PANG HING KWAI AND ANOTHER v. YAM SIU WO

HCA 1601/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1601 OF 2001

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J U D G M E N T

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Introduction

1. The two plaintiffs jointly commenced this action in April 2001 against the defendant claiming the repayment of two loans allegedly lent to him in 1998. The loans are admitted but the defendant denies he borrowed them in his personal capacity. The defence (as per the Amended Defence dated 28 February 2003) is in short that the loans were lent to two companies, Double Garment Manufacturing Co. Ltd ("Double Garment Mfg") and Wing Yee Investment Co. Ltd ("Wing Yee Inv").

Undisputed Facts

2. The background facts are undisputed. The two plaintiffs are husband and wife. The 1st-named plaintiff ("Pang") became acquainted with the defendant in the 1970's when she was working as a garment worker. In about 1975, they, together with a Mr Lee, started their own garment business, Double Garment Mfg. In about 1985, they started Wing Yee Inv. Pang held 24% shares in Double Garment Mfg and Wing Yee Inv each. During 1998, she was responsible for the operation in the Mainland and stayed there for about 3 weeks every month.

3. According to the annual returns of Double Garment Mfg for 1998 and 1999, about 52% of Double Garment Mfg's shares were held by Double Garment Group Co. Ltd ("Double Garment Group"). There is no clear evidence who held the shares in Double Garment Group. Although the plaintiffs claim it was controlled by the defendant, it is accepted in the plaintiffs' written opening that Double Garment Group was regarded as the holding company of Double Garment Mfg and Wing Yee Inv: para. 3(a) thereof.

4. The cheque which evidenced the first loan ("the first cheque") contained the following particulars. It was drawn on the current account of the 2nd-named plaintiff ("Chan") in favour of the defendant and was dated 30 March 1998. The amount of the first cheque was $1 million. After the $1 million was credited to the defendant's current account, it was paid out by two cheques respectively in favour of Double Garment Mfg and Wing Yee Inv.

5. On the other hand, the cheque which evidenced the second loan ("the second cheque") was drawn on Chan's current account in favour of Wing Yee Inv and was dated 6 May 1998. The amount of the second cheque was $800,000. It was deposited into Wing Yee Inv's bank account and later paid out to the following companies:-

(a) Wing Yee Inv;

(b) Wellday Trading Co. Ltd ("Wellday Trading"), and in turn to a company called "中山永備" in the Mainland;

(c) part of the sum paid to Wing Yee Inv was in turn paid to two companies called "中山永隆" and "中山埠城".

6. Apart from the $1.8 million which allegedly was owed by the defendant, it is common ground Pang also lent two sums of $200,000 each to Wing Yee Inv.

7. The receipts for the cheques were not given to the plaintiffs at the time of the loans but were only given to them in about June 1998 when Chan went to the defendant's office: Chan's affirmation, para. 16.

The Plaintiffs' Case

8. The plaintiffs' case can be summarised as follows. On about 28 March 1998, when Pang was in the Mainland, the defendant telephoned her and said he urgently needed $1 million. Pang was sure the defendant was not borrowing for Double Garment Mfg or Wing Yee Inv because he did not tell Pang that the money was needed by those companies. Pang said she did not have cash but she later telephoned her husband, Chan, and asked him to lend the sum to the defendant.

9. When Chan testified, he said he filled in the particulars of the first cheque at the bank (on 28 March 1998) before arriving at the defendant's office on 30 March 1998. When Chan handed over the first cheque to the defendant, he asked the defendant if the first cheque was correctly drawn. The defendant replied it was and did not mention that it was for Double Garment Mfg or Wing Yee Inv.

10. Pang's testimony in relation to the second cheque is this. She received a telephone call from the defendant on 6 May 1998 when she was in the Mainland. Again, the defendant said he needed $800,000 urgently. Pang also told the defendant she would contact Chan (who was in Hong Kong). Like the last occasion, Pang informed Chan of the defendant's request.

11. Chan testified that after he was told of the defendant's request for $800,000, he immediately brought his cheque to the defendant's office. The defendant told Chan to draw the second cheque in favour of Wing Yee Inv. Although Chan found this strange because Pang had told him the money was needed by the defendant, out of courtesy he did not ask the defendant why the second cheque should be payable to Wing Yee Inv.

12. Both plaintiffs also said that in April 1999 they asked the defendant for repayment of the loans and, so they asserted, the defendant promised to do so as soon as he had the money. The promise was repeated in February, July and August 2000.

13. Chan also said he went to the defendant's office to ask for the immediate repayment of $500,000 in about September 2000. The defendant claimed he could not do so but proposed repayment by instalments. Chan was given two post-dated cheques of $100,000 each. The cheques were drawn on the account of Wing Yee Inv. He was also told thereafter he could collect a similar cheque every month but this promise was not kept by the defendant.

The Defendant's Case

14. The defence called two witnesses, the defendant and a Ms Chiu Mei Yin ("Chiu"), the account manager of Double Garment Group. Before proceeding further, it is part of the defence case that the Double Garment Group consisted not only of the company called Double Garment Group, but also its subsidiaries and related companies, including Double Garment Mfg and Wing Yee Inv.

15. The defendant testified that he was the chairman of Double Garment Group which had five subsidiaries, including Wing Yee Inv and Wellday Trading. In October 1997, Double Garment Group has five warehouses; one in Hong Kong and four in the Mainland. It (and its subsidiaries) also employed over 2,000 workers in the Mainland.

16. Since the economic crisis in October 1997, the banks reduced the credit amount for Double Garment Group and Double Garment Group was forced to repay more than $10 million to the banks within a short time.

17. In March 1998, shortly after the Lunar New Year, Double Garment Group was in need of cash to pay the salary of its staff. At Chiu's suggestion, the defendant approached Pang on about 30 March 1998 for a loan for Double Garment Group. The defendant testified he expressly informed Pang of the problem relating to Double Garment Group's financial situation and, upon learning that, Pang agreed to lend to Double Garment Group. Pang told the defendant she would arrange Chan to bring a cheque to the defendant's office. When Chan arrived shortly afterwards, Chan gave a cheque (namely, the first cheque) payable to the defendant, instead of Double Garment Group. Chiu asked Chan to write another cheque but Chan had not brought any other cheque with him. Chiu advised the defendant not to amend the payee's name of the first cheque for fear that it might be rejected by the bank.

18. In relation to the second cheque, the defence case is this. In about early May 1998, Double Garment Group again faced financial difficulties: Standard Chartered Bank demanded for the immediate repayment of $460,000; Double Garment Group also needed cash to pay salaries to the staff of the factories in the Mainland.

19. The defendant again approached Pang for a loan of $800,000 on behalf of Double Garment Group. On 6 May 1998, Pang arranged Chan to bring the second cheque to the defendant's office.

20. The defendant also admitted he had personally borrowed $700,000 from a Mr Au in about July 1998 but the loan was repaid in about August 1998.

21. In relation to the two post-dated cheques given to Chan in September 2000, the defendant testified that earlier (in about April 1999) the plaintiffs discussed with him about Pang's wish to withdraw from the business because of her poor health. They also indicated Pang wanted her share of the "company's money" to be repaid to her. The defendant told the plaintiffs Double Garment Group's finance was tight and they would have to wait. The plaintiffs raised this matter again subsequently and pressed for payment of money repeatedly. Finally (in September 2000), even though the finance of Double Garment Group was tight, the defendant acceded to the plaintiffs' request for the repayment of $500,000 by instalments.

22. The defendant denies having agreed to repay any loan to the plaintiffs in his personal capacity.

Credibility and Findings of Fact

23. If the parties had not called any witnesses, and if this action were to be determined based purely on the relevant documents, the documents (save for one) would have shown that the debtor(s) was/were Double Garment Mfg and/or Wing Yee Inv:-

(a) the second cheque was payable to Wing Yee Inv;

(b) the receipts were issued in the name of Double Garment Mfg;

(c) the money from the first cheque was used by Double Garment Mfg and Wing Yee Inv;

(d) $700,000 out of the money from the second cheque ($800,000) was used by Wing Yee Inv.

The only document which suggests that the debtor was the defendant is the first cheque because it was made out to him.

24. However, the parties' respective witnesses have given conflicting and/or different explanations in their testimony regarding:-

(a) the true identity of the debtor(s);

(b) the circumstances under which the above documents came about.

Hence, the outcome of this action must depend ultimately on the credibility of the witnesses.

25. In short, for the reasons given below, I accept the testimony of the defence witnesses to be truthful and reliable but reject that of the plaintiffs' witnesses as untruthful.

26. One of the matters I took into account when assessing credibility is the circumstances surrounding the agreement in about September 2000 to repay $500,000 to Pang by instalments and the reason for drawing the post-dated cheques of $100,000 each. According to the plaintiffs, by April 1999, Pang suffered from cancer and wished to withdraw from the business. She and Chan started to discuss this with the defendant and they asked him to take over her shares. Pang and Chan also asked the defendant to repay the loans. After quite some discussion, in about September 2000, Chan asked for the immediate repayment of $500,000. The defendant promised to do so and the defendant gave him two post-dated cheques drawn on the account of Wing Yee Inv.

27. When Chan was cross-examined, he confirmed that, at the time when he urged the defendant to repay immediately $500,000, that repayment was related only to the two loans totalling $1.8 million (supposedly owed by the defendant). According to him, the repayment would be by instalments and the defendant gave him two post-dated cheques of Wing Yee Inv for such purpose.

28. I find it incredible that the plaintiffs would accept the defendant's repayment of (what allegedly was) his personal loans by using the money of Wing Yee Inv. As stated above, some 24% of Wing Yee Inv's shares were held by Pang. It can be inferred that at least Pang would view Wing Yee Inv as in essence a corporate vehicle to carry on what in effect was a quasi-partnership involving her and the defendant. Counsel for the plaintiffs argues that the plaintiffs, being laymen, were unable to distinguish between loans owed by Wing Yee Inv ($400,000) and those owed by the defendant ($1.8 million). With respect, I find the argument to be invalid, and in fact contradicts the testimony of the plaintiffs' witnesses. A clear distinction between the two has been made by them both in their witness statements and testimony in court.

29. There was a discrepancy between the testimony of Chan (see para. 30, Chan's affirmation) and that of Pang (see para. 25 to 27, Pang's affirmation). Chan said when he went to the defendant in September 2000, he asked for the immediate repayment of $500,000. As stated above, Chan said he regarded the repayment as being related to $1.8 million allegedly owed by the defendant. Pang, however, said she considered the repayment of $200,000 (by way of the 2 post-dated cheques) was only for the repayment of the loans lent to Wing Yee Inv (two sums of $200,000 each). Pang's account is inconsistent with Chan's because if the plaintiffs only intended the defendant should repay $400,000, there was no reason why Chan should ask for the immediate repayment of $500,000.

30. The other matter which supports the defence case is that the receipts were made out in Double Garment Mfg's name. It is important that the receipts were not given at the time of the two loans, but were given in about June 1998 (about 3 months after the first cheque and one month after the second cheque): see Chan's affirmation, para. 16. Irrespective of whether they were given to the plaintiffs voluntarily (as they allege) or at their request (as the defendant alleges), it is incredible that the plaintiffs would accept the receipts without protest or question. Receipts from Double Garment Mfg represent evidence of loans owed by Double Garment Mfg. Further, they can be evidence that the loans were not owed by the defendant. More importantly, to a reasonably experienced business person (which the plaintiffs must have been), this would mean that there is at least a risk the repayment would have to be made by Double Garment Mfg. Pang, being a shareholder of Double Garment Mfg, would lose out because it would mean assets of Double Garment Mfg would be used to repay the loans. The plaintiffs' mere assertion that they trusted the defendant at the time is not a sufficient explanation.

31. The plaintiffs are correct when they argue that the receipts cannot in law change the nature of the loans. However, the receipts can be taken into consideration when assessing the witnesses' credibility.

32. Another matter which was taken into account is the use to which the loans were put. According to the defendant, the loans were used entirely by companies in which Pang had shares, or related companies. Counsel for the plaintiffs submits that there is no direct evidence that companies such as "中山永備", "中山永隆", "中山埠城" or Wellday Trading were related to Double Garment Mfg or Wing Yee Inv, but were only related to Double Garment Group. However, that these entities were closely related can be inferred from at least the following matters:-

(a) the financial statements and bank statements of Double Garment Mfg and Wing Yee Inv show that there have been inter-corporate transfers of fund among them;

(b) the plaintiffs have not denied the close relationship among these entities when they were cross-examined as to how the funds of the first cheque and second cheque had been used.

33. Similar to their argument regarding the receipts, the plaintiffs also argue that the usage of the funds lent cannot in law change the nature of the loans. While that is true, the significance of the use to which the funds have been put is that it is unlikely the defendant would borrow in his personal capacity when the funds were to be used for business purposes.

34. Various other comments have been made by counsel for the plaintiffs. They will be discussed below.

35. The plaintiffs submit that if in fact the defendant had informed Pang of the financial difficulties of the business, the first cheque would have been payable to one of the companies, rather than to the defendant. I can see the force of this argument. However, one must keep in mind that the various business entities must have been treated (at least by the defendant) as within the same business group. It is plausible the defendant had not identified to Pang the exact identity of the compan(ies) which were in need of funds when he spoke to Pang over the telephone.

36. Criticisms have been levied against the changes made to the witness statements of the defendant and Chiu shortly before the trial. These changes were related to the identity of the companies. In their witness statements, the reference to "Double Garment" originally has always meant "Double Garment Group". Parts of witness statements were changed so that "Double Garment Group" was replaced by "Double Garment Mfg". I have considered the criticisms and found that the changes resulted from misunderstanding between the drafter(s) of the statements and the witnesses and/or the lack of attention to details at the time when the witness statements were prepared.

37. There was a discrepancy in the testimony of the defendant and Chiu regarding whether Chiu was present in the defendant's office and/or overheard the conversation between the defendant and Chan. I have considered this discrepancy and found the defendant to be more reliable over this matter. The defendant testified that no one else should hear the conversation. This can be regarded as in the plaintiffs' favour. However, the finding does not affect my overall conclusion that the defence witnesses are truthful and reliable.

38. I do not propose to set out other points referred to by counsel in their respective final submissions suffice it to say they have been considered.

Conclusion

39. The plaintiffs have not established their claim on the balance of probabilities. The claim is dismissed.

Costs

40. There is no apparent reason to depart from the usual rule that costs should follow the event. There will be a costs order nisi pursuant to RHC O. 42 r 5B(6) that costs of this action (including any reserved costs) be paid by the plaintiffs to the defendant to be taxed if not agreed.