FAN MAN KONG STEPHEN v. CHAN CHUN SANG

HCA2405/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2405 OF 2001

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J U D G M E N T

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1. The plaintiff claims against the defendant the sum of $667,602.11, being the total amount of five dishonoured post-dated cheques drawn by the defendant in favour of the plaintiff less part payment of $18,908.44 admitted by the plaintiff to have been paid.

2. It is not disputed by the defendant that the five post-dated cheques were drawn by him in favour of the plaintiff and they had been dishonoured upon presentation. Instead the defence raised can shortly be summarized as follows :

(a)	delivery of the five cheques were not intended to transfer the property in the cheques to the plaintiff;
(b)	there was no consideration supporting the five cheques;
(c)	the condition upon which the five cheques would become payable has not arisen;
(d)	the defendant did not guarantee the debt of Vertical Ascent;
(e)	alternatively, the defendant was discharged from the guarantee by reason of the plaintiff accepting a different mode of repayment; and
(f)	the defendant's liability on the five cheques had been discharged by subsequent agreement.

The plaintiff's case

3. The plaintiff's case is that the plaintiff, the defendant and another person called Jim Hoi Ming had set up, at the end of July 1999, a limited company by the name of Vertical Ascent to deal in radio control helicopters, all three of them being enthusiasts in that hobby.

4. The initial intention was for each of the three of them to contribute equally each a sum of $500,000 in the venture. However, due to the fact that Jim Hoi Ming was not in a position to make that contribution, it was agreed between them that the plaintiff and the defendant would each put up $750,000 and that Jim's shareholding in Vertical Ascent would be held by him half of it on trust for the plaintiff and the other half on trust for the defendant.

5. In effect the plaintiff had put up totally a sum of $823,813.85 in setting up Vertical Ascent.

6. After just one month from the commencement of business trading under the name of Bestkopter, a dispute arose between the plaintiff on the one hand and Jim and the defendant on the other hand when, on a Sunday towards the end of August 1999, the plaintiff discovered that the shop which was run and managed by the defendant and Jim was not opened for business but that the two of them were at an airfield in Sai Kung flying model helicopters.

7. Resulting from that dispute, the plaintiff decided to withdraw from the business and demanded immediate repayment of the money (the sum of $823,813.85) which he had injected into the business as being money loaned to Vertical Ascent.

8. As a result of further negotiation between the plaintiff and the defendant, it was agreed between them that Vertical Ascent would repay the plaintiff's loan by six equal monthly installment of $137,602.11 commencing from the end of September 1999 to the end of February 2000. In that respect six post-dated cheques from the company were to be issued to the plaintiff. It was also a condition agreed between them that the defendant would guarantee the repayment of the loan by Vertical Ascent and deliver six personal cheques of the defendant to the plaintiff with the same dates and in the same amounts as the six company cheques of Vertical Ascent.

9. This agreement was then put into writing by the plaintiff and was signed by the plaintiff, his wife, the defendant and Jim.

10. However, when the agreement was implemented, the defendant only delivered six personal cheques of the defendant to the plaintiff but did not give any company cheques. The plaintiff did not insist on receiving the six company cheques.

11. When the first of the six cheques from the defendant was presented for payment by the plaintiff after it became due at the end of September 1999, it was dishonoured.

12. Thereafter, it was agreed between the plaintiff and the defendant that the plaintiff would offset the amount owed by Vertical Ascent to him by obtaining from the business merchandiser, stocks and proceeds of sales.

13. Between 6 October 1999 to 20 January 2000, the plaintiff had obtained sales proceeds and/or goods from the business of Vertical Ascent to the tune of $161,212.24 and had kept the defendant informed of such by e-mail as and when it happened. Moreover, because that sum had exceeded the amount of the September cheque which had been dishonoured upon presentation, the September cheque was returned to the defendant some time in October after the amount of the September cheque had been satisfied in this way.

14. The October cheque was presented on 2 November 1999 and was dishonoured. The reason given for the dishonour was "Refer to drawer".

15. The remaining four cheques were not presented until April 2000 and were all presented at the same time. They were all dishonoured. By then the defendant's bank account upon which these cheques were drawn had been closed and that was given as the reason for the dishonour of the last four cheques.

The defendant's case

16. It is the defendant's case that even before Bestkopter opened for business, there had been constant disputes between the plaintiff on the one hand and the defendant and Jim on the other hand over the setting up of Vertical Ascent as the plaintiff was a short-tempered person and always insisted on things going his way.

17. Matters came to a head because on a Sunday towards the end of August 1999, the plaintiff learnt that the shop Bestkopter which was supposed to be manned by the defendant and Jim was not opened for business but that both the defendant and Jim was at an airfield in Sai Kung playing remote control model helicopters. When the plaintiff arrived at the airfield to find the two of them there, the plaintiff questioned the defendant as to why the shop was not opened on a Sunday. The defendant tried to explain that on a Sunday it was futile to open the shop as all helicopters enthusiasts would be flying helicopters and it would be better for the business that they are out in the airfield making contacts with the people flying helicopters there rather than sitting in the shop. The plaintiff did not accept his explanation and a heated quarrel ensued between them.

18. It is the defendant's case that as a result of that dispute, while still at the airfield, the plaintiff suggested that he (the plaintiff) should withdraw from the business of Vertical Ascent and that the company should repay him all the capital which he had injected into the business. The defendant had no alternative but to agree to that suggestion. At that time, according to the defendant, there was no mention by the plaintiff that the defendant should guarantee the debt which Vertical Ascent was to repay to the plaintiff. Initially the plaintiff had wanted immediate repayment of that debt by the company, but when the defendant indicated to the plaintiff that the company was not financially able to repay the plaintiff at one go, it was agreed between them that the company will repay such debt over a six-month period by six post-dated cheques of the company from the end of September 1999 to the end of February 2000.

19. Several days later, the plaintiff drafted a written agreement to be signed by the plaintiff, the plaintiff's wife, the defendant and Jim. The books and accounts of the company had shown that the plaintiff had injected the sum of $823,813.85 into the business of the company. In the written agreement, this sum of money was designated as an "interest free directors loan" to be repaid by Vertical Ascent to the plaintiff by six equal monthly payments from the end of September 1999 to the end of February 2000.

20. It is the defendant's case that it was only when he was shown the draft agreement by the plaintiff that he saw in clause 2 thereof that it provided for the defendant to issue another six personal cheques of the defendant for the same amounts as the company cheques "as unconditional collateral". He, the defendant, did not understand the words "unconditional collateral" and so he asked the plaintiff what was the six personal cheques for. In reply he was told by the plaintiff to just issue the six personal cheques and that those six personal cheques would not be banked by the plaintiff. He accepted what the plaintiff said and without any further question, he also made out six personal cheques of his and handed them over to the plaintiff. It is the defendant's case that he gave six post-dated cheques of Vertical Ascent as well as six personal cheques of his (also post-dated) in similar amounts to the plaintiff at the same time when the written agreement was signed by him.

21. The first proviso under clause 8 of the agreement also provided for the plaintiff's wife to unconditionally transfer all her shareholdings in Vertical Ascent to a person designated by the defendant upon full repayment of the loan.

22. In his witness statement which he adopted as his evidence in chief, in particular paragraph 18 thereof, the defendant stated that the first of the company cheque which was post-dated to the end of September 1999 was presented by the plaintiff and dishonoured. However, under cross examination, he said that did not have actual knowledge of that but that he thought the plaintiff may have presented the company cheque dated 30 September and which was dishonoured. He further accepted that if the company cheque had been presented and dishonoured, he should have been able to see it from the bank statement issued to Vertical Ascent since he was still managing the affairs of the company until February 2000.

23. After the dishonour of the first of the post-dated cheques issued by the company, the defendant says that the plaintiff then proposed to take merchandise, stock and the proceeds from sales of the business of Bestkopter to set off the debt owed to him by the company. The defendant agreed to this proposal by the plaintiff. By so agreeing the defendant says that it was their understanding that the remaining five cheques of the company would not be presented for payment by the plaintiff but that this new arrangement for repayment by the company would be used.

24. As a result of such arrangement, the plaintiff had obtained totally the net amount of $161,212.24 by way of merchandise, stocks and proceeds of sales from the business of Bestkopter and/or Vertical Ascent between 6 October 1999 and 20 January 2000.

25. The defendant further says that the plaintiff refused to return to him the personal cheques of the defendant given to the plaintiff although they had entered into such new arrangement for the company to repay the plaintiff. Instead the plaintiff informed him by an e-mail that he (the plaintiff) would deposit the September and October cheques of the defendant and "let them bounce just in case". The defendant further says that at no time did the plaintiff ask the defendant to arrange for funds to meet the personal cheques of the defendant.

26. On 29 March 2000 there was another heated argument between the plaintiff and the defendant. On the morning of the following day, when the defendant arrived at the shop, the plaintiff demanded to have the keys to the shop from the defendant and told the defendant that he would take over control of the business and the running of the shop from the defendant. Since the defendant could not see any chance of reconciliation between them, he had no alternative but to withdraw his interests in the company and to hand over the shop to the plaintiff.

27. The defendant thereupon handed over the keys of the shop to the plaintiff, signed all the necessary documents to change the authorized signatories of the company's bank accounts from their joint names to that of the plaintiff's sole name and effectively withdrew his interests in Vertical Ascent and calling off the original plan of the plaintiff selling the plaintiff's shares in the company. The defendant also asked the plaintiff to return to him his personal cheques but the plaintiff refused to do so.

28. After that the defendant left the shop and the business of Vertical Ascent and Bestkopter and left the plaintiff to run it.

29. Until the present proceedings was commenced, the plaintiff has never requested or demanded from the defendant the repayment of the sum of $686,511.55 or, for that matter the amount now claimed by the plaintiff.

Assessment of the evidence

30. All the oral evidence in this case came from the plaintiff and his witness Jim Hoi Ming on the one hand and from the defendant on the other hand.

31. There was a preponderance of disputed facts between the parties much of which was not directly pertinent to the issues to be decided in this matter but only went to credibility. I shall therefore confine myself in this judgment to dealing with only those facts which are relevant to the issue in this case.

32. The plaintiff is, on his own admission, a person with a short fuse. He has been in business for something like twenty years. There is little doubt that he is shrewd and astute in his business dealings, but at the same time he is impulsive as a person and at times careless. Another shortcoming of the plaintiff is that he would not bother himself with trifling matters even if it concerned his business, and because of that and his carelessness, he becomes confused at times. It is this which have led to some parts of his evidence (which are not directly relevant to the issue in dispute) being shown to be wrong or inaccurate under cross-examination.

33. This can readily be seen from the written agreement drafted by the plaintiff and ultimately signed by him, his wife, the defendant and Jim and which was dated 1 September 1999. This agreement was drafted by the plaintiff on the footing that his shares in Vertical Ascent was held in the name of his wife when in fact his shares were held by Castany, a BVI company, on his behalf. This could easily have been checked by him when he drafted the agreement, but apparently that was not done by the plaintiff.

34. The plaintiff was also adamant in his evidence that he was a director of Vertical Ascent when the formal documents lodged with the Companies Registry show that it was his wife, and not him, who was a director of Vertical Ascent.

35. Having said that of the plaintiff, I have no doubt that the plaintiff was doing his best to tell the court the truth in his dealings with the defendant over these dishonoured cheques. Each time the plaintiff was shown to be wrong in cross-examination, it related to a matter either of marginal or of little importance and significance and was not directly related to the issue which I have to decide in this matter. At no time did it occur to me, even remotely, that the plaintiff was lying or deliberately telling an untruth.

36. As for Jim Hoi Ming, he lacks the intelligence which both the plaintiff and the defendant possess, possibly because he has not attained the same level of education as they have.

37. I accept that the plaintiff did not have a cordial or good relationship with Jim even when they were together in this joint business venture in 1999 and 2000. That being the case, I do not accept the suggestion from the defence that Jim is now deliberately lying in his testimony for the plaintiff.

38. Again, I find that Jim is an honest witness doing his best to tell the truth to the court but he suffers from a lack of memory. That is perhaps understandable because many of the things he is now being asked in evidence but which he has difficulty remembering relates to rather obscure and insignificant matters which happened back in the latter part of 1999 and for which he has no good reason to keep in his memory when it happened.

39. In the case of the defendant, I did not find him to be an honest or truthful witness in a number of important and directly relevant matters.

40. I cannot accept his evidence that there was no agreement between him and the plaintiff that he should personally guarantee the debt to be repaid by Vertical Ascent to the plaintiff during their dispute at the Sai Kung airfield. If that was the case, and he only saw that in the written agreement drafted by the plaintiff, one would have expected the defendant to refuse to sign such an agreement.

41. I also do not accept his evidence that he did not know what the words "unconditional collateral" meant. Of his own admission the defendant holds the degree of Bachelor of Science and Accounting from the University of Southern California. The standard and level of his proficiency in English can be seen from the e-mails between him and the plaintiff. It is inconceivable that with his educational background, the defendant did not understand the meaning of those words.

42. Furthermore, his evidence that upon his asking the plaintiff why it was necessary to issue six personal cheques of his to the plaintiff, and upon the plaintiff telling him to just do so, and they would not be presented for payment, the defendant complied with those instructions without more. That evidence of his does not carry with it a ring of truth about it.

43. On the other hand, the e-mails between the plaintiff and the defendant produced in evidence clearly showed that the plaintiff informed the defendant well in advance that he was going to present the defendant's personal cheques for September and October to the bank for payment. Even so, that did not draw any reply from the defendant to say that the plaintiff had promised not to bank in the personal cheques of the defendant. There were also other e-mails from the plaintiff to the defendant reminding him that the end of October is approaching and telling the defendant not to "disappoint me again".

44. The defendant admitted that the personal cheque of the defendant dated the 30 September 1999 which had been dishonoured upon presentation by the plaintiff to the bank was returned to the defendant by the plaintiff after the plaintiff had obtained merchandise, stock and proceeds of sale from the business of Bestkopter to fully set off the amount of that cheque. The other five cheques were not returned to the defendant. This was yet another piece of evidence which clearly showed that the plaintiff had always intended that the defendant personally guaranteed the repayment by Vertical Ascent and that was the purpose of the personal cheques issued by the defendant. It therefore contradicts the evidence of the defendant that the plaintiff told him that his personal cheques would not be presented to the bank.

45. Neither was there the slightest indication in any of the e-mails passing between the plaintiff and the defendant that the defendant had been chasing after the plaintiff for the return of his five personal cheques after the plaintiff started to off-set the moneys owed to him by Vertical Ascent by obtaining stocks, merchandise and proceeds of sale from the business.

46. I also do not accept the evidence by the defendant that he had given six company cheques of Vertical Ascent to the plaintiff together with his six personal cheques at the time when the written agreement was signed.

47. I accept the evidence of both the plaintiff and Jim that the defendant had only written out six personal cheques of his to give to the plaintiff when the written agreement dated 1 September 1999 was entered into.

48. The defendant admitted that when his own personal cheque (for September) was returned to him after the plaintiff had fully set off the amount of that cheque by taking the merchandise, stocks and proceeds from the business, the company's cheque for September was not returned to him by the plaintiff. It would indeed be very odd of the plaintiff to return the personal cheque to the defendant but not the company cheque after he had obtained full satisfaction of same from the merchandise, stocks and proceeds of the business.

49. Moreover, in all the e-mails passing between them, there is only mention of the defendant's personal cheques, no mention whatsoever of the company cheques which the defendant says was also given to the plaintiff.

50. Indeed, in paragraphs 17 and 18 of the defendant's witness statement which he adopted as his evidence in chief, his evidence was that the company's cheque for September was dishonoured when it was presented for payment by the plaintiff. However under cross-examination, when confronted with those two paragraphs of his statement, the defendant at first tried to evade the matter by saying that paragraph 17 referred to his personal cheque when it clearly did not. Ultimately he admitted that he did not actually know that the company cheque for September was dishonoured upon presentation notwithstanding that it was a matter which could easily have been ascertained by him by simply looking at the bank statement relating to the company bank account.

51. I conclude from the evidence that what was stated by the defendant in paragraphs 17 and 18 of his statement was stated by him with a view to prop up his evidence that he had issued to the plaintiff six post-dated company cheques when in fact he had not and that the defendant well knew that what was stated in those two paragraphs were quite untrue.

Finding of fact

52. For the reasons given above, I find that the plaintiff had initially demanded immediate repayment by the company of the loaned amount by the plaintiff to it. This demand for immediate payment was made orally by the plaintiff to the defendant during their argument at the Sai Kung airfield.

53. As a result of further discussion between them, the plaintiff agreed to the loan being repaid by the company by six equal monthly instalments from the end of September 1999 to the end of February 2000 on the condition that the defendant would personally guarantee the repayment of such loan by the company.

54. As a result, the defendant knew and agreed to be a guarantor of the company in its repayment to the plaintiff for the amount of the loan owed by the company to the plaintiff. The six personal and post-dated cheques of the defendant was issued and given to the plaintiff for this purpose.

55. I further find that pursuant to the written agreement signed by the plaintiff, his wife, the defendant and Jim, the defendant had only issued and given to the plaintiff six personal post-dated cheques of the defendant but had never issued or given to the plaintiff any corresponding cheques of Vertical Assent notwithstanding such provision in the written agreement.

56. I further find that after the September cheque of the defendant was dishonoured, it was with the knowledge, consent and agreement of the defendant that the plaintiff decided to help himself to the merchandise, stock and proceeds of sale of the company to set off what was owed to him by the company. In doing so he had kept the defendant informed of what he had taken from the company.

57. I further find that the plaintiff had never released the defendant from his obligation as a guarantor upon the remaining five post-dated cheques given to the plaintiff. The only release by the plaintiff to the defendant was in relation to the September cheque of the defendant which was returned to the defendant after it had been dishonoured.

Decision

58. As a starting point, I accept the submission by counsel for the plaintiff that the evidence in this case, namely, the documents filed at the Companies Registry in relation to Vertical Ascent, shows that the issued and paid up capital of Vertical Ascent is only $300 made up of the 300 issued shares of nominal value of $1 each. As such, whatever other money injected into the business of Vertical Ascent and/or Bestkopter by the plaintiff can only be by way of a loan to the company itself.

59. I further accept the plaintiff's submission that if no specified time is stipulated for the repayment of a debt, it is repayable on demand. In the present case, there is no evidence before me that the loan made to the company by the plaintiff was other than repayable on demand.

60. Based on the above finding of fact, I reject the defence that the post-dated cheques of the defendant sued upon by the plaintiff was not supported by any consideration. The consideration for those cheques must be the forbearance by the plaintiff to sue or demand from Vertical Ascent the immediate repayment of the loan.

61. From the facts as found by me, I further reject the defence that the property in the cheques sued upon was never intended to pass to the plaintiff having rejected the defendant's evidence that the plaintiff told him that the plaintiff would not present those cheques for payment. Moreover those cheques of the defendant were given by him to guarantee the repayment by Vertical Ascent.

62. As for the defence that the defendant has been released from his guarantee due to the alternative arrangements entered into between the plaintiff and Vertical Ascent for repayment of the loan, I also reject that defence. In this respect I accept the submission of counsel for the plaintiff that the self help embarked upon by the plaintiff to set off what was owed to him by the company by taking its merchandise, stock and proceeds of sale was an arrangement which was known and consented to by the defendant. Moreover, in consenting to such arrangement, the defendant well knew that the plaintiff was not releasing the company from its obligation to repay the plaintiff the amount of the loan to it. It was merely a different mode of payment than was originally contemplated, probably because it was well known to both plaintiff and defendant that Vertical Ascent did not have the necessary funds in its bank account to make the repayment to the plaintiff. Ultimately, the company could only repay to the plaintiff the amount of $161,212.24 in the form of merchandise, stock and proceeds of sales obtained by the plaintiff from the company in partial set-off for the debt owed by the company to the plaintiff.

63. None of the defences raised by the defendant succeeds against the claim of the plaintiff.

64. Accordingly there will be judgment for the plaintiff for the sum of $667,602.11 with interest thereon at the rate of 8% p.a. (being 1% over the best lending rate) for the period from April 2000 till judgment and thereafter at judgment rate.

Costs

65. There will be a cost order nisi that the defendant do pay the plaintiff's cost of this action, to be taxed on the High Court scale if not agreed.