could pay its liabilities from its assets.
70. JPM agreed that the PIBA rules required minimum assets for an insurance brokerage of HK$100,000. Ms Lai pointed out that the audited financial statements of the plaintiff as at 31 December 2017 showed net assets of HK$1,971,169, so even if HK$1,748,615 was written off or waived, the plaintiff could still comply with the PIBA solvency rules. Therefore the main issue was solvency. JPM disagreed because Lien bought the shares of the plaintiff, not its assets.
71. Ms Lai said that ADC only previously mentioned purchasing the brokerage licence, not assets and liabilities. JPM replied that the documents showed that Lien had bought shares, 100% of the shares, which included the assets and liabilities, not just the licence.
The issues
72. The plaintiff’s Opening Submissions attached the plaintiff’s List of Issues. The defendant subsequently served its Opening Submissions with a further List of Issues (“defendant’s List of Issues”). The plaintiff consolidated the two Lists of Issues for the defendant’s agreement, producing the following Consolidated List of Issues:
(1) What were the principal terms of the contract (in June 2016 as to 49% and in August 2017 as to the balance of 51%) for the purchase by Lien from the defendant of the entire issued share capital of the plaintiff and:
(i) whether the insurance brokerage licence number M0195 of the plaintiff was the only asset that the defendant sold to Lien;
(ii) if not, what other assets did the defendant sell to Lien,
on completion of the share transfer of the 51% in August 2017 or otherwise?
(2) Notwithstanding that a person on behalf of defendant signed and chopped a written acknowledgement of indebtedness dated 9 February 2018 addressed to the plaintiff (which was countersigned by ADC and chopped on behalf of the plaintiff), confirming that as at 31 December 2017 the defendant was indebted to the plaintiff for HK$2,017,803.50 and:
(i) whether and if so, why, the plaintiff is prevented from recovering this amount from the defendant; and, if so,
(ii) whether the plaintiff is entitled to recover any other amount from the defendant?
73. The defendant did not agree the Consolidated List of Issues saying it stood firmly on the defendant’s List of Issues. The defendant’s Closing also submitted that the three main issues are:
(1) What the bargain actually was between Lien and the defendant in August 2017?
(2) Whether the insurance brokerage licence number M0195 of the plaintiff was the only asset in effect that the defendant sold to Lien when Lien acquired 51% of the issued shares in the plaintiff from the defendant?
(3) Whether the defendant has mistakenly stated “Due to you” (the plaintiff), on the “Request for Confirmation of Balances” to the plaintiff on 9 February 2018?
74. Mr Hart for the plaintiff submitted the differences are not material. The parties really are ad idem: What were the terms of the transaction? Was it just purchase of the brokerage licence? Or did it also include rights, obligations and liabilities? There must be added, whether the audit confirmation dated 9 February 2018 was an acknowledgement of indebtedness by the defendant?
75. I shall divide the issues into two. First, issues in respect of the agreements between the parties (“Agreement Issues”). Secondly, issues in respect of the Acknowledgment (“Acknowledgment Issues”).
76. The plaintiff suggested that given how the defendant ran its case at trial the only legal issues for consideration were in relation to (i) rights and liabilities attaching to shares in limited companies; and (ii) admissions of indebtedness and evidence thereof. Any legal points in respect of agreements to vary contractual terms or unilateral mistake and rescission no longer arise.
The law
77. The plaintiff cited authorities for the proposition that a signature signifies the signatory’s assent or adherence to what that document states. It relied upon the principle in the English Court of Appeal case L’Estrange v Graucob Limited [1934] 2 KB 394 where, at 403, Scrutton LJ (as he then was) held that in the absence of fraud, or misrepresentation the party signing is bound, and it is wholly immaterial whether he has read the document or not.
78. The principle is followed in Hong Kong. The Court of Final Appeal in Bank of China (Hong Kong) Limited v Fung Chin Kan (2002) 5 HKCFAR 515, per Litton NPJ at 503 held:
“......the fundamental principle that, generally speaking, when a person signs a legal document, he or she is bound by the act of signature: As a matter of general law, it is no defence to say that he or she did not understand the contents of a legal document; that person takes the chance of being bound by its terms, as he or she can take the simple precaution of not signing until its contents have been fully explained and understood.”
79. In the Court of Final Appeal, Ming Shiu Chung and Others v Ming Shiu Sum and Others FACV 25 of 2005 Riberio PJ held at paragraph 84:
“Reliance is universally placed on signatures appended to documents by persons of full age and understanding as signifying the signatory’s assent or adherence to what that document states. Where such a person has signed a document which purports to have legal effect, the law has never regarded it as enough to show that he signed without knowing its contents for the document to be disavowed. It is an everyday occurrence that people sign documents without reading the small (or even the large) print and therefore sign without actually knowing the terms (or all the terms) of the document signed. But they are held to the documents which they have chosen to sign unless there is shown to be a recognized legal basis for concluding that their apparent consent has been in some way vitiated or that reliance on that document by some other person falls into some category of unconscionable conduct justifying relief in equity.”
80. The defendant does not claim by way of defence simply that JRL or the defendant did not know or understand the contents of the 2016 Agreement, the 2017 Agreement or the Acknowledgment.
81. The plaintiff referred to Halsbury’s Laws of Hong Kong (2nd Edition), Volume 18, pages 197-201, [115.024] in respect of contracts wholly or partly in writing, including the following. Their meaning is a question of construction, and therefore of law, to be ascertained in the light of the language used in the context of all the relevant surrounding circumstances. Where the contract has been reduced to writing in a document which appears to record the whole of the parties agreement, there is a rebuttable presumption that it does record that agreement. Extrinsic evidence is not admissible to add to, vary or contradict the terms of the written document. There are exceptions to the parol evidence rule. In particular, extrinsic evidence is admissible to establish that the parties did not intend that the written agreement set out all their contractual terms, common mistake in reducing the agreement to writing as a ground for rectification and whether the contract has been vitiated by mistake.
82. The defendant relied on the Insurance (Financial and Other Requirements for Licensed Insurance Broker Companies) Rules (“Insurance Rules”) under the Insurance Ordinance (Cap 41), Rule 8, Audited Financial Statements.
83. The plaintiff relied on the following provisions of the Insurance Rules:
(1) Authorised share capital and net assets are each required to be HK$100,000, which is common ground between the parties (Rules 4 and 5);
(2) There are strict requirements as to indemnity insurance being maintained (Rule 5), there being a client account (Rule 6), keeping of proper books and accounts (Rule 7), financial statements must be provided in accordance with “applicable financial standards” (Rule 8) and the auditor’s report must contain a statement whether the financial statements give a true and fair view of the position of the company as at the end of the financial year (Rule 9).
The defendant’s case on the Agreement Issues
84. The defendant’s Closing submitted that the defendant said that the sale of 51% shares in the plaintiff to Lien was only to sell the insurance brokerage license to ADC. The parties never had a discussion or the intention to include the assets and liabilities of the plaintiff in the share transaction. In fact, the Speedinsure book, was stripped out and sold, as further demonstration of the intention for the transaction to be only for the insurance brokerage license. This was the same type of transaction for the previous purchase of 49% share; ADC only wanted a company having an insurance brokerage license. The plaintiff submits first, that there is no evidence the defendant “said” the sale of the shares was only to sell the licence or that the parties never had the intention to include the assets and liabilities of the plaintiff. The defendant’s pleadings do not constitute evidence. Secondly, APIA bought Speedinsurance and the 2017 Agreement provided for necessary adjustment. Thirdly, it is simply not correct that ADC only wanted a licence. She wanted to build up her own business which must be under and in conjunction with a company.
85. Ms Lai referred to ADC’s evidence that the important components for an insurance brokerage license are:
(i) Comply with the “solvency” requirement – at all material time, the assets less the labilities must be over HK$100,000;
(ii) The plaintiff must have a CE.
I accept that solvency and having a CE were important components, indeed mandatory requirements, for holding and operating a brokerage licence. The plaintiff added there were also other requirements, such as a separate client account, and that ADC wanted to grow a fully compliant business.
86. ADC invested HK$1,000,000 to acquire 49% shares in the plaintiff in 2016. Ms Lai asserted that it was unbelievable and unreasonable that ADC had not reviewed the audited financial statements of the plaintiff before she made that investment. Both ADC and JPM are highly educated and professionals in commercial sectors. ADC is a law graduate with 3 degrees. How did she assess the investment risk or her liabilities without due diligence check of the plaintiff? Mr Hart said ADC did not review them because she did not have them. She focused on income and expenses of the plaintiff on the assumption that it was compliant with the Insurance Rules.
87. Ms Lai suggested that the only reason may be that ADC just wanted to acquire a platform with an insurance brokerage company which would allow her to continue the business of AD Medilink operating through the plaintiff’s license. ADC estimated the value of the company at the license only, with no intention, interest or understanding, of any other assets, including the intercompany loan. Lien and the defendant agreed the value of the company was equivalent to the value of the insurance brokerage license, as further demonstrated by the sale of the Speedinsure book of insurance. Mr Hart said that there was no such evidence, no such agreement and this was pure speculation which is refuted by ADC.
88. Ms Lai continued, ADC did not want to be involved in the company’s affairs. She never asked Shirley Choi for the monthly management accounts of the plaintiff for her review. ADC had the right to be appointed as a director of the plaintiff but she never exercised this right or appointed another person to sit on the board to understand the company’s business and financial affairs and her interest in the plaintiff. ADC disputes allegations that she did not want to be involved, did not care or was not interested. She was not a director, even though entitled to nominate a director since purchase of the 49% shareholding. This was not due to disinterest. In June 2016 she asked about directorship but was told not yet. She was only appointed on 31 October 2017 after purchase of the entire share capital. Mr Hart said she had bought shares, should have had financial statements but was not given proper respect or full information within the company, although she did ask, including about accounts.
89. On 31 July 2017, ADC asked Shirley Choi to provide the overheads and expenses of the plaintiff during the discussions with JRL for sale and purchase of the 51% shareholding in the plaintiff. On 1 August 2017, when ADC received the management accounts from Shirley Choi as at 30 June 2017, she had not discussed with JRL the adjustments and arrangement on the assets and liabilities of balance sheet before and after the 51% shares transfer to Lien.
90. Ms Lai asserts that it was impossible that if ADC knew that she had to take the assets and liabilities of the plaintiff after the 51% share transfer, she would not have discussed every detail of the balance sheet with JRL. Later, when realizing the oversight ADC opportunistically sued for the intercompany loan, which was never intended to be part of the deal or it would have been handled similarly to the Speedinsure book of insurance and incorporated into the deal. Mr Hart reminds the court that the submission is not evidence. The defendant has not adduced evidence to establish an “oversight” on its part in relation to the 2017 Agreement. He also refutes as unsubstantiated the allegations against ADC.
91. The defendant suggested that during the discussion between JRL and ADC, there must have been assurance or indication from the defendant to ADC, may be “you don’t need to bother, we will clean up the company and you will have complete control of the license”, some kind of assurance or oral agreement from the defendant. As such, ADC never reviewed and queried the management accounts or financial statements of the plaintiff. The evidence does not establish any such assurances, indication or oral agreement from the defendant. I am not prepared to infer that there “must have been” such assurances or indications from the defendant to ADC. The defendant merely postulates possible assurances such as “we will clean up the company” prefaced by “may be”. I decline the invitation to speculate.
92. The defendant continued that because ADC knew that there was nothing in the plaintiff’s balance sheet, or the balance will be adjusted or cleaned up, ADC didn’t bother to have its own accountant handle the accounting book. ADC gave the burden to APIA. The evidence does not establish that ADC did not have her own accountant handle the accounts because she knew that there was nothing in the balance sheet or that it would be adjusted or cleaned up. ADC and JRL had agreed terms for continuing accounting support after the sale of the shares.
93. Ms Lai says ADC did not even know about the inter-company loan as she stated she never asked any questions on the plaintiff’s financial statements from March 2016 to 8 May 2018. ADC estimated the value of an insurance brokerage license at HK$1,625,000 in June 2017, which she said was the value of the company and agreed to pay to acquire complete control of the plaintiff. ADC did not value the plaintiff at HK$1,625,000 + HK$2,017,803.50, which would have been the proper valuation.
94. The defendant admits that the details and terms of the share transaction were put into writing on 25 August 2017 in the confidential 2017 Summary of Terms between the parties but asserts that it was never the parties’ intention that the 51% share transaction would include other assets in the plaintiff, except the insurance brokerage license.
95. Regarding the solvency issue, ADC said that she never agreed to waive the outstanding debt of HK$2,017,803.50 which can jeopardize the plaintiff’s ability to hold an insurance brokerage license. JPM confirmed that even if the amount of HK$1,769,907 due from the defendant were written off from the audited financial statement as at 31 December 2017, the plaintiff would remain “solvent” since the total assets less liabilities was over HK$200,000. Therefore ADC’s view that to waive the amount due would jeopardize the plaintiff’s ability to hold or renew the insurance brokerage license is untenable. Mr Hart asked even if could take HK$2 million and still comply, why pay HK$1.4 million for a company with net assets less than HK$200,000? Further, accounts state the true and fair view. If more than HK$2 million was written off before signed on 21 June 2018 the accounts would have to be restated.
Documentary evidence
96. The most material documents are:
(1) On the 2016 Agreement, the 10 March 2016 email and the 2016 Term Sheet dated 23 March 2016 in respect of the sale of the 49% shareholding, with supporting agreements;
(2) On the 2017 Agreement, the 2017 Summary of Terms dated 25 August 2017; and
(3) The Acknowledgement dated 9 February 2018.
The 2016 Agreement
97. On 10 March 2016 ADC and JRL agreed the basis of purchase of 49% of the issued share capital of the plaintiff. They agreed by email that: (1) ADC would buy 49% of the shares of the plaintiff for a consideration of HK$1,000,000; and (2) The consideration was divided: (i) HK$500,000 in cash; and (ii) HK$500,000 by providing the defendant a 25% interest in AD MediLink. The email expressly provided, inter alia, that ADC will be an equity partner in the plaintiff and all related businesses, Hong Kong – 49% of the plaintiff, 75% AD Medilink.
98. The 2016 Term Sheet signed by JLR for the defendant and ADC on or about 27 March 2016 for purchase of 49% of shares in the plaintiff express terms included:
(1) Restructuring Transaction: The defendant will sell, and ADC will acquire, shares (“Sale Shares”) in the issued capital of the plaintiff representing 49% issued share capital of the plaintiff, in consideration thereof ADC shall (a) transfer and assign shares (“Consideration Shares”) in the issued share capital of AD Medilink representing 25% issued share capital of AD Medilink and (b) pay the defendant a sum of HK$500,000 in cash upon completion.
(2) Shareholders Agreement: Upon completion a shareholders agreement shall be entered into between the defendant and AD Medilink. The majority shareholder shall have the right to nominate the majority of the directors, but the other shareholder shall have the right to nominate one member to the board of directors, unless and until its shareholding decreases to below 10%. All profits of the plaintiff and AD Medilink, to the extent available … will be distributed by way of dividend in respect of their respective shareholders.
99. The 2016 Agreement was supported by the following shareholders agreements:
(1) 13 June 2016 Lien Shareholders’ Agreement in relation to the plaintiff between the defendant and Lien that provided, inter alia, that:-
(a) The defendant and ADC acknowledge and confirm that immediately prior thereto the defendant had sold and ADC had purchased shares representing 49% of the issued share capital of the plaintiff, including the right to all dividends paid, declared or made after the date thereof (clause 2.1(c)
(b) Each shareholder shall have the right to appoint and remove up to the following number of directors: the defendant 2 directors (including the Chairman), Lien 1 director (clause 4.2).
(2) 1 November 2016 shareholder agreement between the defendant and ADC in her personal capacity.
The 2017 Agreement
100. The 2017 Summary of Terms dated 25 August 2017 was signed by JRL for the defendant and ADC for Lien at the end of August 2017. It provided for Lien to acquire the balance 51% of the issued share capital of the plaintiff from the defendant. Express terms included:
(a) Background: The defendant and Lien are shareholders of the plaintiff, a licensed insurance broker in Hong Kong, holding shares representing 51% and 49% of the issued share capital of the plaintiff respectively. The plaintiff is in the course of finalizing disposal of its “Books” (“SI Books”) of its Speedinsurancebusiness to a third party at a consideration of HKD550,000 (“SI Disposal Transaction”).
(b) Scope of Transaction: Lien will acquire from the defendant, and the defendant will sell to Lien, those shares of the defendant representing 51% of its issued share capital (“Sale Shares”) so that, following the completion of the transaction, Lien will hold the entire issued share capital of the plaintiff which ceases to own the SI Books.
(c) Consideration: HKD950,000, in cash payable in 2 instalments;
a. HKD600,000 upon completion of the transaction, of which:-
(i) HKD300,000 being partial sales proceeds from the SI Disposal Transaction being held in escrow pending release in favour of the defendant upon completion of the Transaction;
(ii) HKD300,000 being the balance amount payable by Lien upon completion.
b. HKD350,000 on February 28, 2018, of which:-
(i) HKD250,000 being the balance of the sale proceeds from the SI Disposal Transaction being held on escrow pending release in favour of the defendant;
(ii) HKD100,000 being the balance amount payable by Lien.
The purchase consideration under the Transaction is subject to the same adjustment as provided in the SI Disposal Transaction.
(d) Post-Completion Arrangement: The defendant to provide the plaintiff:-
a. Sharing of office space at current location with monthly fee of HK$10,400, until end of October.
b. Sharing of service of an account staff.
Construction of the 2016 Agreement and the 2017 Agreement
101. The principle of construction is the ascertainment of the meaning which the document would convey to a reasonable person that has all the knowledge which would reasonably have been available to the parties at the time of the contract. A court must balance between the indications from the factual background, rival constructions and a close examination of the language in the agreement. This requires a textual analysis in the factual matrix but the surrounding circumstances should not be used to undervalue the language: Jumbo King Ltd v Faithful Properties Ltd & Ors (1999) 2 HKCFAR 279; Law Ting Pong Secondary School v Chen Wai Wah [2021] 1 HKCA 873 Lam VP, Yeun, Chu JJA, 11 June 2021.
102. In Jumbo King Lord Hoffmann NPJ at 296 D-I held:
“The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve. … In ordinary life people often express themselves infelicitously without leaving any doubt about what they meant. Of course in serious utterances such as legal documents, in which people may be supposed to have chosen their words with care, one does not readily accept that they have used the wrong words. If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other. The court is not privy to the negotiation of the agreement - evidence of such negotiations is inadmissible - and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession. Or one of the parties may simply have made a bad bargain. The only escape from the language is an action for rectification, in which the previous negotiations can be examined. But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean. Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail.”
103. The parties have set out their agreements in writing. The meaning which the 2016 Agreement and the 2017 Agreement would convey to a reasonable person that has all the knowledge which would reasonably have been available to the parties at the time of the agreements must be ascertained. Having regard, not merely to the individual words used, but to the agreements as a whole, the factual and legal background against which they were concluded and the practical objects which they were intended to achieve I hold that the 2016 Agreement and the 2017 Agreement were for the sale of shares in the Plaintiff.
104. The only factors that may support the defendant’s case on the 2017 Agreement are indications from the factual background and the practical objects which it was intended to achieve. The defendant contends that ADC only wanted the brokerage licence. I accept that practical objects which the agreements were intended to achieve included, in 2016, to grow the healthcare and health insurance business with the plaintiff under the brokerage licence and, in 2017, the sale of the balance shareholding of the plaintiff that was compliant and solvent, with the licence, so that ADC could fully own and grow the health insurance book and build up the business. The 2017 Agreement expressly provides the Scope of Transaction was that “Lien will acquire from the defendant, and the defendant will sell to Lien, those shares of the defendant representing 51% of its issued share capital (“Sale Shares”) so that, following the completion of the transaction, Lien will hold the entire issued share capital of the plaintiff which ceases to own the SI Books.” I have considered the indications from the factual background, rival constructions and examined the language in the agreements. The surrounding circumstances should not be used to undervalue the plain language. It is clear that the intention was to sell the shares, not merely the brokerage licence or an asset.
105. There is nothing in the language of any of the material documents that limit the sale to that of the brokerage licence. Contrary to the submission of the defendant, the fact that Speedinsurance was expressly excluded from the sale in 2017 does not demonstrate an intention that the transaction was only for the brokerage licence. In my view on an objective construction of the terms the inference to be drawn from the express exclusion is that the parties intended all else be included. For any thing to be excluded it must be excluded expressly. So construed there would be no need for an express agreement toinclude the assets and liabilities of the plaintiff in the share transaction. They would be included unless expressly excluded. I reject the contention that if the intercompany loan was part of the deal it would have been handled similarly to the Speedinsurance book and incorporated into the deal. The negotiations and prior discussions are not admissible in the construction of the Agreements.
106. Mr Hart says that there was nothing in the 2017 Agreement excluding the debt or providing that the plaintiff was only buying the licence. Therefore the issue is whether there was an agreement oral or written to exclude this receivable. The defendant’s case is that there was such agreement or a unilateral mistake. It sought recession and that the parties be put into the position at the beginning. Mr Hart asks when is the beginning? Before the purchase of the 49% shareholding or the balance 51%? It is imposable to put them back to the beginning. Had a witness testified to say there was a verbal agreement then the question would be who to believe. However, ADC’s evidence that there was no such agreement is unchallenged by evidence of any such a verbal agreement.
Assessment of witnesses
107. The defendant did not call any witness. That does not mean the court must accept the evidence of the plaintiff’s witnesses. I have considered the evidence of each ADC and JPM.
108. In assessing the credibility of the witnesses, I have reminded myself of the well known principles and the dicta summarised in Hui Cheng Fai and another v Daiwa Development Limited, HCA 1734/2009, dated 8 April 2014 at para 77-81.
109. ADC and JPM were subject to cross-examination by Ms Lai on the documentary evidence and their witness statements. Mr Hart insists that none of the answers diminished in any material way the evidence in their witness statements.
110. The contemporaneous written documents and documents which came into existence before the dispute emerged are of great importance in assessing credibility. I have considered the evidence of each ADC and JPM against all the documents. The most material documents referred to above in respect of the 20I6 Agreement and the 2017 Agreement are agreements for the sale shares of the plaintiffs.
111. I have also considered the inherent likelihood or unlikelihood of events having happened and the apparent logic of events. Ms Lai asserts that the 2017 Agreement as advanced by the plaintiff is nonsense. This raises whether the account of each party is inherently plausible or implausible. I find the account of ADC and JPM inherently plausible.
112. I also attach importance to the consistency of the witness’ evidence with undisputed or indisputable evidence. Overall there was internal consistency between each witness’ oral testimony and his and her witness statements.
113. However, ADC had given evidence that upon receipt of the management accounts in April 2018, becoming aware of transactions of concern and of the Acknowledgment the plaintiff’s ability to hold the licence could be in jeopardy and the plaintiff was insolvent. Specifically, that without this receivable the plaintiff was insolvent. However, when Ms Lai put the balance sheet as at 30 June 2017 ADC agreed that the plaintiff was solvent even without the loan. I accept that in 2018 ADC became concerned about the solvency of the plaintiff and matters that could put the licence in jeopardy. The Financial Statements of the Plaintiff were signed by ADC on 29 June 2018. By then they should have known that the plaintiff meet the PIBA solvency requirements. I do not find that ADC’s evidence on solvency of the plaintiff undermines her evidence or displays dishonesty. When put to her by Ms Lai ADC readily accepted the numbers showed that the plaintiff was solvent at 30 June 2017. JPM had confirmed the truth of matters in ADC’s Witness Statement. Although that included her evidence on solvency, in cross-examination JPM agreed that the audited financial statements of the plaintiff as at 31 December 2017 showed that the net assets were such that even if the loan were written off or waived the plaintiff could still comply with the PIBA solvency rules. Neither ADC nor JPM has been discredited because of their evidence on solvency of the plaintiff, or over any matter. Their evidence has not, in a material way, been contradicted by other evidence.
114. Mr Hart submitted that both ADC and JPM are highly educated, professionals and persons of integrity. I would not draw any conclusions about truthfulness and reliability solely or mainly from the appearance of the witnesses or from an assessment of character. ADC struck me as earnest, endeavouring to be as precise as she was able. JPM gave his evidence in a straight forward manner. There was nothing in the manner in which either gave evidence or in what they said that caused any concern as to their veracity. I found their evidence was honestly given. I accept the evidence of each ADC and JPM.
Pleaded points of defence
115. The defendant maintained reliance on the Amended Defence. Mr Hart suggested that based on the defendant’s List of Issues, and the cross-examination, of the 8 points pleaded at paragraphs 8 to 17, and summarised at paragraph 3 above:
(1) Only paragraph 3 (1) and (3) above were pursued by Ms Lai at trial. It was never put to ADC or JPM that there was the agreement reflected at paragraph 3 (2), (4) and (6) above. Nor was there any questioning of ADC or JPM as to paragraph 3 (5), (7) and (8) above.
(2) Therefore, unless the defendant is relying on a specific document in the Trial Bundle, there is no evidence that is available to the defendant to sustain any of these Defences, save for paragraph 3 (1) and (3) above.
(3) The plaintiff’s evidence and pleaded case on the other 6 items, paragraph 3 (2) and (4) to (8) above is unchallenged by the defendant.
(4) As for paragraph 3 (1) and (3) above, ADC already denied such an agreement in her Witness Statement, but Ms Lai never put any of the 8 points to ADC or JPM in cross-examination.
116. Ms Lai is not a lawyer but conducted the case for the defendant admirably. The plaintiff knew and had ample opportunity to fully address all defences, however certain matters were or were not put. Mr Hart says that Ms Lai was unable to provide documentary evidence that any one of these defences is available. Therefore, the case of the plaintiff is unchallenged and such defences cannot be sustained.
Discussion of the Agreement Issues
117. Ms Lai maintained that ADC displayed an extraordinary lack of care and concern on her investment of 49% shares in 2016 and 51% shares in 2017. ADC never did a due diligence check on the plaintiff before her investment. It was incredible that ADC had ever thought she had acquired the company shares in the two deals which would include assets and liabilities of the company. ADC only valued her investment on the value of the insurance brokerage license of the plaintiff. Mr Hart replied that it is not strictly true that she never did due diligence. She had worked there, had some idea and asked questions. I accept the evidence of ADC that she had sought legal advice on due diligence prior to purchase of the 49% shareholding and was told that any legal or financial due diligence would cost more than the value of the transaction. I do not find that it would be incredible that ADC ever thought she had acquired the company shares in the two deals which would include assets and liabilities of the plaintiff. The documents show acquisition of the shares. ADC is an educated professional. She is legally qualified, had set up a company in Hong Kong and conducted business in the world of corporate structures. JPM was formerly an investment banker. He would be familiar with the nature of shareholdings. They gave evidence that the purchase of the shares included benefits and burdens, the assets and liabilities.
118. Further, the plaintiff and the defendant were part of a corporate group under a public company. I would readily infer that JRL and directors of the plaintiff, SG Lim and R Lau, or those acting for the plaintiff and the defendant would be familiar with the nature of shareholdings and company accounts. If it was agreed that Lien would only acquire the licence with the shares and not receivables they could have so provided in writing. The express terms of the 2017 Agreement only exclude Speedinsurance. The 2017 Agreement would have been drafted differently. They could have addressed the sum due from the defendant to the plaintiff however they saw fit. They could have made adjustment before the transaction or provided for how any sum due was to be treated in the future. The evidence does not establish any agreement that they would clean up the books, that the sum due was non-collectable, for book keeping purposes or otherwise.
119. Ms Lai cross-examined ADC to adduce evidence and then submitted, that on 1 August 2017 when ADC received the management accounts from Shirley Choi as at 30 June 2017, she had not discussed with JRL the adjustments and arrangement on the assets and liabilities of the balance sheet before and after the 51% shares transfer to Lien. ADC said that at no time during the negotiations and the transaction did JRL bring up the topic of the sum owed by the defendant to the plaintiff. She had every reason to believe that the plaintiff was solvent. There was no discussion at all. This is contrary to pleaded defences. I find that there was no mention of any sum due from the defendant to the plaintiff. There was no evidence of a suggestion or agreement that any outstanding sum would be written off or adjusted, either before or after the transaction.
120. The conduct of ADC and JPM in 2018 after receipt of the accounts demonstrates a concern as to the plaintiff’s past financial transactions and liabilities. This raised issues of compliance with Insurance rules and solvency. They did not challenge the defendant for failing to “clean up” the books. Their conduct is consistent with having purchased shares, with which came risks, the liabilities as well as assets. It evidences an appreciation of having accepted the risks as part and parcel of the share purchase under the 2017 Agreement.
121. The defendant says that from June 2016 to August 2017, ADC had numerous occasions to ask JRL, Shirley Choi or SG Lim to provide either the monthly management accounts or the audited financial statements of the plaintiff for her review. The only reason that ADC had not done so was because she only wanted to operate her AD MediLink business under an insurance brokerage licence. ADC did not care the about business performance, any assets and the liabilities of the plaintiff. ADC’s evidence was that there was not much transparency. I reject the suggestion that she did not care about those matters.
122. The defendant notes that the value of the 51% shareholding in the plaintiff should be reflected on the balance sheets. It asserts that the plaintiff and the defendant had made a deliberate commercial decision not to include the management account in the 2017 Summary of Terms. It showed that the shares’ value was minimal. The only valuable asset to be transferred from the defendant to Lien was the insurance brokerage license. True, the management accounts are not expressly included in or attached to the 2017 Summary of Terms, but there is no evidence that there had been a deliberate decision to exclude them because of the value of the shares. I do not infer from their absence that the shares’ value must be minimal. Mr Hart says the accounts show net assets of HK$1.6 million. Total consideration of HK$1.4 million is not far away. It was not “only the licence” that was bought. While the licence facilitates carrying on the business one cannot isolate it from the entirety of the company.
123. Ms Lai says that in numerous discussions from June 2017 until 25 August 2017 between JRL and ADC, ADC said that she only wanted the insurance brokerage license and to get rid of Speedinsure business from the plaintiff. Only when ADC knew the defendant made the mistake on the audit confirmation, she declared that the deal was including the assets and liabilities on 19 June 2018. I accept ADC’s evidence that in 2017 having first considered also acquiring the Speedinsurance business she then decided she did not want that business. So JRL had to quickly find a purchaser for that business. This explains the one express exclusion in the 2017 Agreement. ADC clearly wanted the licence but the evidence establishes purchase of the balance of the issued share capital.
124. According to the defendant it would be nonsense to suggest that the defendant sold the 51% shares to Lien at HK$400,000 attaching a right for the plaintiff to claim a receivable of HK$2,017,803.50 from the defendant. Mr Hart disputed the suggestion that it would be nonsense as the entire position must be considered, not only receivables or the figure HK$400,000 in isolation. The total agreed consideration for the share purchase of the plaintiff was HK$1,400,000. 49% for HK$1 million, comprising HK$500,000 cash and the balance in AD Medilink shares. Then HK$400,000 for 51%, but without the Speedinsurance business. Based on the Balance Sheet at 31 July 2017 the net assets of the plaintiff were HK$1,660,758.80, with a large retained loss of HK$3,537,853 which was slightly reduced from the higher figure of HK$3,677,144.33 as at 31 December 2016. At the time of the second sale the company was not in such a strong financial position, there were announcements of change of structure and apparently other considerations at a group level, including time constraints within which transactions were required to be completed. Lien would not be privy to all considerations of the seller. Mr Hart says ADC was not simply buying receivables but rights and obligations, liabilities and responsibilities. Therefore the characterisation of the transaction as nonsense is both misleading and unfair. It was a commercial bargain. In all the circumstances I do not find that the bargain lacks sense such that it could not be true. I reject the suggestion that the 2017 Agreement advanced by the plaintiff should be characterized as nonsense.
Answering the Agreement issues
125. On the Amended Defence pleaded defences: (1) Lien only bought all the shares in the plaintiff, not the rights and liabilities attaching to those shares; and (2) It was never intended that consideration would include the outstanding of HK$2,109,418, I accept ADC’s evidence and find as follows:
(a) ADC negotiated and agreed with JRL (i) in 2016 for Lien to buy 49% of the shares of the plaintiff for HK$1,000,000 and (ii) in August 2017 to buy the balance of the 51% shareholding in the plaintiff for HK$400,000 save for SpeedInsure business, which was sold separately, for HK$550,000;
(b) A critical part of the share purchase transactions was for the plaintiff to be solvent and to be able to continue to use the brokerage licence, therefore following the requirements of PIBA to have a paid-up share capital of at least HK$100,000 and net assets of the same figure.
(c) Based on the negotiations between JRL and ADC, ADC was confident that the plaintiff had always complied with PIBA regulations. JRL never raised the HK$2,017,803.50 owed by the defendant to the plaintiff, so ADC believed the plaintiff was solvent.
(d) In early 2018 ADC requested management accounts to be circulated but they were not until 16 April 2018.
(e) The acknowledgement letter dated 9 February 2018, signed on behalf of the defendant, confirmed that the defendant owed HK$2,017,803.50 to the plaintiff.
(f) During the audit and in April and May 2018 JPM noticed multiple transactions causing questions and concerns where there was no documentary proof to be found, including:
(i) The letter dated 9 February 2018 showing HK$2,017,803.50 owed by the defendant to the plaintiff;
(ii) Monthly bank transfers of between HK$20,000 to HK$50,000 from the bank account of the plaintiff to the defendant’s bank account;
(iii) Payment from the plaintiff’s bank account of HK$267,000 in July 2017 to Peter Ho;
(iv) Monthly transfers of cash from the plaintiff’s client accounts to the plaintiff’s operating accounts, which are then transferred to the defendant.
(g) ADC and JPM raised these issues with JRL by emails and in meetings from May to September 2018 to attempt to obtain the defendant’s written explanation, but this was never forthcoming.
126. To the extent of his knowledge, JPM’s evidence followed and corroborated ADC’s witness statement. I accept his evidence.
127. I find that Lien bought all the shares in the plaintiff, including the rights and liabilities attaching to those shares. I reject the submission and defences that it was never intended that consideration would include the then outstanding sum of HK$2,109,418 or any other sum due from the defendant to the plaintiff.
128. In answer to the Consolidated List of Issues, the Agreement Issues:
(1) What were the principal terms of the contract (in June 2016 as to 49% and in August 2017 as to the balance of 51%) for the purchase by Lien from the defendant of the entire issued share capital of the plaintiff? I find and hold that that the principle terms are those set out in writing in the documents, namely for the 2016 Agreement, the 10 March 2016 email and the 2016 Terms Sheet and for the 2017 Agreement, the 2017 Summary of Terms.
(2) Whether the insurance brokerage licence number M0195 of the plaintiff was the only asset that the defendant sold to Lien? The answer is No.
(3) If not, what other assets did the defendant sell to Lien, on completion of the share transfer of the 51% in August 2017 or otherwise? The defendant sold the shares to Lien including all the assets of the plaintiff, except Speedinsurance, which included receivables and the debt due from the defendant to the plaintiff.
129. The defendant said it stood firmly on its own defendant’s List of Issues. In answer to the defendant’s Closing first two main issues:
(1) What was the actual bargain between Lien and the defendant in August 2017? I find that the bargain was that set out in the 2017 Agreement.
(2) Whether the insurance brokerage licence no M0195 of the plaintiff was the only asset in effect that the defendant sold to Lien when Lien acquired 51% of the issued shares in the plaintiff from the defendant? The answer is No.
130. In so far as the 2017Agreement issues are: What were the terms of the transaction? Was it just purchase of the brokerage licence? Or did it also include rights, obligations and liabilities? I find it was not just the purchase of the brokerage licence. It also included all the assets, rights, obligations and liabilities of the plaintiff save for Speedinsurance.
131. Other defences pleaded in the Amended Defence are set out at (1) to (5) below and may be disposed of shortly:
(1) Lien agreed to write off HK$2,043,440.89 due from the defendant to the plaintiff “after the Sale Transaction” which sum appeared on unaudited balance sheet of the plaintiff as at 31 July 2017. I find that there was no evidence of any such agreement or for any sum to be written off after the sale transaction.
(2) It was agreed between JRL and ADC that the Outstanding was not collectable by the plaintiff. There was no evidence of the Outstanding, or any sum, being “not collectable” by the plaintiff.
(3) The Outstanding was a non-collectible/forgiven amount for book-keeping purposes. There was no evidence that the Outstanding was a non-collectible/forgiven amount for book-keeping purposes.
(4) JRL and ADC were colleagues who discussed this agreement. The evidence does not establish discussion of any such agreement.
(5) Alternatively, the defendant relies on unilateral mistake/oversight at time of the agreement around August 2017: and asks for rescission and for parties to be restored to pre-contract position. The defendant has not adduced evidence of unilateral mistake or oversight at the time of the agreement in August 2017. Having considered all the evidence I cannot infer any such unilateral mistake or oversight. The burden is on the defendant to adduce evidence of mistake or oversight. It has failed to discharge that burden. The defendant has not established any basis for rescission or for the parties to be restored to the pre-contract position.
The Acknowledgment
132. The plaintiff’s claim against the defendant is in debt, evidenced by the written acknowledgement of indebtedness from the defendant to the plaintiff of HK$2,017,803.50, dated 9 February 2018. The plaintiff relies on the Acknowledgment as unequivocal, unconditional and unchallenged evidence that as at 31 December 2017 the defendant owed the plaintiff the Acknowledgment Sum.
133. The plaintiff emphasises that the Acknowledgment was not just chopped but also signed by the defendant. There is a manuscript signature within the company chop. Mazars chop, as auditor of the defendant also appears to be at the bottom of the Acknowledgment. The plaintiff contends that the Acknowledgment undoubtedly constitutes an admission of debt so the burden is on the defendant to produce evidence either that the debt had been written off or that it is a different amount. No one gave evidence for the defendant as to either.
134. The plaintiff says that the claim is straightforward, given that the defendant does not challenge that: (1) it owed money to the plaintiff; (2) the Acknowledgement was prepared by the defendant’s auditors, who had access to the defendant’s accounting books and records to identify which parties were owed monies by or owed monies to the defendant; and (3) the Acknowledgement was chopped and signed by the defendant’s personnel.
135. In support of the fact that the defendant owes it moneys, the plaintiff produced its own financial statements showing the following amounts outstanding from the defendant to the plaintiff as at:-
Date |
Amount (HK$) |
31 December 2015 |
1,222,536 |
31 December 2016 |
1,632,852 |
31 December 2017 |
2,109,418 |
136. According to Note 7(b) to the plaintiff’s financial statements year ended 31 December 2017 “The amounts due from former immediate holding company [defendant] are unsecured, interest free and have no fixed repayment term”. The same was the position with the plaintiff’s financial statements for the year ended 31December 2015 and 2016.
137. The plaintiff also relies on the Hong Kong Standard on Auditing 505, External Confirmations, of the Hong Kong institute of Certified Public Accountants (“SAP”). Paragraph 2 of that SAP provides:
“External Confirmation Procedures to Obtain Audit Evidence
2. HKSA 500 indicates that the reliability of audit evidence is influenced by its source and by its nature, and is dependent on the individual circumstances under which it is obtained. That HKSA also includes the following generalizations applicable to audit evidence:
• Audit evidence is more reliable when it is obtained from independent sources outside the entity.
• Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference.
• Audit evidence is more reliable when it exists in documentary form, whether paper, electronic or other medium.
Accordingly, depending on the circumstances of the audit, audit evidence in the form of external confirmations received directly by the auditor from confirming parties may be more reliable than evidence generated internally by the entity. …”
138. Paragraphs 16, A24 and A25 of that SAP provide for evaluating the evidence obtained, including whether the results of the external confirmation procedure provide relevant and reliable evidence, categorizing the results and, when taking into account other audit procedures, whether sufficient appropriate audit evidence has been obtained or whether further audit evidence is necessary.
Construction of the Acknowledgment
139. The defendant submitted that:
(a) The audit confirmation requested the plaintiff to confirm the amount outstanding from the defendant to the plaintiff as at 31 December 2017. It cannot be considered as an acknowledgement of debt because it in fact only requests confirmation of the amount due.
(b) In order to be an acknowledgement, however, the debt must be quantified in figures or, at all events, it must be liquidated in the sense that it is capable of ascertainment by calculation, or by extrinsic evidence, without further agreement of the parties. The plaintiff submits that the Acknowledgement is both quantified in figures and liquidated in the sense that it is ascertainable without agreement of the plaintiff.
(c) What constitutes an acknowledgment of debt was considered by the Court of Final Appeal in New World Development Co, Ltd v Sun Hung Kai Securities Ltd & Anrs (2006) 9 HKCFAR 403 where Ribeiro PJ discussed the requirements for a valid acknowledge at paragraphs 87-93. The plaintiff seeks to distinguish the case and submits it does not assist the defendant.
140. In New World Development the Court of Final Appeal was considering a limitation defence. SHK contended that each of NWD’s claims for reimbursement first accrued as causes of action on the date each demand was made and that claims in respect of demands made more than six years before issue of the Writ were time-barred. Four such demands particularised totalled HK$11,082,945. In response, NWD relied on SHKS’s letter to NWD signed by SHK’s executive chairman Arthur Dew dated 18 December 1997 (“the Dew letter”) as an operative acknowledgment of SHKS’s liability to pay so that, by virtue s 23(3) of the of Limitation Ordinance (Cap 347), the claims were not time-barred. The Dew Letter satisfied the section 24 formal requirements for such acknowledgment. Ribeiro PJ held:-
“G.(i) The legal principles …
89. The question which therefore calls for determination is whether the Dew letter is a sufficient acknowledgment for the purposes of s 23(3), a question on which there is guidance in the case-law.
90. First, it is clear that the question is one of construction. As Lord Goddard CJ put it in Jones v Bellgrove Properties Ltd [1949] 2 KB 700 at 704:
“Whether a document is or is not an acknowledgment must depend on what the document states......”
It follows that arguments based on the words used in particular reported cases are of little relevance. …
91. Secondly, it is clear that in construing the document relied on, the court will look at connected documents (not necessarily expressly referred to in the document relied on) to ascertain its proper meaning, as where, for instance, an acknowledgment emerges from reading together two or more letters written by the debtor in response to letters from the creditor: McGuffie v Burleigh (1898) 78 LT 264; and see Spencer v Hemmerde (above, at 516 and 518).
92. Thirdly, the object of the construction exercise is to decide whether, fairly read, the document relied on constitutes an acknowledgment by the debtor of a liability to pay outstanding amounts to the creditor. There is no need for the document to specify the amount of the debt so long as it can be ascertained by other means, including resort to extrinsic evidence, without requiring the parties’ further agreement.
(a) Thus, in Good v Parry [1963] 2 QB 418 at 423 – 424, Lord Denning MR articulated the principle as follows:
“...... there must be an admission that there is a debt or other liquidated amount outstanding and unpaid. ...... In order to be an acknowledgment, however, the debt must be quantified in figures or, at all events, it must be liquidated in this sense that it is capable of ascertainment by calculation, or by extrinsic evidence, without further agreement of the parties. ...... But if the debt is not quantified and is not ascertainable without further agreement, then there is no acknowledgment sufficient to satisfy the statute.
No doubt a promise in writing by a debtor to pay whatever sum is found due on taking an account is a good acknowledgment today just as it was before the Act, provided always that the amount is a mere matter of calculation from vouchers, or can be ascertained by extrinsic evidence, and is not dependent on the further agreement of the debtor.”
In Dungate v Dungate [1965] 1 WLR 1477 at 1487, Diplock LJ stated the principle thus:
“There is clear authority that an acknowledgment under this Act need not identify the amount of the debt and may acknowledge a general indebtedness, provided that the amount of the debt can be ascertained by extraneous evidence.”
Jones v Bellgrove Properties Ltd [1949] 2 KB 700, provides a good illustration. In that case, the document held to constitute an acknowledgment was a company’s balance sheet signed by the company’s accountants and by two directors and communicated at a meeting attended by the plaintiff. The balance sheet acknowledged debts to “sundry creditors” amounting to £7,638 6s 10d without either identifying the plaintiff as one of the creditors or stating the amount of his debt. However, he was able to call the accountants to testify that a debt of £1,807 0s 0d was owed to him and was included in the sum stated in the balance sheet.
93. Finally, even if the document relied on acknowledges a debt, it is not a sufficient acknowledgment for the purposes of the section if it is accompanied by words which nullify or materially qualify that acknowledgment, for instance by confessing and avoiding the debt or asserting a set-off or cross-claim which renders the document in effect a denial of liability: see, eg, Surrendra Overseas Ltd v Government of Sri Lanka [1977] 1 WLR 565 at 575.”
141. New World Development determined whether the acknowledged must be of a specific amount or a liability for time to start to run again in terms of the Limitation Ordinance. It reaffirmed that whether a document is a sufficient acknowledgment for the purposes of s 23(3) is a question of construction. New World Development held the amount need not be specified if ascertainable. It may be quantified or ascertainable. No limitation issue arises here. Mr Hart says in any event the amount is both quantified and ascertainable as there is also extrinsic evidence of how much is outstanding. He argues that there are connected documents in the form of the audited accounts of the plaintiff. Whilst I accept that the plaintiff’s audited accounts evidence the existence of a debt, the amount varies according to the date. The defendant has not disclosed its own audited accounts. Had the Acknowledgment not specified the amount due that sum would have had to be ascertained by extraneous evidence.
142. The defendant contends that the audit confirmation cannot be considered an acknowledgement of debt because it was only a request for confirmation of the amount due. In construing the Acknowledgement the nature and purpose of the document must be borne in mind. The SAP on auditing, external confirmations is instructive. The audit confirmation is sent out as part of the audit exercise to obtain external audit evidence. It is to check an existing debt, not to agree a sum with the plaintiff. The defendant is acknowledging an existing debt to which confirmation of the plaintiff is sought to assist in the preparation of audited reports.
143. In my view the Acknowledgment is not accompanied by words which nullify or materially qualify that acknowledgment or which render it in effect a denial of liability. Fairly read, it constitutes an acknowledgment by the defendant of a liability to pay the sum to the plaintiff and is an admission that there is a debt outstanding and unpaid. To be an acknowledgment the debt must be quantified in figures, alternatively liquidated. Here the debt is quantified in the sum of HK$2,017,803.50.
144. New World Development does not assist the defendant or support an argument that the 9 February 2018 audit confirmation does not constitute an acknowledgment of debt by the defendant.
Discussion of the Acknowledgment Issues
145. The defendant seeks the following findings on the evidence in respect of the Acknowledgment, which I shall address in turn:
(1) 28 May 2018 was the first time that ADC emailed JRL and SG Lim attaching the audit confirmation dated 9 February 2018 to query the outstanding amount due from the defendant. I accept that 28 May 2018 was the first time ADC emailed JRL and SG Lim attaching the Acknowledgment to query the amount due. Mr Hart notes there is no evidence that 28 May 2018 was the first time it was seen or received by the defendant or JRL. The defendant must have been aware of it earlier because it had been chopped and signed on behalf of the defendant before sent to the plaintiff.
(2) ADC and JPM cannot confirm when ADC signed the audit confirmation and when they sent it to the defendant’s auditor. The evidence establishes that the Acknowledgment was signed and chopped on behalf of the plaintiff, but not when signed and sent.
(3) Mazars did not testify that they had received the signed audit confirmation from the plaintiff. I accept that it was returned to the auditor. Although, what is material is that it was chopped and signed by the defendant acknowledging the sum due, rather than particulars of subsequent receipt by the auditor. The plaintiff maintains that the evidential burden is now on the defendant to rebut the evidence of ADC, JPM and the documentary evidence so it was for the defendant to adduce evidence from Mazars, not the plaintiff. I agree.
(4) Ms Lai, APG provided the management accounts of the plaintiff from January to December 2017 to ADC on 16 April 2018. The plaintiff says it was only the Profit and Loss not the Balance Sheet.
(5) JPM said that he had not checked the general ledger of the plaintiff whether the audit confirmation matched with their record before ADC signed on it but that the auditor has checked therefore it showed that ADC received this audit confirmation in May 2018 as they appointed Mazars as the auditor of the plaintiff at that time. It is agreed that JPM did not see the ledger but he did look at the historic financial statements then contacted Mazars to confirm. Mazars was appointed in the spring.
(6) There were three different claims on the amount due from the defendant in the plaintiff’s pleadings. The plaintiff wrongly stated the amount outstanding from the defendant had increased to HK$2,109,418 in the Reply to the Amended Defence. This figure included HK$305,744 due from ADC’s own company, Healthy Matters (note 7(c)). This displayed that both ADC and JPM were completely lacking in knowledge to understand the audited financial statements. Ms Lai is correct in that the plaintiff’s pleadings do state different amounts due according to different documents. There are not three different amounts claimed. The plaintiff’s claim has always relied on the Acknowledgement as evidence of the existence of the debt and of the amount due. The plaintiff relied on it’s own financial statements to show that there were amounts outstanding from the defendant to the plaintiff. The defendant criticised the 31 December 2017 figure of HK$2,109,418. However, the plaintiff’s figures are taken from the plaintiff’s financial statements. No similar financial statements have been disclosed by the defendant. The financial statements of the plaintiff as at 31 December 2017 were signed by ADC on 29 June 2018, almost 5 months after the date of the Acknowledgment dated 9 February 2018 for the sum of HK$2,017,803.50. In so far as ADC and JPM lacked knowledge to understand the plaintiff’s audited financial statements I accept that they were trying to get information and understand the full picture for the audit of the 2017 financial statements.
146. The defendant asserted that ADC signed on the audit confirmation just to take advantage of the defendant’s mistake. Further, Mazars might have requested ADC sign the audit confirmation for their record. Until that time, around 28 May 2018, ADC knew that the defendant had made the mistake. ADC saw the audit confirmation as a windfall surprise which she should follow up resulting in this disingenuous law suit. I find that the evidence does not established mistake. I hold that the defendant has not made out a defence of mistake in respect of the Acknowledgment. The plaintiff strongly objects to the allegation that ADC signed to take advantage and any aspersion of impropriety. I do not find that ADC signed just to take advantage of the defendant’s mistake. Lien had purchased the entire issued share capital of the plaintiff.
147. The defendant says that ADC did not know how much the defendant owed the plaintiff, but does not dispute that it owed the plaintiff money. The evidence shows that since 2014 there has been substantial amounts of over HK$1 million due from the defendant to the plaintiff. I accept that when considering the audit confirmation JPM first looked at the historic audited Financial Statements then spoke to Mazars.
148. Ms Lai continued that the plaintiff did not submit the audit confirmation prepared by Mazars addressed to the defendant to confirm the amount due of HK$1,769,907 stated in the plaintiff’s audited financial statement as at 31 December 2017. This is said to strongly suggest that ADC, JPM and Mazars knew that the assets and liabilities had to be adjusted to “NIL” before 8 May 2018. The figure of HK$1,769,907, is reached by adding the amounts at Note (b) of HK$21,292 plus HK$1,748,615. Mr Hart says that it fails to take account of the monies paid to Peter Ho of HK$267,000, which makes a total of HK$2,036,907, which is very close to the Acknowledgment Sum.
149. The defendant has declined to produce its own books of account or financial statements to show the amount it recorded for the amount of the debt. The plaintiff submits that Mazars were auditing the accounts of both the plaintiff and the defendant, given the strict terms of the Insurance Rules and SAPs, it is inconceivable that there would be material inconsistencies. I accept it would be highly unlikely.
150. Mr Hart also objected on the basis that the defendant was now suggesting a conspiracy between ADC, JPM and Mazars because all knew the sum should be zero. He asks if that were really so why did Ms Lai not testify to substantiate the allegation? Further, the defendant should not be permitted to raise the matter by submission in Closing for first time. Conspiracy with Mazars is not pleaded. However, the case that ADC knew that the amount due from the defendant was to be written off or was non-collectable can be found in the Amended Defence. I do not infer that ADC, JPM and Mazars knew that the assets and liabilities had to be adjusted to “NIL” before 8 May 2018 from the absence of an audit confirmation to confirm the amount due according to the plaintiff’s audited financial statement as at 31 December 2017.
151. There was another acknowledgement apparently signed by JRL dated 7 May 2018, in relation to the indebtedness of a different entity Relevant Marketing Group Limited, to the plaintiff which was agreed to be zero as at 31 December 2017. This has never been challenged. The defendant’s Closing paragraph 15(n) sought to make a new argument on the RMG acknowledgement but Ms Lai formally withdrew the argument and confirmed she did not rely on paragraph 15(n) of the Closing.
152. The plaintiff relied on Ricardo Leong v Asean Resources Limited formerly known as Michaelson Limited, CACV 27/1983, 14 July, 1983 in support of the submission that the Acknowledgment constitutes an acknowledgment binding on the defendant and that the burden is on defendant to prove the contrary. In that case the defendant’s auditors in the course of regular examination of the defendant’s accounts in 1973 sent to Falcarra Investments Ltd a written request for confirmation that as at 30 November 1973 there was shown in the defendant’s books a sum of US$200,000.00 as being due from the defendant to Falcarra Investments Ltd. After an assignment of claims in favour of the plaintiff written requests for confirmation of balances were periodically sent to the plaintiff. The plaintiff relied on the said confirmations as admissions of indebtedness and/or as statements from the defendant or its auditors in the nature of account stated. Fuad JA held at paragraphs 24 and 25:-
“24. … I only wish to add that in my view, the Judgment of Kempster, J. can be upheld on another ground which was sufficiently raised in the pleadings and in the Respondents notice. … There was clear evidence that on a number of occasions and over a long period, the defendants, through their agents, acknowledged the debt now claimed as being due personally to the plaintiff. I adopt, with respect, the following statement of the law in paragraph 2057 of the 25th Edition of CHITTY ON CONTRACT –
“Different meanings of the term “account stated”.
The term “account stated” is applied in at least three ways.
a. To a claim by one party to payment of a definite amount, which is admitted to be correct by the other party. This is merely an admission of a debt out of court and is equivalent to a promise from which the existence of a debt may be inferred. Such an admission is only evidence of a debt, and can be rebutted; an item in an account stated of this type can be challenged or explained, or the admission can be rebutted by evidence that there was no consideration for the promise to pay. In order to have this evidential effect, the admission of liability must be unqualified and must relate to an existing debt …”
25. The defendants made no attempt to rebut the unequivocal admissions of the existence of the debt. They were not challenged or explained as so easily could have been done.”
153. In this case the defendant did not adduce evidence to rebut the Acknowledgment or the existence of the debt. The defendant did not call any witness to challenge the claim. JRL may not have been available but there were other individuals who were involved with the financial affairs of the defendant and the plaintiff at material times.
154. The defendant did not call any auditor or staff from Mazars, the auditor of both the defendant and the plaintiff at the material times and whose chop appears on the Acknowledgement. The plaintiff’s financial statements included a debt owed by the defendant at each year end from 2014 to 2017. Until August 2017 the defendant was a shareholder and until October 2017 SK Lim and R Lau were directors of the plaintiff, who signed off on Financial Statements. Peter Ho had been a CFO, although he left at some stage. Ms Lai was involved with the accounts of the defendant and the plaintiff. During the trial Ms Lai sought to have another individual, Ms Wong, admitted to give evidence by adopting the witness statement of JRL, not to provide her own statement. The application was refused. However, Ms Lai informed the court that Ms Wong knew about the matters contained in the JRL witness statement. JRL may have been in Thailand for more than a year but at least some of these others were in Hong Kong. Mr Hart says witness statements were filed in July 2020 and exchanged in September 2020. The defendant could have provided witness statements from anyone it saw fit.
155. There were no submissions as to the availability or otherwise of some of these people. If the failure to give necessary evidence can be credibly explained, even if not entirely justified, the effect of the silence in favour of the other party may be either reduced or nullified. I do not draw any adverse inference against the defendant for not calling any witness on any matter. Rather, the situation is simply that the defendant has failed to adduce evidence to rebut the evidence advanced by the plaintiff. My findings do not turn on fine lines of the burden of proof or require the drawing of adverse inferences against the defendant. The evidence clearly establishes the admission of debt for the Acknowledgment Sum and I so find on the balance of probabilities.
156. The plaintiff also contends that Mazars, as auditors, together with former directors SG Lim and R Lau must be fully cognisant and aware of the strict obligations under the Insurance Rules and SAPs. They would not sign financial statements without qualification for the years ended 31 December 2014, 2015 and 2016 which were materially inaccurate as to amounts in excess of HK$1,000,000. The same is the position of ADC when she signed the financial statements as at 31 December 2017, as sole director of the plaintiff from 31 October 2017, on 29 June 2018. Those are reasonable inferences to draw from the evidence. I accept those contentions.
Answering the Acknowledgment Issues
157. In answer to the Consolidated List of Issues, Issue 2: Notwithstanding that a person on behalf of defendant signed and chopped a written acknowledgement of indebtedness dated 9 February 2018 addressed to the plaintiff, countersigned by ADC and chopped on behalf of the plaintiff, confirming that as at 31 December 2017 the defendant was indebted to the plaintiff for HKD2,017,803.50 and: whether and if so, why, the plaintiff is prevented from recovering this amount from the defendant? The answer is No. Whether the plaintiff is entitled to recover any other amount from the defendant does not arise.
158. The defendant’s Closing, third main issue is whether the defendant has mistakenly stated “Due to you” on the “Request for Confirmation of Balances” to the plaintiff on 9 February 2018? The evidence did not establish that the defendant had mistakenly so stated.
Conclusion
159. For the above reasons I find that the plaintiff has established the claim that the defendant is indebted to the plaintiff and liable to pay the principle sum due of HK$2,017,803.50 and hold that the defendant has no defence to plaintiff’s claim.
160. Therefore Judgment shall be entered for the plaintiff against defendant for the principal sum of HK$2,017,803.50 together with interest at the Judgment rate from 31 December 2017 until payment. I make a costs order nisi that the costs of the action, including all reserved costs, be paid by the defendant to the plaintiff to be taxed if not agreed.
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( Liza Jane Cruden )
Deputy District Judge |
Mr Hart Andrew of Hart Giles, for the plaintiff
The defendant appearing in person, represented by its Director Ms Lai Po Yin
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