LIU BO SUN AND ANOTHER v. LUI KUEN KEE

HCA1346/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1346 OF 2002

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J U D G M E N T

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1. This is an action commenced by writ of summons issued on 11 April 2002 whereby the plaintiffs claim from the defendant the sum of $1,271,808.92 together with interest and costs.

2. The defendant denies the claim and counterclaims the sum of $1,723,947.50 together with interest and costs.

Background

3. The plaintiffs were, and still are, the only registered shareholders of the South China Tent Fty Limited ("the Company") which was incorporated on 31 August 1995. The Company, perhaps not surprisingly, was (at least at some stage) engaged in the manufacture of tents. The defendant worked for the Company and was remunerated for that work by commission rather than by salary.

4. By a deed of Declaration of Trust dated 8 May 1997 both plaintiffs declared that they held their shares on trust as to 40% for the 1st plaintiff; as to 40% for the defendant; and as to 20% for one Yuen Tak Sing ("Yuen") who also worked in some capacity for the Company.

5. The 1st plaintiff was a director of the Company at all material times. The 2nd plaintiff was a director of the Company from its incorporation until 30 August 1999 when she resigned and was replaced as a director by the defendant.

6. In March 1997 a residential property known as Unit 1505, 15 floor, Block B, Kornhill, Quarry Bay, Hong Kong ("the Property") was purchased by the Company for the sum of $7,630,000.00 and after its purchase it was rented out by the Company.

7. A Legal Charge was entered into in August 1997 by the Company with the Union Bank of Hong Kong Limited (now the Industrial and Commercial Bank of China (Asia) Limited) ("the Bank") whereby the sum of $5,247,000.00 loaned by the Bank to the Company was secured against the Property.

8. It was a requirement of the Bank that the plaintiffs, as the registered shareholders of the Company, should each sign a letter of guarantee in favour of the Bank as additional security in respect of the loan and this they did.

9. In June 2001 the Company defaulted in its required monthly payment to the Bank and the solicitors acting for the Bank issued a demand letter requiring immediate repayment of the outstanding balance of the loan and accrued interest totalling $5,026,546.72.

10. On 23 July 2001 the Bank issued proceedings against the Company as the borrower and against the plaintiffs as guarantors and on or about 4 October 2001 the Property was sold by Receivers for $2,770,000.00 which sum was used by the Bank to reduce the outstanding balance of the loan and accrued interest and to pay for other costs connected with the default and the sale.

11. The plaintiffs reached a repayment arrangement with the Bank for the then outstanding principal, interest and other costs which amounted to $2,543,617.83. As part of that arrangement the plaintiffs were required to pay $1,070,896.86 to the Bank on 2 January 2002. The then outstanding balance of $1,472,720.97 was to carry interest at the rate of 5.875% per annum and was to be repaid monthly until 4 August 2017.

12. The plaintiffs claim is for 50% of the sum of $2,543,617.83 referred to in paragraph 11 above plus interest.

The plaintiffs' case

13. Put shortly the plaintiffs' case is this :

(a) that in March 1997 the 1st plaintiff and the defendant orally agreed that they would enter into a 50/50 property investment joint venture (i.e. the purchase of the Kornhill property): that they would each provide 50% of the funds needed for that purchase; that they would share any profit or loss resulting from the investment equally and that the Property would be bought in the name of the Company. Yuen was not a party to the agreement and he was to have no interest in the venture;

(b) on about 15 July 1999 the 1st plaintiff and the defendant attended a shareholders meeting at which it was decided that the Property should be sold at the then market price; that if there was a deficit between the selling price and the money owed to the Bank the shareholders would meet that deficit in proportion to their shareholding; and each director and shareholder would give and sign a personal guarantee to the Bank;

(c) that both the 1st plaintiff and the defendant signed the minutes of that meeting and thereafter they both continued to deposit money into the Company bank account for the purpose of repaying the Mortgage Loan;

(d) that subsequently the defendant refused to sign a letter of personal guarantee with the Bank;

(e) that on 12 March 2001the 1st plaintiff and the defendant attended another shareholders meeting at which it was agreed that the property should be sold as soon as possible and that any deficit was to be the responsibility of the shareholders;

(f) that both the 1st plaintiff and the defendant signed the minutes of that meeting;

and

(g) in breach of the agreement between the 1st plaintiff and the defendant, the defendant failed to pay his share of the monthly mortgage payments to the Bank in April and May 2001 and thereafter he refused to make any further payment.

The defendant's case

14. The defendant's case, again put shortly, is as follows :

(a) that the decision to purchase the Property was that of the plaintiffs and he (the defendant) was not a party to it. There was no agreement at all between the defendant and the 1st plaintiff to enter into a 50/50 property investment joint venture and, as he was neither a shareholder nor a director of the Company in March 1997, the defendant was in no position to agree to the 1st plaintiff using the name of the Company to purchase the Property;

(b) that at no time did the defendant agree to indemnify the plaintiffs in respect of their indebtedness to the Bank which was their responsibility alone and nor did he ever agree or undertake to give any personal guarantee to the Bank;

and

(c) that far from him paying monies to the Company in respect of the mortgage payments due to the Bank the monies which he did pay to the Company were personal loans to the plaintiffs which he claims should be repaid to him.

The trial

15. Both of the plaintiffs gave evidence before me, as did the defendant. Perhaps significantly there was no evidence before me from Yuen or from a Mr Chan Hung the Company Secretary who, or so it would appear from the minutes, was in attendance at both the meetings referred to in paragraph 13(b) and (e) above.

16. The 2nd plaintiff (and I intend no criticism of her whatsoever) apparently knew nothing regarding the purchase of the Property or indeed about the business or the workings of the Company. It would seem from her evidence that she put her signature to various documents, including the Legal Charge and the Declaration of Trust, at the behest or upon the instruction of her husband the 1st plaintiff.

17. Let me say straightaway that I reject the evidence of the defendant to the effect that the purchase of the Property was nothing to do with him and that whilst I am in no doubt whatsoever that both the 1st plaintiff and the defendant did agree that the Property should be purchased (and in the name of the Company) in the hope and in anticipation of a subsequent sale at a profit it never occurred to either of them that such a sale might result in a loss; that such a loss was never contemplated (let alone provided for) and, when a loss resulted, the 1st plaintiff found himself in a position of having to try to protect his interests by doing retrospectively what he should have done at the very outset of the venture, i.e. put into writing the precise terms of his agreement with the defendant and, in so doing, anticipate a possible loss and provide for settlement of it.

18. My view that there was such an agreement (regardless of its precise terms which, given the fact that it was not evidenced in writing and the fact of some distinct uncertainties in the 1st plaintiff's recollection of events, I can only guess at) is reinforced by the fact that the 1st plaintiff and the defendant both agree that they had previously purchased (in the name of the same or another company or both) at least one other property at Kornhill and had resold it almost immediately at a sizeable profit.

The documents

19. It is, I think, necessary to refer specifically to a few of the documents in evidence before me at trial as follows :

(a)	The conveyancing documents.
	None of these were signed by the defendant who, at the relevant time, was neither a director nor a shareholder of any kind of the Company. He did however sign some cheques of the Company relative to the purchase of the Property and in so doing perhaps held himself out as having, at least, an interest in the Company.
(b)	The Declaration of Trust.
	The precise reason why the plaintiffs had this document prepared and why they signed it remains somewhat unclear to me although the 1st plaintiff told me in evidence that it was at the request of Yuen who wished to have his interests protected. That reason however does not sit happily with other evidence before me to the effect that Yuen was aggrieved by this document. And, I might add, it sits a little uncomfortably with me that the 1st plaintiff unilaterally signed a declaration the effect of which (on one view of it) ensnared the defendant in a liability to which he might not have been subject in its absence. Be that as it may. For the purposes of this action the reason for the document is perhaps not as important as the interpretation put upon it by the 1st plaintiff and the defendant. This document impacts upon the evidence in this action in two ways : firstly in relation to the alleged 50:50 joint venture between the 1st plaintiff and the defendant and secondly in relation to the so-called shareholders meetings.
(c)	Minutes of Shareholders Special Meeting 9 May 1998.
	These minutes suggest that Yuen was the chairman of the meeting albeit that the defendant denies that he was even present. In the event Yuen refused to sign them, presumably because he did not accept them as being correct or because he wished to disassociate himself from what had been agreed. There is no specific reference in the minutes as to how the loss on the Property was to be met albeit that there is provision to meet any deficit that might arise from the Company's purchase orders. That of course is an entirely different matter. The minutes were signed by the 1st plaintiff, the defendant and Chan Hung.
(d)	Letter to Yuen from Chan Hung 10 March 1999.
	This letter, in effect, suggests that Yuen is liable for 20% of the losses arising from the purchase of the Property.
(e)	Fax to Chan Hung from Yuen 23 March 1999.
	Yuen expresses outrage at the suggestion made in Chan Hung's letter of 10 March. He makes it plain that in his view he has no liability whatsoever in respect of the Property. [The importance of this is that the plaintiffs now accept that that is so and that instead of seeking a 20% contribution towards the loss from Yuen they now seek a 50% contribution from the defendant.]
(f)	Minutes of Shareholders Meeting 15 July 1999.
	These minutes recite that the 1st plaintiff and the defendant (who were both present at the meeting) each held 40% of the Company's shares and that Yuen (who was not present) held 20%. Inter alia the minutes recite that it was agreed that :

"... each and every shareholder shall share the outstanding balance and expenses in selling the [Property] in proportion to their respective shareholdings."

	These minutes were signed by the 1st plaintiff, the defendant and Chan Hung.
(g)	Minutes of Shareholders Meeting 12 March 2001.
	These minutes recite that only the 1st plaintiff, the defendant and Chan Hung were present and that it was agreed that the Property was to be sold and that :

"... the outstanding balance due to the Bank and the expenses shall be the responsibility of the shareholders."

	The minutes were signed by the 1st plaintiff, the defendant and Chan  Hung.
(h)	Draft Deed of Indemnity 5 February 2001.
	This document was prepared on the instructions of the 1st plaintiff and the defendant refused to sign it. The effect of the document (if signed by the defendant) would have been that he had agreed to indemnify the plaintiffs as to 40% of the losses resulting from the sale of the Property.
(i)	Confirmation for audit purposes 8 January 2002.
	This document purports to show that the Company was indebted to the defendant in the sum of $1,723,947.50.
and
(j)	Directors Loan Account.
	This document purports to show how the greater part of the $1,723,947.50 referred to in (i) above was paid over to the Bank in repayment of the mortgage loan. Such payments were, to all intents and purposes, matched by identical payments to the Bank by the 1st plaintiff until April and May 2001 when no payments were made by the defendant and the 1st plaintiff made good the shortfall for those two months.

Conclusion

20. The 1st plaintiff in his evidence before me, maintained that (by reason of his misapprehension of the legal position) he assumed as a consequence of the Declaration of Trust that any property owned by the Company (and any losses resulting therefrom) should be shared according to the declared beneficial shareholding ratio, i.e. 40:40:20, and that explains the decisions reached at the shareholders meetings as minuted.

21. Whilst it may possibly be right that he was labouring under a misapprehension it does little to strengthen his case against the defendant who continues to maintain that he never had an agreement with the 1st plaintiff; that he was not (at the material time) either a shareholder or director of the Company and that whilst he had no objection to the Company purchasing the Property he cannot be held responsible for the loss resulting from that purchase.

22. I have little doubt, on the evidence before me, that the defendant has sought to take advantage of the 1st plaintiff's negligence in not 'tying him down' to the consequences of a possible loss resulting from the purchase of the Property, but equally by reason in part of that negligence, and in part by the 1st plaintiff's acknowledged misunderstanding of the true position regarding the shareholding in the Company and his evidence generally before me I find myself unable to say that he has proved his case on the balance of probabilities.

23. All that I am sure about, on the evidence before me, is that the defendant's counterclaim is unsustainable : it is based upon a complete fiction. Most of the $1,723,947.50 which he paid to the Company was paid by him specifically in respect of the Property. It was not, as he maintains and as the Auditors' Notes might suggest, paid by him in the form of loans to the plaintiffs.

24. Accordingly I dismiss the claim of the plaintiffs and I dismiss the counterclaim of the defendant and I make an order nisi that each party must bear its own costs.