CHEUNG SIU LIN v. SHUN SENG HOP YICK KNITTING FACTORY LTD AND ANOTHER

HCA 2565/2014 and
HCA 360/2016 (Consolidated),
HCA 2566/2014 and
HCA 359/2016 (Consolidated) and
HCA 2929/2015
(Heard together)

[2021] HKCFI 120

HCA 2565/2014
HCA 360/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2565 OF 2014 and 360 OF 2016

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(Consolidated by Order of Master J Wong dated the 6th day of July 2016)

AND

HCA 2566/2014
HCA 359/2016

ACTION NO 2566 OF 2014 and 359 OF 2016

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________________________

(Consolidated by Order of Master J Wong dated the 6th day of July 2016)

AND

HCA 2929/2015

ACTION NO 2929 OF 2015

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________________________

(Heard Together)

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J U D G M E N T

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1.  These actions involve family members and their business, Shun Seng Hop Yick Knitting Factory (“the Company”). The actions commenced in 2014 are against the Company and those commenced in 2016 are against its majority shareholder and director in control, Au Wing Chor (“AWC”). The consolidated HCA 2565/2014 and HCA 360/2016, which were commenced by the mother of the family, Cheung Siu Lin (“the Mother”), will be referred to below as “the Mother’s Action”. The consolidated HCA 2566/2014 and HCA 359/2016, which were commenced by the younger sister of AWC, Au Yin Pin (“AYP”), will be referred to below as “AYP’s Action”. In these consolidated actions, the Mother and AYP respectively claims for outstanding debt allegedly owed by the Company and guaranteed by AWC.

2.  HCA 2929/2015 is the action commenced by the Company against Au Piu Chor (“APC”), younger brother of AWC, for outstanding debt allegedly owed to the Company.  This will be referred to below as “the Company’s Action”.

3.  The Mother’s Action and AYP’s Action have been directed to be tried at the same time and immediately after the Company’s Action.  The then Registrar also directed that the evidence in these actions shall be mutually admissible at the trial[1]. The direction was given when the parties have already exchanged their witness statements in respect of these actions separately.  Apparently because of the direction, both sides of these actions proceeded without taking issue as to whether any part of the evidence of the parties or their witnesses in these actions is inadmissible in the other action(s) by reason of the pleading confines of the latter.

BACKGROUND

4.  The Mother and her late husband Au Hoi gave birth to 6 children, who, in the order of their seniority, are son AWC, daughter AYP, late son Au Kwai Choi (who passed away in 1992), daughter Au Yin Wan (“AYW”), son APC and son Au Kin Chor (“AKC”).

5.  AWC, the eldest son of the family, came from the Mainland to settle in Hong Kong in the 1960s.  He started working at teen age, and had provided financial support to the members of the family in the Mainland then.

6.  The family members, including AWC, received limited education.  None of them who are involved in the present litigation really knows English.  The Mother is effectively illiterate.

7.  In 1979, AWC successfully applied for his parents and siblings to move to Hong Kong.

8.  By early 1980s, AWC has worked as an employee, with AYP and the late Au Kwai Chor working under him.

9.  In 1983, AWC and Mr Ho Kwok Sang (“Ho”), ex-husband of AYP, set up the Company and started the business of knitwear manufacturing and sale.  The Company started out as a family business, but has expanded into a group consisting of numerous companies and factories located in Hong Kong and the Mainland by the 1990s.

10.  Most of the family members participated not only financially but also manually in the daily operation of the business of the company.  The late father, the Mother, AWC, AYP, Ho and the late Au Kwai Chor became shareholders in 1986.  AWC, Ho and the late Au Kwai Chor were the directors.  APC worked for the Company, and spent most of his time stationed in the associated company and factory in Zhongshan.  He became a shareholder in 1990 and a director in 1992.  The Mother, AYP and AYW also worked under the employ of the Company.  So did APC’s wife, Fong Yuk Ngor (“Fong”), until 2003.

11.  AWC was at all times the majority shareholder and very much in control of the Company.  There appears to be no dispute that being the eldest son and founder of the Company, AWC commanded respect and was listened to by the rest of the family.   AWC still sees himself as having been the provider for the livelihood of the family.  However, a series of events manifesting the alienation and even breakdown between AWC and the other family members (perhaps except for AKC who is not involved in these actions) have happened since 2013.

12.  First, AWC caused the Company to move APC from the associated company in Zhongshan back to the Hong Kong office by mid-2013.  In November of the same year, APC’s employment was terminated, and his directorship in both the Zhongshan company and the Company was removed.

13.  Then, in late September 2014, AWC caused the Company to terminate the employment of the Mother, AYP and AYW.  The notices of termination invariably demanded these family members to remove their belongings from their workroom of the Company or the same would be disposed of as abandoned.

14.  In the same year, litigation began.  APC filed his claim at the Labour Tribunal (“the Tribunal”) against the Company (LBTC 2220/2014).  His claim for payments in lieu of notice, severance payments and long service payments was eventually settled, whereas his claim for unpaid annual leave concluded with an award in his favour by the Tribunal.  The Mother also filed her claim against the Company (LBTC 3586/2014) for unpaid annual leave.  That ended with a consent order in December 2014 whereby the Mother obtained a lesser sum in settlement of her such claim.

15.  As for AYP, the termination of her employment did not take effect in accordance with the notice of termination. In 2015, she filed her claim against the Company for unpaid annual leave and rest days (LBTC 1391/2015).  The proceedings were concluded by an order by consent in May 2015 whereby the employment was terminated by consent on the day of the order, and she also agreed to accept a sum from the Company in settlement of her claim.

16.  Whilst AYW has received her termination payment, AWC caused the Company to commence proceedings in the District Court against her in 2015 for alleged overpayment (DCCJ 1879/2015). However, the Company discontinued such action after AYW has filed her defence.

17.  It was amidst the above family situation and relationship in 2014-2015 when the actions now before this court were also commenced.

18.  In 2014, the Mother and AYP respectively commenced their actions against the Company, seeking repayment of alleged outstanding loan and interest owed by the Company to them.

19.  In 2015, AWC caused the Company to commenced action against APC and Fong, asserting its beneficial ownership of the residential property of APC and Fong at King’s Park Villa, Homantin (“the King’s Park Villa Property”) (HCA 1184/2015).  This action was discontinued a month later, but only to be followed by the Company’s Action in the same year.

20.  In 2016, the Mother and AYP commenced actions for extending their respective claims in respect of the primary indebtedness of the Company mentioned above against AWC on the basis of his alleged personal undertaking of liability towards the repayment of such debt to them.  As mentioned, these actions against AWC and their original actions against the Company were subsequently consolidated to become the Mother’s Action and APY’s Action.

THE MOTHER’S ACTION AND AYP’S ACTION

The case of the Mother and AYP

21.  According to the Mother and AYP, the family members, including AWC, Ho, the late father, the Mother, AYP and AKC, had all made contributions towards the capital of the Company when it was founded.  That said, the Mother and AYP acknowledged the fact that they, together with the late father and the late Au Kwai Chor, were made shareholders only in 1986.  No issue arises out of that.  However, the Mother and AYP, and APC as well, contend that members of the family had provided financial assistance to ease the cash flow of the Company at the requests of AWC from time to time throughout the years.

22.  According to the Mother and AYP, the Company would pay interest on their outstanding loans, normally every year before Chinese new year, at the rates as agreed between AWC on behalf of the Company and AYP on behalf of herself and the Mother from time to time.  The agreed rate was originally 12% per annum, which was reduced to 8% in December 2002 and 6% in August 2003.  Interest was normally paid around Chinese new year.  The loans were repayable on demand.  AWC would also cause the Company to draw cheques in favour of the Mother and AYP as acknowledgement of and security for the outstanding balance of the loans and interest.

23.  By January 2011, the principal amounts of the loans owed by the Company to the Mother and AYP remained outstanding in the sums of HK$1,360,000 and HK$1,840,000 respectively.  During a meeting at the Company on about 28 January 2011, AWC requested, and the Mother (through AYP) and AYP agreed, to accept his personal cheques for the purpose of security mentioned in the preceding paragraph.  By that, AWC personally guaranteed the repayment.  On the same day, AWC drew two cheques in favour of the Mother and AYP for the sums of HK$1,360,000 and HK$1,840,000 respectively.

24.  In April 2011, AWC again represented that the Company had cash flow need, and the Mother agreed to extend a further loan at his request.  On 27 April 2011, the Mother withdrew a sum of HK$300,000 from her bank account and handed to Mr Lam Hon Ling (“Lam”), a staff of the Company then, as directed by AWC.  AWC guaranteed the repayment, though he caused the Company to issue a cheque in favour of the Mother for the same amount on the following day.

25.  As for AYP, it was in March 2013 when she, together with APC and AKC, agreed to lend at the request of AWC their shares of the proceeds of sale of 2 properties in Zhongshan in the Mainland jointly owned by the four siblings.  The proceeds were deposited into an account in the Mainland as directed by AWC.  Two months later, on 14 May 2013, AWC caused the Company to draw in favour of each of his three siblings a cheque for the sum of HK$828,109.38 as security for the repayment of their advances and interest which AWC guaranteed.

26.  As mentioned, later in the same year, AWC fell out of terms with APC.  APC was removed from the Company by the end of the year.

27.  In early 2014, the Mother and AYP started to demand the Company through AWC for the repayment of their loans and accrued interest.  However, in September 2014, AWC caused the Company to terminate the employment of the Mother and AYP (and, as mentioned, AYW as well).  The litigations at the Tribunal mentioned above followed.

28.  In the Mother’s Action, she claims against the Company and AWC for the repayment of the principal amount of the loans in the total sum of HK$1,660,000 and interest accruing at 6% of HK$1,360,000 since 28 January 2012 and of HK$300,000 since 27 January 2012.

29.  In AYP’s Action, she claims against the Company and AWC for the repayment of the principal amount of the loans in the total sum of HK$2,668,109.38 and interest accruing at 6% of HK$1,840,000 since 28 January 2012 and of HK$828,109.38 since 14 May 2013.

30.  According to the Mother, AYP and APC, apart from actual lending, they had also provided their properties as collateral security to the banks to secure banking facilities to the Company throughout the years.  Amongst others, the Mother and AYP acquired a property at Hung Lee Court, Hung Hom, Kowloon (“the Hung Lee Court Property”) in 1995, which was charged to secure the loan facilities extended by the bank to the Company.  However, the mortgage of this property became what the Company and AWC contend to be underlying the drawing of the two personal cheques of AWC referred to in the claims in the Mother’s Action and AYP’s Action.

The case of the Company and AWC

31.  AWC (and the Company) admits that he had requested AYP and the Mother (through AYP) to charge the Hung Lee Court Property to secure the bank’s loan facilities to the Company.  According to him, it was in such connection that in 2011, he drew his cheques for HK$1,360,000 and HK$1,840,000 in favour of the Mother and AYP respectively merely for their comfort, considering the credit limit of HK$3,180,000.  The charge was subsequently discharged in early 2015.  Therefore, the Mother and AYP are not entitled to the amounts of the cheques.

32.  As to the cheque for HK$300,000 in favour of the Mother, AWC claims that it was drawn for inviting her to retire from the Company in 2011 when she was about 80 years old.  She did not accept that.  As mentioned, the Company terminated the employment of the Mother (together with AYP and AYW) 3 years later in late September 2014. The Company paid on her termination a total sum of HK$264,565.  She was also awarded HK$8,800 by consent for unpaid annual leave in her subsequent labour claim. Therefore, she is not entitled to the amount of the cheque either.

33.  As to the cheque for HK$828,109.38 in favour of AYP, AWC claims that this, together with the cheques for the same amount for his other two siblings, was issued in 2013 on the basis that AYP would arrange the proceeds of sale of their jointly owned properties in the Mainland then in RMB into the bank account of the Company’s Mainland associate.  AYP never did that, and therefore AYP is not entitled to the amount of the cheque.

34.  Apart from the above, AWC claims that he had drawn cheques in favour of the family members from time to time over the years, but they were either gifts or financial assistance to them.  He and the Company deny any debt owed or repayment of any debt to either the Mother or AYP.

THE COMPANY’S ACTION

The case of the Company

35.  As mentioned above, the employment and directorship of APC were terminated by the Company in November 2013. According to AWC, APC was dismissed for misconduct and misappropriation of company funds during his management of the Zhongshan associated company.  This also led to criminal investigation against APC in the Mainland.

36.  By the Company’s Action commenced in 2015, it claims against APC for debt arising out of alleged advances to APC from time to time.  The bulk of the alleged advances went to finance his repayment of the mortgage of the King’s Park Villa Property.

37.  APC and Fong purchased the King’s Park Villa Property, which was financed by a mortgage with the National Commercial Bank (“NCB”), in March 1999.  According to AWC, APC had actually just lost about HK$3,000,000 in his previous property investment and therefore had difficulty in repaying the mortgage with NCB.  Requested by APC for assistance, AWC had since caused the Company to issue cheques in favour of APC to fund APC’s repayment of the mortgage to NCB.

38.  In March 2000, AWC caused the Company to arrange the then Generale Belgian Bank (“Belgian Bank”) to advance mortgage loans to fund the discharge of the mortgage to NCB.  Belgian Bank became the new mortgagee bank, and the King’s Park Villa Property became a collateral for securing Belgian Bank’s financial facilities to the Company as well.  The borrowers became the Company, APC and Fong.  Since then, AWC continued to cause the Company to fund the repayment of the mortgage to Belgian Bank in the same manner as before.

39.  In 2003, Fong ceased to work for the Company, and, according to the Company, APC started to rely on AWC for regular financial support.

40.  In March 2006, AWC caused the Company to arrange Citic Ka Wah Bank (“Citic Bank”) to advance mortgage loans to fund the discharge of the mortgage to Belgian Bank as well as to finance the Company and its associates in its group.  Citic Bank became the new mortgage bank.  Since then, AWC had caused the Company to repay the mortgage to Citic Bank directly.

41.  In February 2011, the Company obtained a range of trade finance, overdraft and term loan facilities from Hang Seng Bank (“HSB”), including a mortgage loan to fund the discharge of the mortgage to Citic Bank.  HSB became the new mortgage bank.  While APC and Fong were the mortgagors, the borrower became solely the Company.  AWC had also caused the Company to repay the mortgage loan to HSB directly.

42.  The loan facilities extended by HSB were due for renewal in November 2013.  Despite repeated requests, including that through AYP, APC neglected or refused to execute the facility letter for the renewal.  As a result, the Company was unable to retain the King’s Park Villa Property as a collateral to secure the renewed banking facilities.  The Company had to discharge the mortgage altogether in July 2014.

43.  According to the Company, such financial assistances extended to or for the benefit of APC have been recorded in the director’s credit account with the Company.  APC has also signed the auditor’s confirmation in acknowledgment of such advances by the Company to him for the years 2011 and 2012.  Only that APC has refused to do so since 2013, when he, as mentioned, also refused to execute the updated facility letter for the renewal of the banking facilities from HSB.  The total advance by the Company and owed by APC reached HK$4,579,827.16 as of 31 March 2015.  This constitutes the amount of the Company’s claim.

The case of APC

44.  APC denies the wrongdoing alleged against him as a director.  He also denies that he or Fong suffered adverse financial impact from the sub-sale of the previous property in 1999 prior to the acquisition of the King’s Park Villa Property.  It was in early 2000 when AWC requested him to re-mortgage the King’s Park Villa Property to Belgian Bank, as it could offer favourable terms than NCB, not only to fund the discharge of the mortgage but also to secure the extension of banking facilities to the Company.  APC acceded to the request.  That was how the Company became a borrower upon the mortgage of the property to the Belgian Bank.  APC had contributed towards the repayment of the mortgage in respect of the King’s Park Villa Property.

45.  APC admittedly stopped contributing towards the repayment of the mortgage in respect of the King’s Park Villa Property in about 2003.  According to him, this was not because of the retirement of Fong from the Company or his financial difficulty as the Company/ AWC alleges.  He stopped only because of a set-off agreement between the Company and him (“the Set-off Agreement”) under which the Company agreed to take up the responsibility of repaying the mortgage in respect of the King’s Park Villa Property as set-off against part of the debt that it owed to APC arising out of the operation of a cheque discounting arrangement (“the Cheque Discounting Arrangement”) (or “期票貼現” as it was referred to in Chinese).

46.  According to APC, it was the practice of the Company to settle the amount owed to its processing factories by way of cheques post-dated for not more than 6 months.  Some of these factories were identified by way of further and better particulars of his pleading and witness statement.  The processing factories would agree to accept such mode of payment, in view of the volume of the orders expected from the Company.  In case a processing factory was in need of cash, it would negotiate the post-dated cheque with AWC (or in some case, third parties) for immediate payment at a discount.  AWC, as the holder of the cheque, could present it for payment on the due date, and thus earning the difference between the amount of the cheque and the discounted value that he had to pay for the cheque to the extent of around 5%.

47.  Since about 2000, the members of the Au family, such as APC and AYP, as well as the family of Fong had also participated in such cheque negotiation arrangement, and come to hold these cheques drawn by the Company.  Whenever the Company had difficulty in meeting the maturity of any of those cheques in their hands, AWC would request them to withhold from presenting the cheques in consideration of agreement to pay interest.  The Company would also issue new cheques in place of the discounted cheques.

48.  According to APC, the amount arising out of the Cheque Discounting Arrangement owed by the Company to APC had reached about HK$10,000,000 by 2003.  He requested AWC to cause the Company to settle the indebtedness as he intended to pay off the balance of the mortgage in respect of the King’s Park Villa Property.  During a meeting where AWC, APC, AYP and Ms Jo Jo Yip (“Yip”) of the Company were present, AWC, on behalf of the Company, and APC agreed that the Company would take up the responsibility of repaying the mortgage to the bank as set off against part of the Company’s indebtedness so owed to APC.  Upon such agreement during the meeting, some of the post-dated cheques of the Company obtained as a result of the arrangement and in his possession were cancelled and torn, while the remaining balance would be settled by cheque payment.  That was how the Company came to repay the mortgage solely since then.

49.  In March 2006, AWC again proposed to APC to re-mortgage the King’s Park Villa Property to Citic Bank, as it could offer more favourable terms than Belgian Bank.  APC acceded to the request, and the property was mortgaged to Citic Bank for funds to discharge the mortgage owed to Belgian Bank and to secure banking facilities to the Company.  The Company and now its associated companies in the group also became the borrowers.  However, as before, APC obtained no personal benefit out of the mortgage except for the discharge of the previous mortgage, which the Company had undertaken.

50.  In early 2011, AWC again proposed to APC to re-mortgage the King’s Park Village Property to HSB as it offered favourable terms of banking facilities.  APC again acceded to the request. Hence the mortgage of the property to HSB for funds to discharge the previous mortgage and for substantial banking facilities up to the principal sum of HK$15,600,000 to the Company.  The Company became the sole borrower.

51.  In the circumstances, APC denies that he was or is responsible for the repayment of the mortgage in respect of the King’s Park Villa property since the Set-off Agreement.  Nor was or is he liable to the Company for any outstanding debt.

ISSUES IN DISPUTE

52.  The dispute between the two sides of the family in these actions is essentially factual and concerning:

(1)  the alleged loans extended by the Mother and AYP to the Company;

(2)  the circumstances surrounding AWC’s cheques for HK$1,360,000 and HK$1,840,000 in favour of the Mother and AYP respectively on 28 January 2011;

(3)  the alleged loan of HK$300,000 by the Mother to the Company on 27 April 2011, and AWC’s delivery of the Company’ cheque for the same amount in favour of the Mother on 28 April 2011;

(4)  the alleged loan to the Company of AYP’s share of proceeds of sale of the Mainland properties jointly owned by the siblings in March 2013, and AWC’s delivery of the Company cheque for the sum of HK$828,109.38 to AYP in May 2013;

(5)  the alleged shareholder’s loans by the Company to APC, including the alleged financial assistance to APC in the repayment of his mortgage of the King’s Park Villa Property by 2015;

(6)  the Cheque Discounting Arrangement and Set-off Agreement alleged by APC;

(7)  depending on the above, the liability of the parties in the respective actions before the court.

53.  Credibility is key.  Counsel refer to various decided cases that discussed the approach of the court in assessing credibility of witness and evidence.  This in every case boils down to the consideration of the inherent plausibility as well as the credibility of evidence in respect of a particular issue against other evidence (including what is undisputed or indisputable).  Credibility in respect of part of a witness’s evidence will also be relevant to the assessment of his overall credibility.  See Star Glory Investment Limited v Kai Tuo (HK) Technology Company Limited, HCA 3523/2002 (13 August 2005) at §12; Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd, HCA 1957/2005 (28 July 2011) at §§21-24.

THE FINANCIAL SITUATION AND THE AUDITED FINANCIAL STATEMENTS OF THE COMPANY

54.  The picture presented by the Company and AWC is that the Company did not have to borrow from the members of the family for its business.  Even if it did, the net position was always that there was and is no outstanding debt owed to any of them.  It is emphasized that the Company managed to declare dividends to shareholders and to provide financial assistance to members of the family from time to time over the years (which its opponents dispute).  In demonstrating such financial ability, the Company and AWC place heavy reliance on the audited financial statements of the Company dated from the mid-2000s.  Indeed, the Company and AWC invite this court to reject the cases of the Mother, AYP and APC on the basis that they are contradicted by what the financial statements of the Company suggest.

55.  As mentioned, the Company started out as essentially a family business, which eventually expanded into a group consisting of numerous associated companies in Hong Kong and the Mainland by the end of the 1990s.  Its factory was equipped with substantial number of computerised knitting machines.  However, to enable that, the significance of borrowing over the years cannot fairly be downplayed.  The evidence shows that the Company would borrow from both licensed money lender as well as banks.  The knitting machines mentioned above, some bank deposits and receivables had been charged.  Banking facilities had been extended on the security put together by the family members’ residential properties (though some of them are alleged to have been acquired or maintained with the Company’s finance).  The Company had maintained constant overdraft.  Then there was the undisputed practice of the Company to settle the processing factories’ invoices by way of post-dated cheques and thus effectively extracting a 6-month credit period.  Record of declarations of dividends suggested that the same were withheld from distribution (in respect of which there is dispute as to whether they were retained to set off the alleged indebtedness of the shareholders to the Company as the documents suggested).  AYP testified that she had not heard of the Company making or distributing profits.  Even AWC admitted in court that distributed dividends would not be much.  AWC also admitted that the cash flow was particularly difficult after the financial tsunami in 2008.

56.  The circumstances, I find, were such that the annual net position as per the financial statements produced (which were available from the mid-2000s) would not necessarily cast light on the cash flow need of the Company on a daily operation basis, at least as AWC might have represented to the family members.  That was the precise basis on which the Mother, AYP and APC were given to understand the cash flow need of the Company, and hence the alleged requests by AWC for financial assistance from them, every now and then over the years.

57.  According to the Mother and AYP, which was not really disputed, the Mother practically entrusted AYP with the management of her finance and bank account.  As mentioned, the Mother and AYP worked as manual workers under the employ of the Company, and were never, or capable of being, concerned about the company accounting matters or documentation, let alone financial statements.  Prior to the breakdown of the trust between them and AWC, the Mother and AYP would sign company documents simply as requested.  I believe that was the case, considering their circumstances and the evidence.  This would explain why they have no real recollection of the company documents that they had signed, including their apparent consent to apply what was said to be their dividend to set off not only their current but also future debt owed to the Company in 2006.  Such documents were of course in English.  As to how the so-called indebtedness of the Mother and AYP is said to have arisen in the first place, the evidence never really got to make clear.

58.  There is no doubt the issue of credibility of the allegation that the Mother and AYP (and APC) had lent to the Company as well as the allegation that the Company and AWC owed or owe them money.  Regarding that, the financial statements are but part of the evidence. In the circumstances as discussed above, I would be slow to accept that the existence of the financial statements serves as trump, as the approach on behalf of the Company and AWC in the trial seems to suggest.

THE ALLEGED LOANS BY THE MOTHER AND AYP TO THE COMPANY

59.  The Mother’s age and background mentioned above were adequately manifested in her way of giving evidence in court.  She did show emotional attachment to the family business.  She was clear that all the family members put in money and manual labour when the Company was set up in the 1980s.  She was also adamant that AWC had requested her to lend money to ease the cash flow of the Company every now and then way back since the 1990s or even earlier.  She was equally adamant about the agreement of AWC to undertake the repayment of the outstanding principal and interest owed to her by 2011, when he provided his personal cheque for HK$1,360,000 as security.

60.  In her evidence, AYP confirmed the pleaded understanding between AWC and the other family members in respect of the family’s loans to the Company and their terms by 2010.  She explained that the interest payable by the Company for such loans was agreed to be 12% per annum prior to 2003, which was reduced to 8% and 6% by the end of that year. Interest would be paid by Chinese new year every year.  AWC would cause new cheques to be issued by the Company or its associated company for the updated outstanding amounts to replace the previous ones.  APC gave similar evidence and such loans had also been extended by the family members of his wife, Fong. Like what the Mother said, AYP confirmed that she received AWC’s personal cheque for HK$1,840,000 in her favour as security when he undertook to repay such amount that the Company owed her by January 2011.

61.  It is true that the Mother and AYP produced no evidence of the actual deposits or remittances of their money into the Company representing their alleged loans over the years.  According to them, and certainly the Mother, those loans were extended mostly by way of cash.  Further, this is not beyond understanding, when the parties proceeded on mutual trust as family and the probable lack of anticipation of the need to retain documentary proof over the years.  However, AYP managed to explain how the outstanding balances said to be owed by the Company to her and the Mother, and thus the amounts of the two cheques drawn by AWC for them on the same day, were calculated.  Further, it is not that the Mother and AYP have no documentary support of that at all.

62.  AYP has kept some of the cheques drawn by the Company and its associated company in her favour, which, according to her, were given to her as the Company’s acknowledgement and security provided to her in respect of the debt owed to her on various dates back in 1998 pursuant to the arrangement mentioned above.  Those cheques, she claims, evidenced the Company’s acknowledgement of owing her a total sum of HK$1,150,000 then.  In his evidence, AWC stated that he caused those cheques to be issued for financial assistance to AYP on those occasions.  In court, however, AWC claimed no recollection as to the exact purpose of those cheques. If those cheques were ever delivered to AYP to answer her requests for financial assistance or payment to her for any purpose, it is inexplicable that they would have somehow been kept unpresented at all.  AYP should have no reason for keeping them unpresented, unless they were meant to be kept that way.

63.  The Mother and AYP also produced accounting records of the outstanding loans and interest owed by the Company to them (“the Accounting Records”).  The available records produced were apparently printed on various dates since 2005, and the earliest record was dated back in 2002.  These records show that unpaid interests up to May 2002 were treated as and added to the principals owed to the Mother and AYP, namely HK$1,300,000 and HK$1,950,000 respectively.  The records continued thereafter with the interests for each month computed at the rate of 12% until the end of November 2002, 8% until the end of July 2003 and 6% thereafter until the end of 2009.  In other words, the interest rates aligned with what AYP said in her evidence.

64.  Further, the amount of interests paid as recorded in the Accounting Records apparently matched the records of deposits of those cheque payments received by the Mother and AYP.  The last such payments were made in late January 2011, which consisted of part of the outstanding principal with interest, and by way of cheques issued by AWC and his wife.

65.  Similar accounting records concerning Fong, her father, her brother and sister-in-law for the period between 2002 and 2007 were also produced in the Company’s Action.  According to APC, his wife and her family had indeed extended such loans to the Company, and therefore received similar kind of records from the Company.  He himself had failed to keep any of those issued to him in respect of his loans to the Company.

66.  According to AYP, she received the Accounting Records after she has left the Company.  Yip, who was in charge of accounting of the Company, claimed no knowledge about that.  However, the evidence was that she moved from accounting duties to other roles some time in 2002, and left the Company at the end of July 2003.  Her successor in charge of accounting, Patrick Ng (“Ng”), should be in a position to testify about them, but was not a witness.

67.  On a couple of pages of the Accounting Records[2], certain initials or signatures could be found, which appear to be similar to those of Ng put down in the Company’s employer’s returns in 2011 and 2012.  On another page of the Accounting Records kept by AYP, which was the same in terms of content as the one already disclosed and included in the trial bundle[3] but apparently printed out on another date and on which there was, according to AYP, an initial of AWC[4].  The existence of such copy was revealed by AYP in the course of her cross examination, and hence her production of it after her oral evidence.  Its production was not opposed, and the opportunity of recalling AYP for further cross examination on this was not taken, by the Company and AWC.  Similar initial also appeared in some of the accounting records produced in the Company’s Action.

68.  AWC was unsure if the initial on these documents look like his, and claimed no recollection of putting that down on these documents.  As to whether it could be Ng who provided these documents to AYP, AWC claimed no knowledge or interest in knowing.  Whilst questioned by the Company and AWC, the authenticity of these accounting records was not strictly put in issue.  As to whether or not Ng and/ or AWC indeed put down any of the initials or signatures on these documents, one perhaps cannot put it higher than the observation made above.

69.  However, the bottom line is that it appears most unlikely that the Mother, AYP or APC had anything to do with the compilation of these documents.  I do not believe that they were capable of doing that.  There is also no basis for suspecting that they were recent fabrication instead of contemporaneous documents.  It is more probable than not that they were compiled and provided by the Company to the family members.  The question then is how they came to be so compiled, had what they recorded not existed as a matter of fact.  Hence the debt owed by the Company and the interest payments.

70.  Whilst these accounting records concerning Fong and her family members reminded AWC of their financial assistance to the Company, albeit, according to him, already settled, these documents concerning the Mother and AYP only led him to deny their financial assistance to the Company completely.  AWC’s evidence in this respect, I say, was far from impressive.

71.  In her evidence, AYP also set out the details of the two payments by cheques to the Mother in 2010 and 2011.  The first one by cheque of AWC was said to cover the payment of interest for the period between August 2007 and the end of 2009.  The second one by cheque of AWC and his wife was said to cover the payment of interest for the period between January 2010 and January 2011 as well as a small part of the principal.

72.  AYP also set out the details of the three payments by cheques to her in 2007, 2010 and 2011 respectively.  They were said to cover the payment of interest for the period since 2006, and the last payment in January 2011 also covered part of the outstanding principal as mentioned.  As mentioned, the last one was made by way of cheque drawn by AWC and his wife on the same day as that for the Mother.

73.  These payments were said to match the computations set out in the Accounting Records.  Unlike those cheques which AYP and the Mother has kept as security and therefore unpresented, these cheques have all been presented and deposited.  The timing (ie around Chinese new year) and their deposit as well as movement of the funds (as shown by their bank account) were said to corroborate the case of AYP and the Mother.

74.  AWC had the opportunity to explain these cheque payments.  The general contention was that these were financial assistances to the Mother and AYP.  However, it was pointed out quite reasonably on behalf of the Mother and AYP that financial assistances would hardly come about in the odd amounts of these cheques which were invariably down to cents.  In court, AWC tried to offer some other explanation such as reimbursement of the expenses incurred by the Mother and AYP on his behalf. Such assertion could go no further in the absence of particulars and documentary support.

75.  The Company and AWC question the financial ability of the Mother and AYP to lend to the Company since as early as the 1990s.  For that matter, reference was made to their income level over these years.  That said, it is interesting to note that the explanation AWC offered in court for the various cheque payments to the Mother and AYP mentioned above was that they were for reimbursement of expenses incurred by them for the Company.  Inherent in such explanation would be the fact that the Mother and AYP had such financial ability at their disposal.

76.  Against the background explained at the beginning, I am impressed that the members of the Au family were prepared to be all in, as far as they managed, if the business, according to AWC, was in need during its operation over the years.  They did so very much on the basis of family and trust in AWC.  The amount of the alleged debt owed by the Company may look substantial, but this very much resulted from the compounding of the principal with interest (at not insignificant rate) that have been left accumulating over the years.  The query about the financial ability of the Mother and AYP to lend to the Company would not serve to explain the totality of the evidence, including the documentary records which did suggest their loan to the Company and the Company’s interest payments.

77.  Considering what AWC caused the Company to do to the various family members since 2013, one would not find it difficult to see why the Mother and AYP would allow the accumulation of the outstanding indebtedness to continue no more.  According to AYP, AWC at one point even verbally threatened to default and would see if she and the Mother would dare take legal action for their money back.  Plainly all those happened.

AWC’S PERSONAL CHEQUES TO THE MOTHER AND AYP ON 28 JANUARY 2011

78.  According to AYP, the last payment by cheques to the Mother and AYP mentioned above took place in January 2011. According to AYP, it was AWC who proposed to provide his personal cheques, instead of the Company’s cheques, as security for the outstanding debt.  The understanding was that AWC undertook personal liability to repay or guarantee the repayment of what the Company continued to owe her and the Mother.  Pausing here, it should be noted that no issue whatsoever about consideration for such personal undertaking or guarantee of AWC has been raised on top of AWC’s denial.

79.  The case of the Mother and AYP is that the repayments by the Company, through the cheque payments mentioned above, by January 2011 accounted for the amount of the two cheques drawn by AWC, ie HK$1,360,000 and HK$1,840,000 in favour of the Mother and AYP respectively, on the same day.  For what they were drawn for, both cheques have been kept and unpresented.

80.  AWC’s case is that the two cheques were issued to the Mother and AYP for their comfort while they mortgaged the Hung Lee Court Property to secure the banking facilities extended to the Company.  The facilities were subject to a maximum of HK$3,180,000, and for that he drew the cheques for the Mother and AYP for the total sum of HK$3,200,000.

81.  Beside denying the alleged comfort cheque arrangement, the Mother and AYP also pointed out the lack of similar arrangement in respect of the mortgages of the properties of the other family members to secure the banking facilities to the Company over the years.  AWC explained that similar arrangement was not made in respect of the cases of AKC and APC because the Company had actually financed the repayment of their mortgages (in respect of the King’s Park Villa Property and the Havelock House Property).  However, AWC explained in his witness statement that the Hung Lee Court Property was also acquired with the financial assistance of the Company and him.

82.  2011 was not the first time the Mother and AYP mortgaged the Hung Lee Court Property to secure the Company’s borrowing from the bank.  As mentioned, this happened in as early as 1995, and the lending bank was the same one.  Further, AWC explained in his witness statement that it was due to the concern about risk of loss of the property expressed by the Mother and AYP after obtaining independent legal advice that he decided to provide the cheques for their comfort.  However, the Mother and AYP were under obligations of similar nature under the 1995 and the 2011 mortgages, namely that both of them and the Company (as the borrower) jointly and severally covenanted with the bank that they would on demand make good and discharge the secured indebtedness.  Unless it is accepted that the Mother and AYP somehow did not understand the consequence of default in 1995, but did so in 2011 only after obtaining independent legal advice, AWC’s account of why he saw the need to provide the so-called comfort cheques in 2011 is not convincing.

83.  AWC explained the amounts of the comfort cheques aligned with the maximum amount of the banking facilities, ie HK$3,180,000.  The discrepancy of HK$20,000 between that and the amount of the two cheques (HK$3,200,000) was pointed out on behalf of the Mother and AYP, but this is perhaps less material.  However, it is unclear how the respective amounts of the two cheques came about, when one would have expected the two owners, being joint tenants, to be beneficially entitled to the property in equal shares.  In his explanation in court, AWC suggested he got the figures from AYP, which for his purpose were random figures.

84.  In January 2012, again around Chinese new year time, both the Mother and AYP received payments by way of consecutively drawn cheques for interests, ie 6% interest on the outstanding sums mentioned above.  The payments were recorded in the Accounting Records. Again, AWC’s evidence remained that these cheque payments were also financial assistance to the Mother and AYP.  The scrutiny over such evidence of AWC in the circumstances discussed above refers.

85.  There was no room for misunderstanding being the reason for the parties’ different versions of events.  The defence of the Company and AWC suggests that the claims by the Mother and AYP were fabrications and knowingly so.  All evidence considered, and to the extent the parties’ versions differ, I am impressed that the version of the Mother and AYP as to the circumstances giving rise to the two cheques and the nature of the cheques is on balance the more believable and preferable than that of the Company and AWC.  I therefore find the version of the Mother and AYP to be the facts.

THE ALLEGED LOAN BY THE MOTHER OF HK$300,000 TO THE COMPANY ON 27 APRIL 2011

86.  The withdrawal of HK$300,000 on 27 April 2011 is evidenced by the Mother’s bank statement.

87.  AWC does have his explanation for the Company’s cheque for HK$300,000.  His case is that he caused the cheque to be drawn and delivered to the Mother with a view to inviting her to resign. However, there is no dispute that the employment and salaries of the Mother carried on, and ended only by way of notice of termination served in September 2014.  Had there been such invitation in April 2011, it must have been rejected by the Mother right then.  It is not just about whether the cheque has been presented (and it has not been), but also how in the first place the Mother would have rejected the invitation and yet not only took but also kept the cheque.

88.  Further, the termination payments, including long service payment up to the date of termination, were computed and issued in writing to the Mother in September 2014.  The total amount was about HK$255,000.  Even by taking into account the award of unpaid annual leave obtained by the Mother from the Tribunal afterwards, the amount that the Company considered to be payable to the Mother in April 2011 would still have exceeded that payable more than 3 years later.  The explanation of AWC in court was not easy to follow.

89.  AYP corroborated the Mother’s evidence, as she was present when AWC made the representation and request for the financial assistance.  The Mother managed to give details of the visit to the specific branch of the bank for the purpose of withdrawing the money and handing over the same to Lam on the day in question.

90.  Lam left the Company in 2015. However, he made a statutory declaration on 25 April 2016 denying the entire version of the Mother.  He confirmed the denial by his witness statement.  All appeared to be unequivocal statements of the facts by Lam.

91.  If what Lam said was true, it would mean the Mother not only fabricated the entire incident but also somehow did so by unnecessarily insisting on identifying the involvement of a third party.  However, Lam was less straightforward in court than expected for a witness to testify as to basically a single incident allegedly involving him. As a matter of introduction, Lam mentioned that there was already dispute between AWC and APC.  As to how AWC came to requested him to testify, Lam oddly referred to his understanding that it was about allegation that APC had given him money.  In correcting himself about that, Lam somehow expressed his understanding that APC started these legal proceedings.  When asked about what happened on 27 April 2011, Lam’s immediate response somehow was that he remembered receiving HK$300,000 from her (presumably the Mother), but he again immediately corrected himself.  If it is suggested that this might be no more than understandable confusion on the part of the witness, it would equally be prudent not to accept his evidence as sufficing as unequivocal contradiction of the case of the Mother and AYP.

92.  Whilst the Company and AWC claimed that there was no record of such deposit into any of the bank accounts of the Company or its associates, none of these bank accounts referred to has been disclosed.  Further, the Mother’s case is that she handed the cash over to Lam on the day, and never claims any knowledge about how Lam handed the cash thereafter, apart from the understanding that the money was needed by the Company according to AWC earlier, which led her to withdraw the money.  AWC then caused the Company to draw its cheque for that sum on the following day, 28 April 2011, which is an undisputed matter.

93.  Query is raised as to how it was the Company instead of AWC personally who should issue the cheque for the purpose of security in respect of this specific loan after AWC’s undertaking made to the Mother and AYP in January 2011.  However, the reality was that neither the Mother and AYP had any control over that.  There was also no reason then for the Mother to refuse to accept the cheque for the sum of HK$300,000 from her son on the ground that that was contrary to the understanding or agreement reached in January 2011.  As mentioned, for the purpose of payment for interest on the previous loan, cheque issued by AWC and his wife had been used as well.

94.  On balance, I prefer the evidence of the Mother to that of AWC or Lam, and find that she did extend such a loan of HK$300,000 to the Company at the request of AWC.

THE ALLEGED LOAN BY THE AYP OF HER SHARE OF SALE PROCEEDS OF THE ZHONGSHANG PROPERTIES TO THE COMPANY IN MARCH 2013

95.  As to the sale of the Zhongshan properties owned by the 4 siblings, namely AWC, AYP, APC and AKC, the documents show that they consisted of 2 residential units.  The sale price was RMB2,650,000, and completion took place on 30 March 2013.  There is also no dispute that AWC caused the Company to issue in early May 2013 cheques for the sum of HK$828,109.38 each for the 4 of them to represent their respective share of the proceeds plus interest.  As to how that arrangement came about, AWC and AYP gave their different versions of events.

96.  According to AWC, it was AYP who represented to him that she would deposit the proceeds of sale in RMB into the account of the Zhongshan associate of the Company, and requested AWC to cause the Company to issue the cheques in favour of the 4 siblings to represent their respective shares of the proceeds in Hong Kong dollars.  AWC did so, but subsequently discovered that AYP never deposited the proceeds of sale into the account of any of the associated companies of the Company in the Mainland.  It follows that AYP should owe the Company or its associate the sale proceeds, or alternatively owe AWC his share of the proceeds.  No claim in any form for that has ever been raised, not even by way of counterclaim in these actions.

97.  AYP testified to confirm that it was at the request of AWC that the proceeds of sale were lent to the Company on the ground of cash flow need (for settling wages in the Mainland).  She gave a meticulous account of how the 4 siblings attended the bank at Zhongshan on the completion date to effect the completion and to authorize the direct transfer of the proceeds of sale directly from the purchaser to the bank account designated by AWC for such purpose.  In early May 2013, AWC caused the Company to issue to each of them the cheque for the sum of RMB828,109,38 as security for the repayment of such sum plus interest.  The cheque was never presented, upon AWC’s request and undertaking of the liability to repay in case of default of the Company.  Both of the cheques issued to AKC and AYP had marked on their face “Hold Only”.

98.  APC corroborated AYP’s evidence in this respect.  He added that in response to his request for settlement of his share in July 2013, AWC projected the ability of the Company to do so only in September to October of that year.  Therefore, AWC caused the Company to issue to APC three cheques to form the total amount plus interest payable to APC but post-dated to the end of September and October 2013.  APC eventually presented first of those three cheques dated 30 September 2013, amounting to HK$200,000 plus 6% interest for the period from May 2013 till then.

99.  It should be noted that the current account in respect of APC kept by the Company mentioned above did contain an entry of such sum of RMB828,109.38 relating to the Mainland associated company dated 29 April 2013.  There was also record of payment to APC with interest calculated from May 2013.  It is therefore fairly pointed out on behalf of AYP and APC that interest would not have been so calculated and paid, had the proceeds never been received for the purpose of the Company or its associate upon completion of the sale of the Zhongshan properties.

100.  All evidence considered, I am satisfied that AYP and APC, and not AWC, were telling the truth regarding the loan of the sales proceeds of the Zhongshan properties in 2013.

APC

101.  APC started to work under the employ of the Company in 1987.  He became a shareholder of the Company in about 1990 and a director in 1992.  He has mainly stationed in the Mainland to oversee the manufacturing until 2013.

102.  According to AWC, the Company has ceased business and laid off all its employees in 2015.  He attributed the decline to the family dispute, which started with the alleged misconduct of APC.  This, according to AWC, led to the decision of the Company to remove APC from his charge of the Zhongshan associated company and back to Hong Kong by mid-2013, and eventually to remove him altogether from the board of directors and employment in November 2013.

103.  The misconduct that the Company and AWC alleges against APC apparently involved usurpation and misuse of company funds allegedly discovered in 2013.  In court, AWC added that APC’s misconduct started even earlier, and referred to certain incident involving stolen company funds in the 1990s.  The undisputed fact however was that the employment and directorship of APC were terminated only in 2013.

104.  Reference was made to the Mainland company’s complaint against APC to the Zhongshan authority.  There was a written complaint dated February 2015, which was well after the family relationship has broken down and the commencement of the actions by the Mother and AYP against the Company.  Further, the complaint concerned what APC had allegedly done in his management of the Zhongshan company during the period between 2008 and 2013.  There was no mention of what AWC now said in his evidence in court about any earlier misconduct.  The authority responded in March 2015 by writing to request the Mainland company for evidence in order to investigate the complaint.  In May 2015, the authority confirmed that there was a case against APC under investigation.  However, the development in this respect since then, if any, was unknown as at the time of the trial.

105.  APC denied all these accusations. It is argued on behalf of the Company that APC did not seek leave to adduce further oral evidence after the exchange of witness statements to rebut these accusations.  However, these accusations are not actually pleaded issues. Nothing turns on APC’s denial of these accusations, to the extent that the Company put them forward, only in his evidence during the trial.

106.  The evidence at this stage manages to take the alleged misconduct of APC no further than mere accusations.  This also sets the extent to which they could be, as they apparently are, relied on to cast doubt on the credibility of APC, when it is reasonably expected that allegations of such serious nature must be established by cogent evidence. Whether or not APC is in fact guilty of the accusations is a matter to be established but beyond the present action.  His credibility for the purpose of the present action remains to be tested against all the other evidence in the action.

107.  AYP and APC gave evidence of their understanding as to what brought about the breakdown of trust and the removal of APC in 2013.  This, they believed, had partly to do with the siblings’ loan to the Company of their shares of the sale proceeds of the Zhongshan properties mentioned above.  As mentioned, AYP and APC testified as to such loan upon completion of the sale of the Zhongshan properties in March 2013 at the request of AWC.  On 14 May 2013, AWC caused the Company to issue four cheques to them respectively for HK$828,109.38 each.  According to AYP and APC, the cheques served as security for the repayment of the loan and thus for “hold only”.

108.  In the case of APC, he requested AWC in July 2013 for repayment of his share as he was then in need of cash.  AWC allegedly agreed to do so by three instalments.  Hence his causing the Company to draw in favour of APC three consecutive cheques with due dates on the last day of September and October of 2013 to replace the original cheque mentioned above, and each of those three cheques was the principal sum of the instalment plus interest.  For instance, the first cheque representing the repayment of the principal of HK$200,000 plus interest at 6% (from 15 May 2013 to the date of this cheque) was for the sum HK$218,921.73.  According to APC, whilst AWC had no objection against the presentment of the first of those three cheques, AWC had requested APC to hold onto the remaining two.  APC eventually defied the request and did the exact opposite and presented all the cheques. According to him, he did so, as it became apparent to him that AWC had issue with him and did not trust him anymore since then.  APC was removed from the Company within a week after his presentment of the remaining two cheques.

109.  As mentioned, later in the same month after the Company has removed APC and terminated his employment, APC refused to sign the updated facility letter from the bank for the renewal of the facility to the Company.  APC’s refusal to co-operate in the circumstances probably surprised no one.  Admittedly, AWC caused AYP to persuade APC but to no avail.  The remuneration of APC was then stopped.  AYP and APC believed that the subsequent termination of employment of the Mother, AYP and AYW in the following year partly had to do with AWC’s discontent with them having, as AWC viewed it, sided with APC.

THE ALLEGED FINANCIAL ASSISTANCES BY THE COMPANY TO APC

110.  The Company alleges that it has provided financial assistance to APC during his tenure as a director since 1992.  That included financial assistance to APC to fund his repayment of the mortgage of the residence of him and Fong, ie the King’s Park Villa Property, since 1999, and eventually actual payment in discharge of such mortgage in 2015.  All these financial assistances, the Company claims, were recorded in its financial statements, including particularly the current account and the yearly audit confirmations issued to APC for the financial years between 2011 and 2015.  As of the end of March 2014, the amount owed by APC was HK$1,415,797.  After the removal of APC and the settlement of the outstanding mortgage in respect of the King’s Park Villa Property for APC, the amount owed by APC to the Company increased to HK$4,579,827.  Hence the amount claimed in the Company’s Action.

111.  APC denies the alleged loans, and avers that he was amongst the family members that had lent to the Company from time to time.  In his witness statement filed in LBTC 2220/2014 (mentioned above), AWC also admitted that APC had lent money to the Company when it was short of cash in operation.  As mentioned, AWC also admitted in court that Fong and her family members, including father, brother and sister in law, had lent to the Company.  APC testified that he had received accounting records like those received by the Mother and AYP as well as his wife, Fong, and her family members from the Company in respect of the outstanding balance of such loans and payment of interests by the Company.  He no longer retains any of those issued to him, but some of those received by the members of Fong’s family were produced as mentioned above.

112.  The current account that the Company produced shows that the bulk of payments made by the Company for the benefit of APC went to fund the repayment of the mortgage in respect of the King’s Park Villa Property.  According to APC, he did repay such mortgage until 2003, and that stopped only as a result of the alleged set-off agreement discussed in the next section below.

113.  Again, the Company placed much reliance on its financial statements and the annual audit confirmations.  The financial statements, as mentioned, reflected the indebtedness owed by APC as recorded by his running current account kept by the Company.  It is pointed out that these documents were actually disclosed by APC in the Company’s Action, but APC has not sought leave to adduce further witness statements to rebut them.  The audit confirmations, as mentioned, were signed by APC for the financial years 2010 and 2011 but not afterwards.  It is pointed out that these confirmations were prepared by the auditor in both English and Chinese. Essentially, it is argued that these documents were not adequately challenged.

114.  There is nothing self-contradictory on the part of APC in disclosing the financial statements of the Company without admitting them.  The fact is that APC never seeks to dispute the existence or authenticity of the financial statements.  It is also not entirely fair to suggest that the financial statements were not challenged during the trial.  It became clear at the trial that AWC was not in a position to personally say much about the financial statements either, apart from relying on the fact that they were audited.  Not even Yip, who was in charge of accounting matters from 1998 to 2002 before she moved to other duties and then left Company in 2003, was in a position to speak on these documents.  Ng, who took charge of the accounting matters from 2003, was however not called as a witness.  There was effectively no witness from the Company who has the necessary personal knowledge about the accounting and the financial statements that could be cross-examined meaningfully.

115.  APC never contends that he signed the audit confirmations because he did not understand their contents.  Not only did he see no reason to dispute them, but he also considered it his duty as director to accede to the accounting needs of the Company.  He maintained that stance until the relationship between him and AWC broke down in 2013 as mentioned above.  Financial and accounting matters of the Company had always been entrusted to the accounting staff.  He claimed no knowledge about the current account balance kept by the Company in respect of alleged loans to him.  As to the annual audit confirmations, APC admitted that he acceded to the request to sign those for the financial years 2010 and 2011.  He considered that as his duty as a director, and did so on the basis of the representation of AWC that they were necessary for balancing the financial statements.  Following the breakdown of trust and relationship towards the end of 2013, APC admittedly refused to co-operate in signing any further such audit confirmations.  Essentially, none of those, APC says, evidences the true state of affairs.  His approach was not too different from that of the Mother and AYP in this respect.

116.  Whether or not there exists basis for the Company to also take action against AWC for any indebtedness owed by him to the Company, no such action would be likely in view of AWC’s control over the Company.  That said, these company documents appear to suggest basis for enforcement against AKC.  Similar resolution and current account of the Company concerning AKC suggested that AKC also owed the Company nearly HK$2.7 million in 2012.  However, there is certainly no evidence that AWC has ever caused the Company to take action against AKC for the recovery of such alleged debt.  When asked about that in court, AWC was somehow vague about whether such debt said to be owed by AKC was either outstanding or settled. What he was certain about was that if requested, he would be prepared to testify for AKC in the latter’s pending legal action against the Mother in relation to the Havelock House Property where she apparently resides. Circumstances are therefore clear in that AWC and AKC sided with each other against the rest of the family.

THE CHEQUE DISCOUNTING ARRANGEMENT AND THE SET-OFF AGREEMENT

117.  APC contends that he, as well as the members of the Fong’s family, has participated in the Cheque Discounting Arrangement, and thus becoming creditor of the Company to the extent of the amount of discounted cheques issued by the Company that have come into his possession under the arrangement.  The amount accumulated together with interest promised by AWC in exchange for APC’s agreement to withholding from presenting the cheques.  Such cheques that were not presented would also be cancelled and replaced by new cheques drawn by the Company.  Eventually, by the Set-off Agreement, part of the accumulated amount so owed by the Company was treated as set off by the Company’s undertaking of the responsibility to repay the mortgage in respect of the King’s Park Villa Property for APC since 2003.

118.  It is argued on behalf of the Company that the scheme advanced in the defence of APC is convoluted.  However, cheque discounting per se is not novel.  It exists whereby the holder of a post-dated cheque will be able to obtain payment earlier than the maturity date of the cheque at a discount.  AWC did not dispute that in his evidence either.  AWC admitted that whilst the Company would normally issue crossed post-dated cheques in settlement of the processing factories’ invoices, it had entertained requests by the processing factories to settle by bearer cheques. That, AWC understood, was to facilitate negotiation of the cheques by the factories.  However, AWC denied any knowledge about negotiation of the Company’s cheques once issued.

119.  AWC testified that after the Company has set up its in-house processing in the Mainland in the 1990s, sourcing out processing, and thus the opportunity for such arrangement, would have diminished substantially.  According to APC, notwithstanding the setting up of its own processing plant in the Mainland, such arrangement still existed, and became much less only since 2003 in line with the much reduced outsourcing of processing by the Company.

120.  According to APC, he and Fong’s family have since about 1990 participated in the arrangement and provided the necessary cash for the discounted payments to the processing factories.  Since about 2000, APC also agreed to AWC’s request to withhold from presenting those post-dated cheques in their possession, and in return they were offered interest on the amount at 12% per annum prior to 2003, 8% since mid-2003 and 6% since November 2003.  Such interest rates tallied with that promised by AWC (and the Company) for the personal loans extended by the family members, including him and his wife’s family, to the Company mentioned above.

121.  APC also explained some fourteen cheque payments were received during the period between April 2008 and June 2012 as repayments in relation to the discounted cheques.  As mentioned, cheques were drawn in place of the original cheques that came into the possession of APC and others as a result of the negotiation.  Most of the cheques were drawn by the Company while a couple were drawn by AWC and his wife.  Most of them were payable to APC while a couple were payable to the sister-in-law of Fong.

122.  AWC did not deny such cheque payments made to the sister-in-law of Fong.  However, he explained that the other cheques were not payment to APC but for him to exchange into RMB for bringing to the Mainland for the use of the Company’s associated company, including paying for staff salaries.  Whilst it relies heavily on its financial statements and records, the Company produced no corresponding accounting record in respect of such alleged expenses of the Company for the benefit of its Mainland associate.  Further, AWC testified that the amount of the monthly salaries paid by the Mainland associate reached millions.  The fact that the amounts covered by those cheques both did not add up to such amounts and varied substantially between months does not lend weight to such explanation of AWC’s.  APC also added that it was not possible to bring cash in RMB in such amounts repeatedly across the border, when the amount allowed per trip was US$5,000.  The mechanism of bringing RMB in cash from Hong Kong to the Mainland for the purpose of the Mainland associated company, though not inherently improbable, is relatively not appealing as an explanation.

123.  Yip testified in corroboration of AWC’s evidence.  She started to take up responsibilities as account clerk in 1998 until the same were taken over by her successor in 2002.  She left the Company in 2003.  She testified as to her impression that it was APC that owed the Company money.  Whilst she claimed to be involved in the matter of the Company, big and small, she somehow had no idea about the Accounting Records issued by the Company to various lenders including the Mother, AYP or the family of APC’s wife, which, as I find above, existed.  Her reference to the current account of APC with the Company did not add to what the documents produced appear to show.  As mentioned, APC claimed no idea about the keeping of such account, and never denied its existence.  Nevertheless, Yip somehow maintained her impression, notwithstanding such documents and AWC’s acknowledgement of financial assistance that had been rendered by people including APC.  According to her, the debt owed by APC to the Company amounted to approximately the value of a residential property.  How much weight should be attached to such impression, when Yip managed to say not much in substance about the state of finance and account of the Company at the material time, is doubtful.

124.  Actually, Yip apparently became a relevant witness mainly because of her being named as one of those present on the occasion when the Set-off Agreement was made between APC and AWC on behalf of the Company.  APC testified as to what, as pleaded, happened at the meeting in 2002 at which AYP and Yip were also present.  Only that he corrected himself in court that it was not he but AWC who tore those post-dated cheques upon their agreement reached at the meeting mentioned above.  He did so in a rather straightforward manner, and objectively raised no serious doubt as to the integrity of his evidence on the weighing scale.  Yip however denied witnessing the occasion and the tearing of cheques.  Objectively, it would appear to be quite unnecessary for APC (and AYP who testified in his support) to invent the presence of Yip for the purpose of establishing an occasion and agreement that only concerned AWC and APC.

125.  As far as the current account of APC with the Company recorded the running account between them, the bulk of the entries in the account were related to the Company’s financing the repayment of the mortgage in respect of the King’s Park Villa Property.

126.  The case of the Company in respect of the King’s Park Villa Property first put forward differed significantly from its case in this action.  APC first received a letter from the Company’s solicitors in April 2015, asserting that whilst APC and Fong are the registered owners, they held the property on trust for the Company as the sole beneficial owner on the basis that the Company paid the deposit and the mortgage for the property or alternatively financed the repayment of the mortgage.  The Company then commenced action by the end of May 2015 (HCA 1184/2015) and registering such lis with the Lands Registry. The Company eventually discontinued that action in late June 2015, and APC also caused the registration of the lis vacated.  The Company through solicitors followed by demanding APC to repay his alleged debt in July 2015. Correspondence between solicitors ensued, and eventually the Company’s Action was commenced.

127.  The documents in connection with the successive facility agreements with the various lending banks and the related mortgages in respect of the King’s Park Villa Property since 1999 speak for themselves.  APC testified in confirmation of his pleaded case.  In denial of the financial difficulty of him and Fong at the time of purchase of the King’s Park Villa Property, APC testified to the profits that he and Fong had gained from the sale of their two other properties in 1994 and 1998 in the total amount of HK$2,700,000.  They also had their savings.  Therefore, the admitted loss of HK$2,700,000 from the other property investment in December 1999 did not result in their financial difficulty as AWC alleges.  The down payment and incidental expenses for the purchase of the King’s Park Villa Property in March 1999 were funded solely by APC and Fong.  The purchase was partly financed by mortgage to the National Commercial Bank (“NCB”) under which APC was the borrower.  As to the Company’s alleged funding of APC’s mortgage repayment, there is no documentary evidence.  AWC explained that the Company could trace none of those, including the current account, dated prior to 2009.

128.  According to APC, the idea of the successive re-mortgages of the King’s Park Villa Property originated from AWC. Apart from the repayment of the mortgage, the arrangements provided the Company with the benefit of facilitating the financial arrangement with the various lending banks to the Company for its benefit.  Hence the addition of the Company as the borrower for the mortgage to the Belgian Bank in 2000.  The Set-off Agreement was reached in 2003.  The Company and its associated companies as the borrower for the mortgage to the Citic Bank in 2006, and the Company became the sole borrower under the mortgage to the HSB in 2011.

129.  According to both AWC and APC, the Company started to discharge the mortgage repayment directly in about 2003. According to AWC, he caused the Company to do so to assist APC because of APC’s financial difficulty and his wife’s leaving the employ of the Company in 2003. According to APC, as mentioned, this was because of the Set-off Agreement to set off against the Company’s indebtedness to him arising out of the Cheque Discounting Arrangement.  Since then, APC paid no heed to the mortgage repayments, which were supposed to be arranged by the Company.  Therefore, he claimed no knowledge about an account in his name with the Citic Bank apparently opened in connection with such purpose.

130.  As mentioned, the relationship between AWC and APC broke down in 2013.  APC was stripped of his authority and eventually employment by the end of November 2013.  Not surprisingly, he refused to co-operate to sign the facility letter for the renewal of the facilities extended to the Company by HSB afterwards.  This triggered the exclusion of the King’s Park Villa Property from the collateral package, and the Company’s discharge of the remainder of the mortgage in respect of the property.  The Company contends that such repayment contributed to the last substantial addition to the debt owed by APC whereas APC maintains that any mortgage repayment since 2003 was the agreed responsibility of the Company pursuant to the Set-off Agreement reached in 2003.

131.  In court, AWC accepted that the repayment in discharge of the mortgage after the termination of the employment of APC should no longer fall within the credit account balance of the Company’s loan to director.  However, it remained under the contractual liability as the borrower to repay the bank, and such repayment in discharge of APC’s liability would be recoverable from APC unless APC’s case in respect of the Set-off Agreement is accepted as a matter of fact.  The argument on behalf of APC that the Company could and should have left it to the bank to enforce the mortgage, it appears to me, detracts from the reality of the matter.

FINDINGS AND LIABILITY

132.  That there seems to be bits and pieces of the evidence of each witnesses that are inexplicable came as no surprise, particularly in view of the history of the matter.  That said, following from the consideration of all the evidence, including those specifically discussed above, I am convinced on balance that the Mother, AYP and APC were telling the truth as opposed to AWC or his witnesses.  I should make it clear that the audited financial statements do not trump, when the circumstances were such that the true picture of the substantial financial dealings initiated by AWC with the family members from time to time, which I find to have existed after considering all the evidence, simply might not have been reflected in how the primary materials for the account and audit were put together.  It is not for the opposite camp of the Company and AWC, which had no real knowledge about or involvement in the accounting matters throughout the years, to go further to show why and how.

133.  Insofar as the Mother’s Action and AYP’s Action are concerned, I find that the Company does owe the Mother and AYP the pleaded debts, and so does AWC to the same extent on the basis of his personal undertaking or guarantee in respect of the repayment.

134.  Insofar as the Company’s Action is concerned, I find that there was in fact the Cheque Discounting Arrangement and the Set-off Agreement.  Whilst APC was imprecise as to the amount owed by the Company and so set off, the claim against him fails once it is found that the Company, through AWC, undertook the responsibility of repaying the mortgage of the King’s Park Villa Property as part of the set-off.

ORDER

135.  In the Mother’s Action, judgment is entered against the Company and AWC for the sum of HK$1,660,000 with interest on HK$1,360,000 from 28 January 2012 and on HK$300,000 from 27 January 2012 at 6% per annum until payment as claimed.

136.  In AYP’s Action, judgment is entered against the Company and AWC for the sum of HK$2,668,109.38 with interest on HK$1,840,000 from 28 January 2012 and on HK$828,109.38 from 14 May 2013 at 6% per annum until payment as claimed.

137.  In the Company’s Action, the claim is dismissed.

138.  Costs follow the event.  I therefore make a nisi order that the Mother and AYP shall have their respective costs of their consolidated actions against the Company and AWC.  I also make a nisi order that the Company shall pay APC’s costs of the Company’s Action.  Costs, including any costs reserved, shall be taxed, if not agreed.  In the absence of application in 14 days to vary, the nisi costs orders shall become absolute without further order of the court.