CHAN HO ENGINEERING PTE LTD v. WONG WING KWONG AND ANOTHER

DCCJ13115/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 13115 OF 2001

---------------------

-------------------

-------------------

JUDGMENT

-------------------

1. The Plaintiff claims against the 1st Defendant and alternatively the 2nd Defendant for an order of rectification of agreement and the payment of $480,000 under the rectified agreement or alternatively a declaration that the sum shall be payable by the 1st Defendant or alternatively by the 2nd Defendant. Furthermore, the Plaintiff claims a further sum of S$10,471.24 payable by the 2nd Defendant.

2. The 1st Defendant denies he is liable to the Plaintiff and counterclaims for a sum of $95,671.02 against the Plaintiff with costs. While the 2nd Defendant counterclaims for $285,981.60, 60% of the loss sustained by the 2nd Defendant during the financial year 1999 - 2000 and an overpayment by the 2nd Defendant to Plaintiff of S$117,188.76 with costs.

Background

3. The Plaintiff was the 60% shareholder of the 2nd Defendant between 16th September 1996 and 31st August 2000, while the remaining 40% shares was owned by Wing Li (HK) Co. Ltd., a company wholly owned by the 1st Defendant (95%) and his wife (5%).

4. Prior to 16/9/96, the 2nd Defendant's shares were owned by its two directors Mr. Chan Poh Hoi ("Mr. Chan") and the 1st Defendant. Mr Chan is and was the Plaintiff's major shareholder and its managing director.

5. The business relationship between the Plaintiff and the 1st Defendant ("Mr. Wong") began in the 1980's. The Plaintiff was a supplier of engineering machines to Mr. Wong's then employer. After Mr. Wong's employer ceased business, Mr. Wong started business on his own. In or about 1988/89, the Plaintiff supplied engineering machines to Mr. Wong. In 1992, Mr. Chan and Mr. Wong jointly started the business of 'high value added laser and waterjet cutting service' in Hong Kong trading in the name of Wing Li Laser Cutting Service Centre. In September 1994, Wing Li Laser Cutting Service Centre was incorporated into a limited company and the 2nd Defendant was born.

6. On 27th July 1996, Mr. Chan transferred his 60% shares in the 2nd Defendant to the Plaintiff while Mr. Wong transferred his own 40% shares to Wing Li Machinery Co. Ltd. it was subsequently renamed Wing Li (HK) Ltd. Both Mr. Chan and Mr. Wong remained directors in the 2nd Defendant. As before, Mr. Wong was wholly in charge of the operations of the 2nd Defendant in Hong Kong while the Plaintiff would supply the machines, parts and technical backup from Singapore.

Plaintiff's case

7. It is the evidence of Mr. Chan that he had a long standing working relationship with Mr. Wong and he trusted Mr. Wong because of their past dealings. This relationship started in the late 1980's when Mr. Wong was a technical salesman of one of the Plaintiff's customers in Hong Kong. When Mr. Wong's employer left Hong Kong, Mr. Wong set up business on his own under the name of Wing Li Machinery Company and was selling hydraulic press brakes and shears in Hong Kong supplied by the Plaintiff on open credit terms.

8. Mr. Chan alleged that it was Mr. Wong who invited the Plaintiff to form a joint venture with him to start a high value added laser and waterjet cutting service in Hong Kong in 1992. The Plaintiff agreed and invested HK$1.015 million with a corporate guarantee up to HK$2.8 million for the operation of the joint venture business from the Standard Chartered Bank.

9. At a later stage, Mr. Wong repaid $400,000 to the Plaintiff thus constituted his capital investment into the joint venture business.

10. Mr. Chan alleged that Mr. Wong was given a free hand to operate the joint venture business in Hong Kong and was the sole signatory of its bank accounts. The joint venture business was incorporated on 15 September 1994 into the 2nd Defendant. Mr. Chan and Mr. Wong were the shareholders holding 60 shares and 40 shares respectively. They were both directors of the 2nd Defendant at the time. On 16 September 1996 Mr. Chan transferred his shares to the Plaintiff and Mr. Wong to Wing Li Machinery Co. Ltd. a company of which he held 95% interests. Mr. Wong continued to run the 2nd Defendant's business with a free hand and he was paid a salary, while Mr. Chan had never received any salaries or emoluments.

11. It is Mr. Chan's evidence that in early August 2000, he had wanted to sell the Plaintiff's shareholdings in the 2nd Defendant due to the pressures of his other business commitments. Following discussions with Mr. Wong, Mr. Wong agreed to buy the Plaintiff's shareholdings in the 2nd Defendant for $480,000. He claimed that the agreed price was roughly based on the 31 July 2000 balance sheet which gave the net asset worth of the 2nd Defendant as $629,712.59. The assets in the said balance sheet included a Bystronic waterjet model BYJET 3015 S/No. 5693 (the 'Machine') and other machines and plant valued at $25,000. Mr. Chan claimed that the value of the 'Machine' alone was worth $800,000 in the second hand market. Therefore, Mr. Chan considered that the 2nd Defendant was worth $(629,712.59 + 800,000) = $1,429,712.59. According to Mr. Chan, due to their past business relationship and trust, he agreed to sell his shares in the 2nd Defendant for $480,000 i.e. 60% of $800,000. He further agreed to give Mr. Wong time to pay upon his requesting for time should he wished to retain the Machine to pay 60% of the purchase price of the Machine. The agreement reached was : the 'Machine' be sold at an early date, the purchase price would be paid at the completion of the sale, should Mr. Wong wished to keep the 'Machine' for own use he was given 12 to 18 months to pay to the Plaintiff 60% of the price or $480,000 (the 'Oral Agreement').

12. Mr. Chan further alleged that he had intended the sale documents to be handled by a lawyer, but on 28 August 2000, Mr. Wong requested by telephone that he wished to finalise the purchase as soon as possible for he had wanted to sell the shares to a Taiwanese friend. Consequently, Mr. Chan wrote out the agreement in Chinese (the 'Written Agreement') at the request of Mr. Wong though Chinese was not his first or preferred language. He claimed he had been assured by Mr. Wong that he would honour the Oral Agreement. He denied that at any stage, he had regarded himself or Mr. Wong to be the agent for the 2nd Defendant.

13. Mr. Chan claimed that he had expected Mr. Wong to have sold the Machine within a short time. When Mr. Wong failed to do so he found a buyer for the Machine in Singapore in March 2001 who placed a purchase order for the Machine at S$201,250 (US$115,000) to Mr. Wong in writing on 14 March 2001. It is Mr. Chan's evidence that Mr. Wong reneged from his agreement and imposed unreasonable terms of payment of purchase price which resulted in the collapse of the deal. Thereafter, in spite of repeated demands upon expiry of 18 months, neither Mr. Wong nor the 2nd Defendant had paid the Plaintiff the $480,000.

14. The Plaintiff further claimed against the 2nd Defendant for money owed at S$10,471.24 for loans made or trade balances of machinery sold and delivered to the 2nd Defendant.

The Defence Case

15. The 1st Defendant admitted that Mr. Chan and he had a long business relationship. He claimed it was the Plaintiff who had invited him to operate a laser cutting services centre in Hong Kong promising to arrange the financing and purchasing of a Scienchem laser cutting machine from Taiwan. He claimed that the motive of the Plaintiff's agreeing to do so was to enable its technicians to receive training from the Taiwanese manufacturer. Though not having injected any capital initially, he had subsequently invested $400,000 of his own money in the management and the expansion of the market without receiving any salary or benefits from the Wing Li Laser Cutting Service Centre before 1994.

16. Mr. Wong further claimed that it was only in July 1996 that upon the consent of Mr. Chan he was paid a monthly salary. He claimed that the Plaintiff was sent a monthly account by the accountant of the 2nd Defendant, therefore the Plaintiff well knew the operations of the 2nd Defendant.

17. Mr. Wong alleged that because the Plaintiff ceased its guarantee for banking facilities extended to the 2nd Defendant on 30 May 1999, he had to apply for similar facilities from East Asia Finance Co. Ltd. in 2000 to 2001 and 2001 to 2002. Furthermore, Mr. Wong alleged that the 2nd Defendant was in financial difficulties due to market forces in 2000 rendering the 2nd Defendant indebted to banks and finance companies for over $700,000. He claimed, at a meeting on 6 August 2000 with Mr. Chan Kin Bong, son of Mr. Chan Po Hoi, Mr. Chan Kin Bong agreed to find a purchaser for the machine which was the only valuable asset of the 2nd Defendant so that the Plaintiff could pay off its share of 60% of the debt in the 2nd Defendant, while the remaining 40% of the proceeds of sale would be injected back into the 2nd Defendant. At the same time, Mr. Wong would look for an investor as his partner in the 2nd Defendant. In order to facilitate the latter, Mr. Wong requested the Plaintiff to transfer its 60 shares in the 2nd Defendant to him.

18. Mr. Wong claimed that on 28 August 2000, Mr. Chan had called him on the phone and told him the board of directors of the Plaintiff had agreed to transfer its 60 shares to Mr. Wong for HK$1. He claimed it was at the Plaintiff's request that the agreement would be signed on or before 31 August 2000 because the Plaintiff's own financial year ended on 31 August 2000.

19. Mr. Wong insisted that (1) it was to facilitate the Plaintiff's discharging its liability for the debt of the 2nd Defendant that the Plaintiff sold its 60 shares to him for $1 while agreeing that the sale price for the Machine should not be less than $800,000 to protect the 2nd Defendant's interest.

20. (2) The agreement that 60% of the sale proceeds of $480,000 would be passed to the Plaintiff after the sale of the Machine was set at 18 months also intended to please the Plaintiff's shareholders.

21. (3) That it was understood the Plaintiff would not be responsible for the 2nd Defendant's debt after 31 August 2000, but it would still be liable for debts accrued before 31 August 2000.

22. Mr. Wong alleged that the purchase order placed by the Singapore company Applied Cutting Technology Pte Ltd. of 14 March 2001 fell through solely because the Plaintiff refused to be liable and pay $545,186.40, the loss suffered by the 2nd Defendant in 1999-2000.

23. He claimed it was Mr. Chan who had repudiated the written Agreement of 31 August 2000. That Mr. Chan had also refused to accept the re-transfer of the 60 shares for $1 subsequently.

24. Mr. Wong counterclaims against the Plaintiff as the joint guarantor of the 2nd Defendant's loan from East Asia Finance Company Ltd. He claimed the Plaintiff is not entitled to unilaterally discharge the guarantee. Therefore, he claims $95,671.02, representing 60% of the $159,451.70 that he paid for the discharge of the guarantee.

25. The 2nd Defendant counterclaims against the Plaintiff for 60% of $545,186.40 the losses of the 2nd Defendant in 1999-2000 of $285,981.60. Further the sum of S$117,188.76 that the Plaintiff overcharged the 2nd Defendant.

Findings

26. At the hearing, the Defendants raised the issue that the agreement may be an unlawful contract, but Mr. Wong claimed he had only heard this from some source, he was not claiming it was an unlawful contract.

27. The agreement is written in Chinese in the following form :

"	28 Aug. 2000
榮理專業切割有限公司與
陳荷機器私人有限公司協議書
1． 陳荷機器以壹元港幣將60%該公司股權賣給黃榮光股東。附帶條件是榮理以最低價目HK$800,000.00或上浮數目出售公司BYSTRONIC CNC水割機；或作為己用。出售時期，越快越佳。
2． 陳荷將收到HK$480,000.00 (60%)或更多的現款。該款定予12至18個月內支付給陳荷機器，作為了結雙方合資事宜。
3． 從1-9-2000起，榮理專業切割有限公司一切業務，債務與財務與陳荷機器一切無關。雙方同意協議。
(Co. chop)
Signature	Signature
_______________	______________
陳宝開代表陳荷機器 廠有限公司	黃榮光代表榮理專業 切割有限公司”

28. The agreement is in two stages :

(1) The Plaintiff shall transfer to Mr. Wong Wing Kwong its 60% interest in the 2nd Defendant for HK$1 on condition that the 2nd Defendant shall sell the Machine for not less than HK$800,000 as soon as possible; or Mr. Wong may apply it for his own use.

(2) The Plaintiff shall receive $480,000 in cash in 12 to 18 months' time to conclude the partnership of the two parties.

It further stipulated that it was agreed that after 1 September 2000, the business and financial affairs and the debts of the 2nd Defendant shall have nothing to do with the Plaintiff.

29. It was in pursuance of this agreement that the Plaintiff signed the 'sale note' to Mr. Wong to effect the transfer. Mr. Wong also signed the bought note and registered the transfer at the Company Registry. This was done obviously in pursuance of the agreement between Mr. Chan and Mr. Wong. This was not denied by either Mr. Chan or Mr. Wong. When Mr. Wong registered the transfer of the 60% shares in his name, there was, therefore, due performance of the first part of Clause 1 of the Agreement.

30. The second part of Clause 1 set out the condition of the share transfer under the written agreement was the immediately sale of the machine; however, this never took place. The only known offer made was from Applied Cutting Techonology PTE Ltd. of Singapore for S$201,250 (US$115,000) on 14 March 2001 under a purchase order. Mr. Wong refused to accept the offer. Neither was the machine sold to a 3rd party until Mr. Wong took it over and transferred it to his own company for $100,000 in 2002.

31. As to Clause 2 of the Agreement, the payment of $480,000 to the Plaintiff, Mr. Wong never paid the Plaintiff at the expiry of 18 months of the Agreement.

The Agreement

32. The agreement according to the Plaintiff was what Mr. Chan said he had agreed with Mr. Wong over the course of negotiations in August resulting in the agreement reached on the telephone between himself and Mr. Wong. A few days after these telephone calls, Mr. Wong asked Mr. Chan to confirm the agreement in writing immediately.

33. Mr. Chan claimed that he wrongly written down in the Agreement that it was an agreement between the Plaintiff and the 2nd Defendant. In fact, he claimed it was made between the Plaintiff and Mr. Wong himself. He admitted, on hindsight, the written Agreement was poorly drafted and contained mistakes as to the party to the agreement. Nevertheless, the intention was clear and he claimed Mr. Wong and himself had been ad idem on the condition of the transfer of the Plaintiff's shares to Mr. Wong was the immediate sale of the Machine with 60% of the proceeds of the $800,000 or above sale price be paid to the Plaintiff upon its sale.

34. The 1st Defendant Mr. Wong, disagreed with the Plaintiff that the sale of the Machine was his responsibility. He agreed that the transfer of the 60 shares in the 2nd Defendant was for a consideration of HK$1 only, yet on the other hand the Plaintiff should still be liable for the loss incurred in 1999-2000. He claimed that since the Machine was never sold, he would not be liable for the payment to the Plaintiff.

35. It is not disputed that both parties had been discussing the Plaintiff's withdrawing from the 2nd Defendant in August 2000. The Plaintiff claimed that the discussion concluded on the telephone leading to the said agreement in writing a few days later at Mr. Wong's request. The Defendant on the other hand disputed the validity of the said written agreement to be binding on him personally for he claimed he signed it as agent of the 2nd Defendant and on behalf of the 2nd Defendant.

36. I am satisfied that the working relationship between Mr. Chan and Mr. Wong was one of long standing of over 15 years. Their co-operation in business in Hong Kong began in 1988 and this relationship was mainly negotiated between Mr. Chan and Mr. Wong. Indeed the partnership business before the 2nd Defendant's incorporation was between Mr. Chan and Mr. Wong only, the Plaintiff was not involved then. When the 2nd Defendant was incorporated in 1994, Mr. Chan and Mr. Wong remained the only directors and shareholders of the 2nd Defendant. It was only in September 1996 that each of them transferred their own respective shares to their respective companies. Clearly their relationship continued to be an informal one. Mr. Wong and Mr. Chan regarded the 2nd Defendant to be a personal business relationship between the two of them. Though at times, Mr. Chan might have sent one of his sons who happened to be in Hong Kong to meet with Mr. Wong occasionally, this apparently happened in August 2000 according to Mr. Wong.

37. It is clear to me that, on this basis, Mr. Chan had expressed to Mr. Wong in early August 2000 his wish to sell the Plaintiff's shares in the 2nd Defendant and they concluded the agreement between themselves over the telephone.

38. Mr. Chan, at Mr. Wong's request subsequently, recorded their agreement in writing personally. The amateurish way the said written Agreement was drafted is evidence that it was done without legal assistance or much consideration on the legal entities involved. It looks more like an agreement of two partners in a partnership, which was probably how both Mr. Chan and Mr. Wong had regarded their joint enterprise.

39. A careful scrutiny of the written agreement shows that the two had reached an agreement acceptable by both parties the withdrawal by the Plaintiff from the 2nd Defendant. To the Plaintiff, it was a fair arrangement because it valued the 2nd Defendant to be worth over $1.4 m. at the time, because its books showed it had assets worth $629,762.59 and the plant and machinery though depreciated to $25,000 in fact consisted of a few machines and particularly a waterjet machine which could still be sold for over $800,000 in the second hand market. Mr. Chan gave Mr. Wong 12 to 18 months to pay him the $480,000 should he wish to keep the Machine.

40. As to Mr. Wong who would become the sole owner of the 2nd Defendant though he claimed he was looking for a partner, it was also a fair deal. The books show there was a healthy turnover of business in 1998, 1999 and 2000. In spite of a slight downturn probably influenced by the slow down in construction business in 2000, all in all, the 2nd Defendant's business had been healthy on the books.

41. I find Mr. Wong to be an evasive witness, his evidence was untruthful and far from full and frank. He was clearly in total control of the business operations of the 2nd Defendant from the start, I am satisfied he was fully in control with full knowledge of its finances. On one hand, he claimed he was totally ignorant of the accounts which he said he left to his accountants, on the other hand, he showed a keen sense of figures when he referred to the figures in the counterclaim and the loans from the banks owed by the 2nd Defendant.

42. Mr. Wong completely failed to explain the various sums of director's emoluments in the accounting reports of the 2nd Defendant for the relevant years. These were not small sums of money, but amounts of $200,000 to $300,000 odd for each relevant year. I am satisfied that Mr. Chan had never received any director's emoluments during those years. The sole recipient must invariably be Mr. Wong.

43. I find Mr. Chan to be a credible witness. He is a successful Singapore businessman who had wanted to sell his engineering machines to Hong Kong and China. It stands to reason that he should encourage Mr. Wong to operate a cutting service for the construction industry in Hong Kong. This laser cutting service obviously was not his major business operation, his business is and was in sale of machines. It also stands to reason that after a few years he would not be interested to be further involved with the 2nd Defendant's business in Hong Kong. I also accept that the Plaintiff was a company very much controlled by Mr. Chan, though there were other directors in the Plaintiff, they were all related to Mr. Chan.

44. Mr. Wong's evidence of why he did not sell the machine to the Singapore Company was completely incredible. He claimed that he would only agree to sell to Applied Cutting Technology Pte Ltd. if the Plaintiff agreed to pay up its share of the losses in the 2nd Defendant in 1999 - 2000. This claim of loss is not supported by any documents. It is unreasonable to expect and demand the Plaintiff to be solely liable for the 2nd Defendant's loss in 1999 - 2000 of $500,000 odd, if indeed there were losses. Furthermore, Clause 3 of the Written Agreement stated clearly that the Plaintiff shall not be liable for any debts of the 2nd Defendant after 1st September 2000.

45. I accept Mr. Chan's observation that Mr. Wong simply wanted to keep the machine for his own use. That was why he sold the other machines in the 2nd Defendant and transferred the Machine to his own company for the sum of $100,000.

46. In determining whether the parties intended the contract to be binding, the construction of the contract must be considered (see Chitty on Contract para. 2 - 148). After hearing evidence from Mr. Chan and Mr. Wong and considering the documentary evidence, I am satisfied an oral agreement was reached between Mr. Chan and Mr. Wong in August 2000. They agreed that Mr. Wong would purchase the Plaintiff's 60% shareholdings in the 2nd Defendant on condition that the 2nd Defendant would sell off the waterjet Machine for not less than $800,000 immediately. The Plaintiff would then be paid $480,000 or 60% of the sale price if it was over $800,000 upon completion of sale. It was mutually agreed that as the date of the agreement was the end of August 2000, the cutting off date would be 31st August 2000. That was why the shares were transferred on 31st August 2000 to Mr. Wong. Meanwhile, Mr. Chan believed that Mr. Wong would pay the Plaintiff $480,000, if he wished to keep the machine for the 2nd Defendant's use, Mr. Wong was given 12 - 18 months to pay because by then the 2nd Defendant in effect would be wholly owned by Mr. Wong.

47. I am further satisfied that there clearly was a true contractual intention from both parties at the time. The mechanism was the only hurdle. It became complicated when the shareholders of the 2nd Defendant were neither Mr. Chan nor Mr. Wong but their own majority owned companies. However, given that the past business relationship had always been between Mr. Chan and Mr. Wong, it is understandable and acceptable that it should be binding on both as the 2nd Defendant was more of a partnership than an incorporated company in the real sense to both of them.

48. Further, part of the agreement had already been performed when the shares were transferred on 31st August 2000. With the partial performance of this agreement, Mr. Wong has to perform his part of the bargain and honour it by paying the Plaintiff the $480,000 as part of the condition of the Plaintiff's transfer of its shares in the 2nd Defendant. That was the condition of the transfer or, as the Plaintiff submitted, the additional consideration of the transfer. He was given a maximum of 18 months to pay and he had failed to do so. For the aforesaid reason, the agreement is rectified and given the effect the parties intended.

49. I further accept the Plaintiff's accounts produced in support of the claim of S$10,471.24 balance outstanding against the 2nd Defendant for trade balance and machinery sold to and delivered to the 2nd Defendant by the Plaintiff particularized in the schedule attached to the Statement of Claim.

Conclusion

50. I grant against the 1st Defendant judgment in terms of paragraphs 1 and 2 of the prayer of the Re-Amended Statement of Claim, judgment against the 2nd Defendant in terms of paragraph 4 of the prayer of the Re-Amended Statement of Claim with interests at 1/2 judgment rate from the date of writ to date of judgment, and thereafter at judgment rate.

Counterclaim

51. As to the 1st Defendant's counterclaim against the Plaintiff under the guarantee. The guarantee was executed by Mr. Wong and Mr. Chan. The Plaintiff was not a party to the guarantee. It follows that the 1st Defendant's claim against the Plaintiff must fail.

52. As to the 2nd Defendant's counterclaim against the Plaintiff for $285,981.60 representing 60% of the accrued loss of the 2nd Defendant in 1999 - 2000. This claim obviously cannot stand in view of my findings above. The audited accounting report failed to support the so-called losses. There are many items in the 2nd Defendant's audited accounts that Mr. Wong could not explain, such as money paid to him as director's emoluments which he claimed he did not receive, on the other hand, he also claimed these were salaries paid to him which I find to be totally devoid of merits or credibility. Furthermore, Clause 3 of the written agreement stated that from 1st September 2000, the Plaintiff would no longer be liable for the 2nd Defendant's debts if the agreement was that the Plaintiff should be liable for losses incurred in 1999 - 2000, the written agreement would have said so. In any event, there was no evidence of any shareholders' resolution produced resolving that the shareholders shall be liable to contribute in full the company's losses for the year 1999 - 2000, in which case both the Plaintiff and Mr. Wong's own company would both be liable.

53. I further reject the 2nd Defendant's claim for over payment of S$117,188.76. The explanation given by Mr. Chan of the accounts of trade balances between the Plaintiff and the 2nd Defendant was clear. I find the 2nd Defendant has failed to prove otherwise.

54. The 1st Defendant and the 2nd Defendant's counterclaims are dismissed with costs.

56. Costs to the Plaintiff to be taxed if not agreed with certificate for counsel.