TSE KAI BOR v. TSE KAI KIT

HCA1353/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1353 OF 2003

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J U D G M E N T

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1. The plaintiff is the elder brother of the defendant, and they are the sons of the late Tse Hin Lung (“the father”) who died in 1998.  They were shareholders and directors of Fung Lung Plastic PRC Company Ltd (“the Company”), a company registered in Hong Kong.  They were also shareholders in one Shantou S.E.Z. Fung Lung Plastic PRC Company Ltd (“the PRC Company”), a company incorporated on the Mainland.

2. In brief the plaintiff’s case is that the defendant cheated him of his shares in the Company, which had not traded since 1990, by fraudulently procuring him to sign Instruments of Transfer and Bought and Sold Notes alleging that the plaintiff sold his shareholding to the defendant for $4,940, plus a Form D4 notice of the plaintiff’s resignation as a director.  This he did by means of a representation that the documents were documents needed to re-activate the Company, on which representation the plaintiff relied.  Now the plaintiff claims an order that the documents be set aside and a declaration that they are null and void, or alternatively an order for the defendant to pay the plaintiff the value of the shares, or in the further alternative for damages to be assessed.  The defendant’s case is that there was no fraud but that the plaintiff signed the documents in the full knowledge of their nature and as part of an agreed arrangement for a mutual transfer between the parties of their shareholdings in the Company and the PRC Company.

Background

3. The following matters are not in dispute.  The Company was founded by the father.  The plaintiff and the defendant acquired shares in and became directors of the Company in about 1988 and they ran it; the father withdrew from the management.  They also ran the PRC Company in the PRC.  Their shareholdings in the company are not in dispute; the plaintiff held 4,940 and the defendant 4,460 of the 12,400 issued ordinary shares.  The balance of shares were held by other family members including the father’s and the mother’s estates.

4. The company ceased business and disposed of its assets in 1990.  It was not dissolved because of ongoing litigation between it and the father in HCA7050/1990.  The father died on 20 November 1998.  By a judgment dated 8 December 2000 in that action the father’s estate was ordered to pay to the Company a judgment sum of $1,473,400.00 with interest at 10% per annum from 13 July 2000 until payment.  The plaintiff says that the total amount of the judgment sum with interest to date is about $3,300,000, and the value of the estate is about the same, taking into account other assets and liabilities but the defendant puts him to strict proof of this.

5. The executors of the father’s will were his wife and three daughters.  The wife predeceased him.  The daughters did not, after his death, take out a grant of probate.  It was therefore necessary for the Company to apply for a grant of letters of administration in its capacity of creditor of the estate.  In 2001, the parties, in ignorance of this fact, decided to de-register and dissolve the company; and it is not in dispute that the plaintiff asked the defendant to prepare documents for this purpose, which the plaintiff signed.

The pleadings

6. The plaintiff pleads that in about July 2002, he was advised by his solicitor that the Company could not be de-registered, pending its application for a grant of letters of administration of the father’s estate.  He so advised the defendant, who was in England, and the parties agreed to deal with the matter when the defendant came to Hong Kong in September 2002.

7. On about 5 September 2002 at the registered office of the Company in Chai Wan, the parties dealt with the apportionment of the proceeds of sale of the PRC Company.  The defendant took away from the office various letters received from Government departments such as the Inland Revenue Department.  On 6 September 2002, the plaintiff on behalf of the Company in its capacity as a creditor of the father’s estate applied to the IRD for a Certificate of Exemption from estate duty.

8. On 7 September, again at the registered office, the defendant told the plaintiff that the letters received by the Company from Government departments were demands for payment of business registration and penalties for non-filing of the business registration and the annual return.  The defendant fraudulently misrepresented that the total of fees and penalties was $9,880 and asked the plaintiff to pay half of it.  The plaintiff issued a cheque in favour of the defendant for $4,940.

9. On 9 September in the Choi Fook Seafood Restaurant at North Point, the defendant fraudulently misrepresented that the Government had waived the fees and penalties but that the plaintiff must sign some documents in order to re-activate the Company.  The defendant issued a cheque in favour of the plaintiff for $4,940, which he said was a refund of the sum paid early by the plaintiff.

10. On this same occasion the defendant produced two documents written in English with spaces left blank and asked the plaintiff to sign them, which he did.  The defendant produced a third document, partly covered it with the other two documents and asked the plaintiff to sign, which he did.  He fraudulently misrepresented to the plaintiff that these three documents were for re-activating the Company.  The plaintiff, who does not read English and had previous signed documents in blank at the defendant’s request, trusted the defendant and relied on his representations.

11. In mid-January 2003 the plaintiff received requisitions from the Estate Duty Office through his solicitors, concerning his capacity to apply for estate duty clearance since he was no longer a shareholder or director of the Company.  On 13 February 2003, the plaintiff obtained from the Company’s auditor, King Fair Secretaries Ltd (“King Fair”), the copies of the three documents which he had signed.  He found them to be an instrument of transfer and bought and sold notes dated 24 September 2002 for the sale of the plaintiff’s shareholding in the Company to the defendant for $4,940, plus a Form D4 notice of the plaintiff’s resignation as a director dated 9 September 2002.

12. The defendant denies that in July 2002 he was told of advice given by the plaintiff’s solicitor.  He pleads that on 1 September, he received a telephone from the plaintiff who said that he agreed to a previous proposal for an exchange of the plaintiff’s shares in the Company for the defendant’s shares in the PRC Company.

13. The defendant says that on 6 September 2002, the plaintiff handed him cheques for $13,200.00 and $10,390.98 which, according to the plaintiff, represented the defendant’s share in the proceeds of sale of machinery by the PRC Company.  They had a further meeting at the Company’s office on 9 September, at which it was first agreed that the consideration for the exchange of shareholdings should be $494,000, i.e. the nominal value of the plaintiff’s shares in the Company, but then the plaintiff resiled from this and a figure of $4,940 was agreed.  The parties completed the transaction by exchanging cheques, signed instruments of transfer and signed bought and sold notes.

14. On the same occasion, the defendant asked the plaintiff about the judgment debt owed to the Company by the father’s estate.  The plaintiff told him that he appointed one Mr Dave Lam of Messrs Lam and Partners, solicitors, to handle the matter; that an application for a grant of letters of administration would be made in the name of the Company and the money received would be credited to the Company’s account.

15. The defendant further says that on 9 September he delivered the instruments of transfer and bought and sold notes to King Fair where one Mr Tsui advised him that it would be better for the plaintiff to resign his directorship.  On 10 September Mr Tsui passed to the defendant a Form D4 and minutes of a directors’ meeting for signature by the plaintiff; the plaintiff handed these to the defendant at the seafood restaurant in North Point.  On 12 September the plaintiff signed some documents and handed them to the defendant, who passed them on to Mr Tsui who dated the transfer documents on 24 September 2002.

16. Later the defendant received forms of a small claim from solicitors claiming legal costs of the action HCA7050/1990.  The defendant took these to the solicitor, Mr Lam to inquire whether this would affect the progress of the application for the grant of letters of administration.  Mr Lam told him that the application was made in the name of the plaintiff and not the Company and that the plaintiff would have control of the estate.  The defendant contacted the plaintiff, accused him of cheating and demanded that the name on the application be changed from that of the plaintiff to that of the Company, or else he would himself write to the Inland Revenue Department that the plaintiff had no authority to make the application.  The plaintiff responded that if the defendant did so, he himself would not admit the transaction for the exchange of the shares.

17. By way of reply the plaintiff pleads that in 2001 it was agreed that the PRC Company, which had ceased production, would be sold off and the net proceeds divided equally between the parties.  The plaintiff would handle the matter and would be paid $6,100 per month for his trouble, plus expenses.  He did so and stayed in Hong Kong and Shantou between February and September 2002 to handle the disposal of the assets.  With the defendant’s consent he sold the PRC Company for RMB150,000.  The net proceeds after payment of the plaintiff’s fees and disbursements came to $20,761.96; and the defendant was given the cheque for $10,380.98 for his half share, at a meeting on 5 or 6 September.  On this occasion the defendant said that the plaintiff’s remuneration was too high; the plaintiff agreed to reduce it by $13,200 and issued to the defendant a cheque for that sum.  There was no agreement for exchange of shares.  It was further agreed that Lam and Partners would be appointed to represent the Company to apply for the grant of letters of administration in the capacity of creditor of the estate.

Documents

18. The first relevant document is the plaintiff’s Affidavit for the Commissioner dated 6 September 2002 (page 24 of the document bundle) which bears to have been affirmed before Lam San Yin, solicitor, of Lam and Partners on that date.  In it the plaintiff states that he is applying for the grant of letters of administration in his capacity of creditor.  The Company is not mentioned at that point, although in Schedule 1 it is named as the creditor of the judgment debt.  No debt is shown as owing to the plaintiff personally; indeed it is difficult to see how the Estate Duty Office or the Probate Registry could accept that the plaintiff had any right to apply for letters of administration as a creditor.  As will be seen below, there is no satisfactory explanation for this.

19. The relevant notice of resignation (page 59), bought and sold notes (page 61), and instrument of transfer (page 60) are also produced, at any rate as copies.  They are signed by the plaintiff in Chinese characters.  It is to be noted that on the latter form the legend “Resigning Director” appears in English and Chinese, below the signature space.

20. There are two cheques for $4,940, drawn by each party in favour of the other.  Both are dated 9 September 2002.  The plaintiff’s bank statement shows a cheque credit for that amount on the same date.

21. There are also bought and sold notes dated 9 September 2002 for a blank number of shares in the PRC Company for a consideration of $4,940 (page 85) as well as a related instrument of transfer (page 84).  They bear to be signed by the plaintiff with a non-Chinese scribbled signature.  These are, apparently, the subject of an allegation by the plaintiff of forgery.  It appears that the police sent the documents for forensic examination but the result was inconclusive.

22. The plaintiff also relies on a Chinese agreement (page 62) which bears to be an agreement for the sale of the whole set of plant and machinery together with supporting ancillary system and facilities of the PRC Company to one Ching Hoi Sun Ngan Plastic Materials and Metal Company for RMB150,000.

Evidence of the plaintiff

23. As appears from the plaintiff’s witness statement, which he adopted as evidence, in 2001 the parties agreed to sell the assets of the PRC Company, which had ceased production, pay off its liabilities paid off and share the residue equally.  The plaintiff was then living in Canada and the defendant in England.  They agreed that the plaintiff would return to Hong Kong to dispose of the PRC Company; and that he would be paid a monthly fee of $6,100 and his disbursements out of the assets.  So between February and September 2002 the plaintiff stayed in Hong Kong and Shantou to deal with this matter.  Ultimately the PRC Company was sold to another Mainland company for RMB $150,000.  After paying off all the liabilities and the plaintiff’s agreed fees and expenses, the balance was $20,761.96.

24. In about July 2002 the plaintiff’s solicitors told him that since the Company would have to apply for a grant of letters of administration as a creditor of the father’s estate, it could not be dissolved.  The plaintiff passed on this information to the defendant who said he would deal with it when he came to Hong Kong that September.

25. On about 5 or 6 September 2002, the parties had a meeting at the company’s registered office, at which the plaintiff gave the defendant a cheque for $10,308.98 which he says represented half the net proceeds of the sale of the PRC Company.  After some discussion, he also gave the defendant a cheque for $13,200 which he says was an agreed refund of his fees, which the defendant claimed were too high.

26. At this point, according to the plaintiff, various letters from Government departments were found in the office and the defendant took them away.  On the same day they went to Lam and Partners, solicitors where the plaintiff swore an affidavit to apply for a certificate of exemption from estate duty; he says that he did this on behalf of the Company which was a creditor of the father’s estate but on the face of the affidavit it appears that he applies in his own capacity and not that of the company.

27. The parties had another meeting at the registered office on 7 September, when, according to the plaintiff, the defendant told him that in order to keep the company alive, it had to pay off the various Government fees and penalties for non-payment of the business registration and the like; the total payable was $9,880; so at the defendant’s request the plaintiff gave him a cheque for half of that figure, i.e. $4,940.

28. The parties met at the Choi Fook Seafood Restaurant on 9 September.  According to the plaintiff, the defendant told him that the Government had temporarily waived the payment of all the fees and penalties, but he must sign some documents to re-activate the company.  The defendant gave the plaintiff a cheque for $4,940 and produced two documents for the plaintiff to sign.  They were in English and the plaintiff could not understand them; but he trusted the defendant and he signed.  Then the plaintiff produced a third document, covered up part of it with the signed documents, and asked the plaintiff to sign, which he did.  Some days later, the plaintiff went back to Canada.

29. Then in mid-January 2003, according to the plaintiff, he received through his solicitors a requisition from the Estate Duty Office as to the capacity in which he was applying for estate duty clearance, because he had ceased to be a shareholder and director of the Company.  On 13 February 2003, he went to the Company’s auditors, King Fair Secretaries Ltd, where he was given copies of the documents he had signed; and he found that they were Instruments of Transfer and Bought and Sold Notes showing that he had sold the defendant his 4,940 ordinary shares in the company for $4,940, and a Notification Form D4 that he had resigned as director on 9 September 2002.

30. The plaintiff also says that he has discovered that the defendant forged his signature on an instrument of transfer and a bought and sold note for transfer of shares in the PRC Company.  This matter was reported to the police, and investigations made but it appears that the opinion of the police handwriting expert was inconclusive.

31. Under cross-examination the plaintiff said that he knew not a single word of English, in spite of his having frequently travelled to Canada and obtained a Maple Card for residence there.  He always signed documents in Chinese characters.  However, he had to admit on being shown other documents that he also on occasion signed with a non-Chinese scribble.  Shown the instrument of transfer and bought and sold note which bore to show the transfer of shares in the PRC Company from the defendant to himself, at first he said that the signature on the instrument of transfer was not his, and that that on the bought and sold note was his.  When it was put to him that he had, according to his statement, reported two forged signatures to the police, he said that both the signatures were forged.

32. It was put to the plaintiff that the document at page 62 was a sham or evidence of a sham transaction.  He admitted that the PRC Company had had a vacuum electro plating machine, a moulding machine, 14 plastic injection machines and over 100 old moulding machines and that in 2000 the audited account had shown assets of about RMB3,000,000.  He explained, then and in re-examination that when the machines were transferred from Hong Kong to the Mainland the PRC authorities had required an investment of at least RMB1,000,000 so the accountant had given false figures, though in fact the machines were very old and of low value.  He was asked why the document at page 62, on which he relied, bore no chop of the buyer.  He said that he had signed two counterparts, and given one to the buyer.  He produced the original of page 62 (admitted as Exhibit P1) which had, apparently, been the subject of unsuccessful requests for specific discovery by the defendant’s solicitors and explained that he had got it from the buyer, his own counterpart being locked up in the Company’s offices, i.e. under the defendant’s control now.  In any event, both counterparts were, it appears, identical, and bore no buyer’s chop.

33. As to the legend “Resigning Director” on page 59 the plaintiff insisted that he had simply not paid any attention to that, when he signed immediately above it.

34. The plaintiff further insisted that he had taken the defendant to Lam and Partners on 6 September 2002, when he had signed the Affidavit for the Commissioner.  He said that the defendant and he had signed an authorisation letter for Mr Lam to act for the Company in the application for administration of the father’s estate but when that was pursued, said that the authorisation was the Affidavit itself and that only he had signed it.  He insisted that in making the Affidavit he had acted on behalf of the Company.  When it was suggested that the solicitor could have asked for authority signed by both parties, and chopped with the Company’s chop he said that the solicitor had forgotten that, and had later chased him for it; but he had simply forgotten to provide it.

Evidence of the defendant

35. The defendant says in his statement, which he adopted, that on about 1 September 2002, in England, he received a call from the plaintiff who agreed to a previous proposal that the plaintiff would transfer his 4,940 shares in the Company to the defendant, while the defendant would transfer his shares in the PRC Company to the plaintiff.

36. The defendant came to Hong Kong and on 6 September 2002 he was indeed given the two cheques, for $13,200.00 and $10,380.98 which the plaintiff told him were for the his share in the proceeds of sale of the PRC Company.  On 9 September they had another meeting to discuss the exchange of shareholdings; he suggested that a solicitor handle the matter but the plaintiff disagreed and he accepted this.  They agreed that the consideration for the exchange of the plaintiff’s 4,940 shares would be $494,000, i.e. their nominal value; but then the plaintiff said that he had no money, so after further discussion they agreed a figure of $4,940; and then they exchanged cheques, signed bought and sold notes, and signed instruments of transfer for both companies.

37. At this meeting, the defendant asked about the debt due by the father’s estate.  The plaintiff said that he had appointed Mr Dave Lam of Lam and Partners to handle the matter; that application would be made in the name of the Company for letters of administration; and that the money received would be credited to the Company’s account.

38. The defendant then took the transfer documents for the two companies to King Fair Secretaries Ltd whose partner, Mr Tsui, advised him that the plaintiff should resign his directorship.  On 10 September the defendant received from Mr Tsui a Form D4 for notification of the resignation, the annual returns and the minutes of board meetings, for the plaintiff’s signature.  The defendant handed these documents to the plaintiff at the Choi Fook Seafood Restaurant, and the plaintiff took them away.  He returned some documents, duly signed, to the defendant on 12 September and later the defendant passed them on to the auditor who had them stamped.

39. Then on 23 September 2002, after the plaintiff had returned to Canada, the defendant received some small claim forms from Messrs Wong & Fook, claiming legal costs for the High Court action.  He went to see Mr Lam of Lam and Partners about this; and from him he found out that the plaintiff, and not the Company, would have control over the estate once the letters of administration were granted.  The defendant contacted the plaintiff and accused him of dishonesty; he demanded that the plaintiff advise the Inland Revenue Department that the Company was the true creditor, or else he would tell that Department that the plaintiff had no authority.  The plaintiff replied that in that case, he would not admit the transaction for the exchange of shares.

40. The defendant further said, in answer to a question put by myself, that his own shares in the PRC Company were worth about $1.5 million; and under cross-examination he said that he had got this figure from the auditor’s report.

41. Under cross-examination the defendant said that the plaintiff had told him that the payment of $10,3890.98 represented his half share of the net proceeds of sale, not of the whole assets of the PRC Company but of one vacuum machine.  He that the payment of $13,200 represented a refund by the plaintiff of two months’ salary; the plaintiff had asked for six months, but agreed to take two months less.  The other four months’ salary had been deduced from the balance after selling the company assets.

42. As to the company transfer documents the defendant said that they had all been signed at the same time, and in respect of both companies.  The plaintiff had signed with his non-Chinese scribble on those relating to the PRC Company; he had asked why, and the plaintiff had told him that he usually signed this way.  In fact when the documents were signed for the transfer of the shares in the Company, there had been extra papers, and the plaintiff had suggested using them for the transfer of the PRC Company, although neither party knew what documents were needed for the transfer on the Mainland.  The defendant had thought that the documents could be stamped in Hong Kong for the transfer on the Mainland, but Mr Tsui had told him that this was not so.  In any event the defendant denied having forged these documents or either of them.

43. As to the affidavit, the defendant maintained that he had not seen it; he had seen Mr Lam of Lam and Partners on 9 September 2002, when he had been told that the latter was acting in connection with the application for the grant of letters of administration, and again on 24 September, when he had been told that the application was to be in the plaintiff’s name rather than that of the Company.  He had thereafter instructed his own solicitor, in October.  He thought that his solicitor had passed information about the transfer, and the plaintiff’s resignation as director, to the Estate Duty Office and that was the reason for that Office’s query dated 15 January 2003.

Evaluation

44. I have set out at some length the matters touched on in cross-examination of the plaintiff from which it can be seen that he was not a good witness, having a tendency to inconsistency and self-contradiction.  There is also the matter of his insistence that he can read no word of English; that is of course possible, but it is obviously unlikely that a person who had spent enough time in Canada to obtain residence there would remain completely ignorant of that language.

45. There is also the matter of the affidavit.  How the plaintiff could properly affirm that he was applying for a grant as creditor, when he was not a creditor, and how his solicitor could let him do that, has not been satisfactorily explained.  But as I have indicated, it is unlikely that the Commissioner or the court could accept that the plaintiff had any right to apply for letters of administration as a creditor, on seeing from the schedule that the debt was owed to the Company.  So perhaps there was a mistake, rather than an attempt by the plaintiff to get hold of the asset personally.

46. As to the plaintiff’s contention of forgery of the transfer documents for the PRC Company (pages 84 and 85), even disregarding his own inconsistent evidence on the signatures, there is simply no evidence of forgery.

47. There are at the same time some strange aspects to the defendant’s evidence.  It is difficult for instance to understand how the parties could have thought that the documents at pages 84 and 85 would be valid for the transfer of a Mainland company or that the defendant could have thought that they could be stamped in Hong Kong.

48. I am not, however, required to decide which party’s case is the more probable; it is for the plaintiff to satisfy me on the balance of probabilities that his pleaded case is true.

49. The elements of that case are, first, that the defendant fraudulently misrepresented on 7 September that in order to keep the Company alive, all the fees had to be paid off; and then on 9 September further fraudulently misrepresented that the Government had waived the fees.  The object of this exercise was to enable the defendant to issue a cheque, which could be used as the consideration for the fictitious transfer.  Then it is said that the defendant further fraudulently misrepresented on 9 September that the transfer documents were documents required to re-activate the Company; and the plaintiff, being unable to read English, and in any event trusting the defendant, was deceived thereby.  Finally we have the documents for transfer of the shares in the PRC Company which the plaintiff says are forged; and the object of this, it appears, was to provide support for the defendant’s fiction of a share swap.

50. The difficulty I have with the cheques is that both are dated 9 September.  The plaintiff says that he issued his cheque on 7 September but no reason is given for its being post-dated, nor was there any good reason for it to be post-dated, assuming the plaintiff’s evidence to be true.

51. A greater difficulty arises with the transfer documents themselves.  The plaintiff signed the Form D4 immediately above the legend “Resigning Director” written in Chinese and English.  Quite apart from any question as to whether the plaintiff is really totally illiterate in English, he does not claim to be illiterate in Chinese and he has given no satisfactory explanation as to why he should not have noticed this.  I do not see that being in a hurry is a satisfactory explanation particularly where the plaintiff says that the defendant, having got him to sign two documents, then used them to hide most of the form.  If part of the document was being deliberately hidden as the plaintiff says, one wonders why he did not seek to find out what it said, or at least look closely at the Chinese characters under his signature.

52. As to the transfer documents for the PRC Company, it is true that the defendant’s explanation of these is somewhat suspect but there is simply no evidence of forgery.

53. If the PRC Company still had assets, then of course this lends credence to the defendant’s story of share swap.  I have difficulty in accepting that, as the plaintiff says, all the assets of the PRC Company had been sold for $150,000, rather than, as the defendant says the plaintiff told him, only one machine had been sold.  The agreement for sale does not inspire confidence because it is not chopped by the purchaser, and while I do not know what rules apply on the Mainland it is certainly a matter of experience that agreements tend to be chopped by both parties, and the purported purchaser appears to be a company and not an individual.  Further the plaintiff’s conduct in respect of discovery of that document itself does not inspire confidence.  In any event there is no documentary evidence of payment or indeed of what was the “whole set of plant and machinery together with the supporting and ancillary systems and facilities (detailed in the list)”.  The list referred to is not in evidence.

54. It may be, as counsel for the plaintiff argues that the plaintiff’s case is logical but it still contains elements of the unlikely.  If the defendant did cheat the plaintiff so as to take over his shares and get rid of him as director, he would still, before he got his hands on any money, have had to go through the process of obtaining letters of administration and then the company as administrator, under his direction, would have had to ingather the estate, including a building, pay off other debts apart from that owed to itself, and cover itself against claims by the persons entitled under the father’s will.  In any event it seems a horribly cumbersome and complicated way of getting money by fraud; the fraud is only the beginning.

Finding

55. Overall, having considered all the evidence I cannot be satisfied on the balance of probabilities that the defendant made the fraudulent misrepresentations pleaded or induced the plaintiff by such misrepresentations to sign the documents.

56. The plaintiff’s claims are therefore dismissed, with costs to the defendant to be taxed if not agreed.