K & E REAL ESTATE (CHINA) LTD v. K & E CO LTD

DCCJ 10729/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 10729 OF 2001

_____________________

__________________

(Consolidated by Order of Acting Registrar R. Yu dated the 12th March 2003)

_____________

Judgment

_____________

Introduction

1. These two consolidated actions are for unpaid rent. The background is slightly unusual which provides a 'twist' to these cases which one might not expect to find in a more orthodox landlord and tenant action.

2. With that in mind it is helpful to start by setting out the background to the matter which will make clear why this dispute has come about in the first place.

3. The central figure in these actions is Mr Thomas Chuang who in 1971 was one of the founders of K & E Company Limited ('K & E') the Defendant in both actions. He had trained as a textile engineer in Germany. From about 1976 he started living in China and became involved in the textile industry there by selling textile production machinery and equipment made in Europe, as well as involving himself in large projects which entailed the setting up of entire textile manufacturing plants. He operated K & E on his own account until 1988 when he sold his shares to the Zuellig Group, a Swiss company. Under the terms of the sale he remained as its Managing Director and as such remained in charge of its day to day operations. I need not go into the details of the sale save to observe that he was paid several million dollars for his shares and became employed by K & E at a substantial salary as Managing Director. Given his vast expertise in this field he was largely left to his own devices to continue the company's operation.

4. In 1973 Mr Chuang established K & E Real Estate Ltd ('K & E RE'), the Plaintiff in DCCJ 10728/2001 to hold properties that he purchased. K & E RE is inter alia the owner of a residential property at Shouson Hill which is where Mr Chuang and his wife live. After the sale of K & E to the Zuellig Group, K & E entered into a rental agreement with K & E RE to rent these premises on behalf of Mr Chuang in order to provide a home for him. The effect of it therefore was that K & E paid Mr Chuang's property company a substantial rental so that Mr Chuang might continue to live in his own home. This highly advantageous arrangement, so far as Mr Chuang was concerned, was known and approved of by the Board of K & E and so nothing turns on this transaction. I merely refer to it as part of the background.

5. K & E RE also owned an apartment at Lin Yuan Road, Shanghai ('the Shanghai apartment') which is the subject of the action in DCCJ 10728/2001. This was let to K & E under a tenancy agreement in writing dated the 16th December 1996 at a monthly rent of $10,000 from the 1st January 1997 for a term of five years. Mr Chuang signed the tenancy agreement on behalf of K & E RE and Mr Shelley To, who I will need to say more about presently, signed on behalf of K & E. The claim in respect of this property is for unpaid rent from March 1998 until December 2000 in the sum of $340,000. Here again, Mr Chuang was renting one of his own properties held through K & E RE to his former company K & E as staff accommodation for Mr To a senior executive of K & E.

6. In DCCJ 10729/2001 K & E RE, which also owned other properties in Shanghai, Guanzhou and Beijing let these to K & E as office premises. This dispute only concerns the Beijing office which K & E had been renting since 1993. This action is brought on the basis of a written tenancy agreement dated the 3rd January 1996, again signed by Mr To on behalf of K & E and by Mr Chuang for K & E RE. This property is at Jin Boa Garden, 183, Andingmenhai Street, Beijing ('the Beijing property') which was purportedly let for a 5 year term starting on the 3rd January 1996 and expiring on the 31st December 2000 at a monthly rent of $35,000. In December 1997 Mr Chuang and Mr To agreed that the rent would be reduced to $25,000 a month as from the 1st January 1998. The claim under this tenancy is for unpaid rent of $450,000 from March 1998 to August 1999.

7. There is also a subsidiary claim for unpaid rent of $30,000 in respect of this property on the basis of a letter dated the 14th December 2000 whereby it is alleged that on the expiry of the 1996 tenancy K & E would continued to rent these premises on a month to month basis at $30,000 a month. The claim is for unpaid rent for February 2001 after which K & E ceased to occupy these premises.

8. I have said enough so far to indicate the tenor of the relationship between Mr Chuang and the new owners of K & E. Having purchased the company from him he remained operating it for them. The new owners had obtained a going concern operated by Mr Chuang, who by 1998 had established excellent connections in the mainland over the previous 12 years. Apart from the price of his shares he stayed on at a substantial salary, was paid an attractive rent to live in his own property at Shouson Hill and in K & E had ready made tenants for his properties at Shanghai, Beijing and Guanzhou.

9. Part of the difficulty in this matter is that whilst the Zuellig Group were content to repose considerable trust in Mr Chuang to successfully continue running the operations of K & E, for his part Mr Chuang ran it, as he had before when he was the company's owner as his own fiefdom. As so often happens the distinction between the individual in charge and the company and its shareholders became rather blurred. It is this that has caused these difficulties and this dispute to come about.

10. Before I consider the specific issues that I am require to resolve I should mention the position of Mr Shelley To. He and Mr Chuang had enjoyed a long previous association. He was well versed in the textile industry and an experienced salesman of textile equipment. Mr Chuang employed him on the 1st January 1994 as Deputy Managing Director/General Manager of K & E. There is no doubt that he was not on the Board of Directors of K & E so the description, Deputy Managing Director, is not apt. Notwithstanding this there is no doubt that he was a very senior Executive of K & E and as such he would sign substantial agreements on its behalf. It is I think accepted those agreements would largely relate to sales contracts. It is on the basis of his seniority within K & E that he is said to have signed the two tenancy agreements on the company's behalf and as such his signature would be sufficient to bind it.

11. Having worked for K & E for very nearly 4 years Mr To resigned on the 5th October 1997. Mr Chuang himself terminated his employment with K & E in July 2000 and ceased to be a director of it on the 31st July 2000. The Zuellig Group sold to Taiwan investors and it appears that it is this, together with a decline in K & E business fortunes in China, that have resulted in the termination of Mr Chuang's connection with K & E. These actions are the aftermath of his departure. In the course of 2001 a debit noted was sent to K & E for the outstanding rents. These were investigated by K & E's staff and rejected, hence these two actions.

The Issues

12. In both cases the Defendants, of course, deny that they are liable to pay the rent which is said to be outstanding. In the event that they are held liable they have taken out Third Party proceedings which are before me, to recover any judgment against them from Mr Chuang and Mr To on the basis of a failure by them to act in the best interests of K & E and for acting without authority. Having regard to the nature of the issues raised in the defences and the way that the matter will need to be decided it seems to me that if K & E RE succeed in recovering the outstanding rent they will only do so in a manner which is consistent with Mr Chuang and Mr To having acted within the scope of their authority when entering into the tenancy agreements and in a way consistent with the broad and acceptable interests of K & E so that the Third Party proceedings could not in the circumstances avail K & E against the two individuals. It is very much a case of the defence standing or falling on its merits which will also be determinative of the Third Party proceedings. If the defence stands then the Third Party proceedings fall away, subject to any issues as to costs as between the Defendant and the Third Party - if it fails it will do so on a basis which would absolve Mr Chaung and Mr To of any liability to K & E.

13. Mr Maurellet has correctly summarised the defences in the following way : firstly, the issue of whether the Defendants ever used the premises over the period covered by the claims, secondly, whether Mr To had authority to bind K & E to these agreements, which of course would have been known to Mr Chuang as Managing Director of K & E. Thirdly, that Mr Chuang had not declared his interest in the tenancy agreements, (he being the ultimate owner of these properties through his controlling shareholding in K & E RE), with the result that the agreements became voidable and have now been avoided by K & E. And, fourthly, that Mr Chuang on K & E RE's behalf had represented to the Defendants that no rent would be charged for March 1998 onwards so that it is now estopped from claming rent since that date.

14. The factual basis for each of these pleas will need to be examined. I propose to resolve this matter by taking each of these issues in turn, consider the facts that relate to it and determine the matter on the legal basis that is said to support it by Mr Maurellet.

Did the Defendants use the properties during the period covered by the claims?

15. This is essentially a question of fact. Mr Maurellet accepts, as he must, that if I find that K & E were using the Shanghai property from March 1998 as ad hoc accommodation and for the purposes of entertaining clients, this being after Mr To had resigned from K & E's employment, then they must be liable for the rent irrespective of the other essentially 'legal' defences that he has raised. Identical considerations apply to the Beijing property which was used as an office.

The Shanghai premises

16. The essential facts appear to be these. Prior to Mr To being sent to live at Shanghai there were no staff quarters. Any corporate entertaining was presumably done at hotels and restaurants. The flat first came into the picture as Mr To's company quarters and no issue is taken that it was used as such until his departure in March 1998. Mr Maurellet points to a number of features which detract from the property being used by K & E after that. In his Further and Better Particulars Mr To's case is put on the basis that he resided there until 2001. [Bundle A80] although, this is plainly wrong - it is no more than that because he has always said that he left the flat in March 1998. If it is put forward and an inconsistency that goes to credit it is of limited value because it is plainly wrong and I am satisfied that in fact this has never been Mr To's case. Its no more than a mistake in pleading which should never have been made. The more substantial point is that relatively late in the day Mr Chuang suggested that he would use the flat when in Shanghai on the occasions that he had to go there on business trips, as well as the locally employed staff. This by way of reinforcing the point that K & E continued to use the premises. Reliance is also placed on the fact that following Mr To's departure in March 1998 the payments for this property stopped. Mr Chuang's explanation for this is that he had simply forgotten to ask for the rent after Mr To left. Nevertheless, the point is that during Mr To's tenure a payment mechanism had been established by standing order but payments under this stopped. Mr Maurellet submits that this is all perfectly consistent with the fact that as the flat ceased to be used for K & E's purposes so the payments were cancelled. Mr Chuang would have found it impossible to justify a continuing charge for rent of empty premises especially as at that stage the tenancy agreement itself had yet to be disclosed to K & E. What this comes to, as I follow the argument, is that now that there has been a cooling of relations between Mr Chuang and the new Taiwanese investors of K & E Mr Chuang has sought to resurrect this claim ex post facto when at the time in 1998, there was no question in his mind that rent would be charged for premises which K & E had no use for.

17. Mr Lam, on behalf of K & E RE, submits that on the contrary the evidence, which after May 1998 only comes from Mr Chuang, is perfectly credible. Thereafter, the keys were retained by K & E's Shanghai office manager. K & E also used the flat to store documents which they did not wish to keep at their offices. This apart from its use to accommodate Mr Chuang and other staff as and when necessary instead of staying at an hotel. Mr Lam also refers to the evidence of Mr Chuang as to why he had not issued debit notes for rent from March 1998. The explanation was that Mr C.Y. Chan, who was in charge of such matters, also left K & E in March 1998 and this issue then went into abeyance.

18. This question of continued occupation really falls to be decided on whether Mr Chuang has satisfied me that the property was occupied in the way that he has described. Whilst there undoubtedly are aspects of the evidence that tend to point the other way, as Mr Maurellet has demonstrated, Mr Chuang has satisfied me that it is more probable than not that the flat remained at K & E's disposal and was used on its behalf in the way that Mr Chuang has told me. In coming to this conclusion I have also had regard to the fact that Mr Chuang is an entirely partizan witness in this matter and that his evidence as a whole needs to be approached with circumspection. Having treated it in this way I accept what he has said and I can well see the sense in the continued use of the flat by K & E. The rent was after all reasonable, the property was of high quality and well located and it would have been very useful for K & E to have it available in the way that Mr Chuang has described.

19. This being so Mr Maurellet accepts that the case falls to be decided in K & E RE's favour in respect of these premises based on the mere fact of occupation although notwithstanding this finding I propose to go on and decide what the result would be having regard to the various legal defences. I say that because Mr Lam says that even without occupation his clients are bound to succeed on the basis of the tenancy agreement which ran for 5 years to December 2000. These defences are common to both properties and so I will leave over consideration of them until after I have made my findings of fact on whether the Beijing property also continued to be occupied after March 1998 together with the additional feature of whether that occupation also carried the obligation to pay rent.

The Beijing property

20. The factual issue here depends on whether or not I accept that this office ceased to operate from February 1998. The starting point is a Circular [Bundle C 29] to K & E's clients that the Beijing office would be temporarily shutting until further notice. All communications were to be directed to Hong Kong. There were of course no payments of rent from after the issue of the Circular. Mr Chuang's explanation for this is that because business had fallen off, Beijing was the worst performing office, rental payments were suspended in order to give the company some breathing space. Mr Lam says that this attitude of suspending rent payments in consistent with what had occurred earlier when rent was voluntarily reduced by Mr Chuang, with Mr To's agreement, from $35,000 a month down to $25,000 a month in order to assist with the difficulties caused by declining business. I have been shown photographs which show the continued use of the office at Beijing at least by means of keeping furniture and documents there right up to the end. The contrary position is put by Mr Zhang Chung Sang [B32-34] who says that he was instructed to work from home. Miss Daisy Ho who gave oral evidence, but who never went to the Beijing office, says that she presumes that the office shut following the Circular after which no rent was charged. There is also evidence from Yu Hing [B35-37] about K & E moving its offices in December 2000 which Mr Lam relies on, but this evidence is really put in to show that the claim for rent in February 2001 is not a valid one because K & E had moved out no later than January 2001. So this witness can't really assist on whether the office had actually closed and never re-opened as from March 1998. I can't rely on this witness' evidence one way or the other on the main point. Again, I am really left with the primary evidence of the Circular and Mr Chuang's explanation for it as well as his explanation as to why rent was suspended, although the office continued to operate from March 1998. His is the only live evidence which has been given on oath and tested by cross-examination. I am disposed to accept what he has had to say, as I am his explanation of why the rent had not been paid. These payments were not waived and always remained liable to be asked for which they were when the demands were sent in 2001.

21. As to the separate claim for rent in February 2001 I am not convinced that by the end of January 2001 K & E had not put an end to its occupation of the Beijing property. It had by then obtained other premises which it had substantially moved into. The claim for rent in February 2001 is in my judgment far too tenuous and must therefore be dismissed. This is a discrete issue which falls to be decided in the Defendant's favour.

22. Having found as a fact that both properties remained effective and continued to be occupied in the way that I have, this must therefore be determinative of both actions in favour of the Plaintiff companies on the basis of a liability on their use and occupation of the premises at rentals that had previously been paid. As I have already indicated I will now turn to the essentially legal defences raised against the validity of the written tenancy agreements which if valid would also, of course, fix K & E with liability for these unpaid rents.

Mr To's authority

23. This and the next matter which I need to consider which concerns 'non-disclosure' has been caused by Mr Chuang's failure to specifically raise the question of these leases at the time that they were signed and then only bringing them to K & E's attention well after the event. This has brought suspicion on himself as being underhand, to which those representing K & E have perfectly properly now sought to attach legal labels to what was, or was not done, in order to avoid the consequences of the agreements. It is also perfectly understandable why a commercial organization such as K & E, particularly, when under new ownership should be most reluctant to have to pay out on stale liabilities for rent going back a number of years. This is all compounded by the fact that Mr Chuang used Mr To (an old associate) to sign on behalf of K & E. The implication being that he did so in order to avoid any unhelpful rebuff from the Board who may not have wished to sign up to a 5 year commitment.

24. Mr Maurellet accepts that whilst Mr To may have been very senior in the organisation he was being asked to "play out of position" by Mr Chuang who asked him to sign for property transactions on behalf of K & E. This should have been referred to Hong Kong where Mr C.Y. Chan, who was in charge of Administration and Finance, would have been the appropriate person or even more appropriately to one of the senior directors. Mr Maurellet's point is that these leases did not come within Mr To's provenance, Mr Chaung knew that and his signature could not therefore bind K & E. He was in charge of sales and not in administration. Mr Lam counters this by saying that given his rank, particularly in the field, as it was, in China these leases were well within the scope of his authority. Reference is made to Bowstead 17th Edition paragraph 3-024. Somebody of Mr To's rank would carry the authority to sign such agreements. He was in effect one rung below the Board and amply authorised to do this.

25. In my judgment that is the correct analysis. I am satisfied that he had the authority to deal with a wide range of matters of such importance and it in artificial to reduce this to a 'demarcation dispute' in what was a relatively small organisation. Senior men such as Mr To must have had reposed in them a wide range of authority. This defence therefore must fail.

Disclosure of interest

26. Mr Chuang's position was undoubtedly a delicate one. He owned the properties through K & E RE and was a Director of K & E. The overview of this is important. K & E's Board was well aware of Mr Chuang's relationship to K & E RE. They knew that he was in effect their landlord. He had let offices to them at Shanghai, Guanzhou and Beijing as well as the home at Shouson Hill.

27. Article 91(a) of K & E Articles of Association is as follows :

"...nor shall any such contract or any contract or arrangement entered into by or on behalf of the Company with any company or partnership of or in which any director shall be a member or otherwise interested be capable of being on that account of being avoided, nor shall any Director so contracting or being such a member or so interested be liable to account to the Company for any profit realised by any such contract or arrangement..." provided the director shall disclose the nature of his interest in accordance with s.162 CO."

S.162(1) and (2) of the companies Ordinance is as follows :

"(1) Any director of a company who is in any way, indirectly or indirectly, interested in a contract or proposed contract with the company shall, if his interest in such contract or proposed contract is material, declare the nature of his interest at the earliest meeting of the directors at which it is practicable for him so to do notwithstanding that the question of entering into the contract is not taken into consideration at that meeting.

(2) Where a director gives to the directors of a company a general notice stating that, by reason of facts specified in the notice, he is to be regarded as interested in contracts of any description which may subsequently be made by the company, that notice shall be deemed for the purposes of this section to be a sufficient declaration of his interest, so far as attributable to those facts, in relation to any contract of that description which may subsequently be made by the company; but no such general notice shall have effect in relation to any contract unless it is given before the date on which the question of entering into the contract is first taken into consideration on behalf of the company."

When one considers these two provisions and the reality of the situation I am abundantly satisfied that the Board was clearly 'in the know' about Mr Chuang and these properties. He was K & E's landlord, K & E was comfortable with that and the terms of the lease itself, notwithstanding its 5 year length, did no more than reflect K & E's actual occupation of the premises concerned at rents which the Board were content to pay. This defence must therefore fail on the basis of substantial compliance with the sub-sections.

Estoppel

28. It is said that there had been an implied representation that no rent would be charged after March 1998 with the consequence that K & E acted to its detriment in accepting that representation so that K & E RE cannot now go back on its promise. This is all depends on a finding of fact that such a representation had been made. I can discover no such representation which can be spelt out from the evidence. As to Beijing the position was clear that this was a temporary suspension pending better times and as to Shanghai there is simply no representation whatsoever to support any sort of estoppel. This plea must fail on the facts.

Conclusion

29. In these circumstances I find that both leases were perfectly valid and binding so that the Defendants are now also liable under them for the unpaid rent which they must now account for. There must be judgment for the amounts of rent claimed in both actions, save of course for the rent in February 2001 for Beijing which I have already dismissed.

The Third Party proceedings

30. These must fail. They are predicated on the basis of breaches of duty by Mr Chuang and Mr To. Explicit in my dismissal of the pleaded defences is the finding that there has been no such breach by either of them with the consequence that these proceedings must stand dismissed.

Interest

31. The judgment must carry interest at half the judgment rate from the date of the writs until today and thereafter at the judgment rate until payment.

Costs

32. I make an order nisi in favour of the Plaintiffs in the actions and in favour of Mr Chuang and Mr To in the Third Party proceedings together with certificate for counsel.