SAN PAK ENGINEERING COMPANY LTD v. CHAN YIK FONG AND ANOTHER

HCA 201/2020

[2024] HKCFI 3250

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 201 OF 2020

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J U D G M E N T

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A.  The Parties

1.  This case may serve as a stark cautionary tale of a company lacking any corporate governance.

2.  Before me is the trial of (1) the action brought by the Plaintiff (“P”) against the two Defendants (collectively “Ds”), (2) the Defendants’ counterclaim against P and (3) the Defendants’ claim against Mr Chan Wing Kin, the Third Party (“3^rd Party”). Ds used to be P’s directors and shareholders. The 3^rd Party is one of the two shareholders (the other being Mrs Chan, his mother) and sole director of P.

3.  P is a Hong Kong company engaged in the business of engineering, construction and consultation work. It was incorporated on 31 January 2013. The original subscribers were Madam Chan Wu Mui (陳烏妹) (“Mrs Chan”) and Ms Chan Pui Ki (陳珮娸). Chan Wu Mui subscribed to 7,500 shares, and Chan Pui Ki subscribed to 2,500 shares. It transpired from the evidence that both Mrs Chan and Chan Pui Ki were nominees of Chan Chin Shing (陳前成) (“Mr Chan”).

4.  Mrs Chan is Mr Chan’s wife. As mentioned, the 3^rd Party is their son.

5.  The 1^st Defendant (“D1”) was P’s director from 2 October 2018 to 21 January 2020. He was also P’s shareholder. On 2 October 2018, Mrs Chan transferred her 7,500 shares in P to D1 in consideration of HK$7,500. On 21 January 2020, D1 transferred his 7,500 shares back to Mrs Chan for the same amount of consideration and resigned as director.

6.  The 2^nd Defendant (“D2”) became P’s shareholder on 2 October 2018, when Chan Pui Ki transferred her 2,500 shares in P to him for HK$2,500. On 2 January 2019, D2 became a director of P. On 18 September 2019, he ceased to be P’s shareholder and director. An Instrument of Transfer shows that on 18 September 2019, he transferred his 2,500 shares to the 3^rd Party for HK$2,500, and a Notice of Change of Director shows that on the same date, he resigned as director, and the 3^rd Party was appointed as a director. However, this transfer of shares and change of directors are challenged by D2 and are one of the issues at this trial.

7.  I should mention that both the 3^rd Party and Mr Chan allege that, according to a document in Chinese entitled “柏晟工程有限公司股份合作會議紀錄” in Chinese and “Minutes of Director – Shareholding of San Pak Engineering Co., Ltd” in English, Mr Chan and Ds agreed that Mr Chan had a 50% shareholding in P[1]. Ds deny this claim. They assert that neither Ds nor Mr Chan signed the said minutes. Instead, they orally agreed that D1 should hold 75% of the shares in P, with 25% held in trust for Mr Chan. They gave evidence that this arrangement was proposed by Mr Chan to avoid the risk of his shares falling into the hands of creditors in the event of bankruptcy[2]. I do not find it necessary for this Court to decide on this matter. For the purposes of determining the issues in this case, it is sufficient to proceed on the basis that at all material times: (1) Mr Chan was not a director of P, and (2) D1 held in trust for Mr Chan some shares, amounting to at least 25% of P’s shares.

8.  According to P’s Annual Return dated 31 January 2024, the 3^rd Party is its sole director, with Mrs Chan holding 7,500 shares and the 3^rd Party holding 2,500 shares of P.

B.  The Plaintiff’s Claim

9.  First, P’s claim against D1 for breach of director’s fiduciary duties is based on the following transactions:

(1)  On 9 December 2019, D1:

(a)  withdrew HK$60,000 in cash from P’s bank savings account (“Saving Account”) with Bank of China (Hong Kong) Limited (“BoC”) (the “1^st Withdrawal”);

(b)  withdrew HK$300,000 in cash from P’s bank current account (“Current Account”) with BoC (the “2^nd Withdrawal”); and

(c)  withdrew HK$700,000 from P’s Current Account and transferred the money to D1’s personal account (“D1’s Personal Account”) with BoC (the “3^rd Withdrawal”). On 10 December 2019, D1 transferred HK$700,000 from D1’s Personal Account back to P’s Current Account.

(2)  On 12 December 2019, D1 withdrew HK$50,000 from the Current Account by cheque drawn in his own favour (the “4^th Withdrawal”).

(3)  On 10 January 2020, D1 wrote to BoC requesting a suspension of P’s bank accounts because P was facing liquidity and solvency problems (“Account Suspension”). On 20 January 2020, the suspension was lifted at the request of D1 and the 3^rd Party.

(4)  On 20 January 2020, D1 withdrew HK$502,150 in cash from the Current Account (the “5^th Withdrawal”).

The five withdrawals described above shall be collectively referred to as the “5 Withdrawals”.

10.  P claims that D1 made the Withdrawals and Account Suspension without P’s approval and authorization and the monies withdrawn were not used for P’s business. In other words, P accused D1 of misappropriating P’s monies.

11.  The total amount of the Withdrawals was HK$1,612,150. Taking into account the HK$700,000 that he returned to P’s Current Account, the outstanding sum that D1 should return to P is HK$912,150.

12.  Second, P claims against Ds for defamation and malicious falsehood. P alleges that on 13 January 2020, Ds delivered a letter to P’s customer, namely “a Mr On (安傑麟） of New World” (the “Letter”)[3], which contains the following defamatory and false words:

“新世界安傑麟先生：

關於我們柏晟公司，因新世界工程費一到公司戶口，陳前成就私自叫他兒子拿出來，然後跟其他董事說新世界到賬的款不多，不足以支款各方面的支出，還需要柯文佳和陳奕芳另拿錢出來賠，所以我柯文佳和陳奕芳要求新世界凍結柏晟戶口，等我們公司內部先解決問題。謝謝！＂

13.  P asserts that the contents of the Letter carry the following defamatory meanings[4], that:

(1)  the 3^rd Party, being a director of P, was a puppet of his father (Chan Chin Shing), in executing his instruction to misappropriate P’s money in P’s bank accounts[5] (the “Accounts”), out of the 3^rd Party’s father's (i.e. Mr Chan’s) own interest, without P’s authorization nor approval;

(2)  the 3^rd Party and his father, being P’s key personnel, were acting dishonestly;

(3)  P had liquidity and solvency issues;

(4)  P and/or its key personnel lied to its directors about its liquidity situation;

(5)  P required its former director and/or employee to make payments on P’s behalf out of their own pocket; and

(6)  a lot was going on internally within P and P was at a poor state to receive incoming payment.

14.  P did not apply for and there was no split trial order for the assessment of damages for defamation. Nonetheless, in its written opening submissions[6], P suggested to this Court (but did not apply) that the quantum of damages be assessed separately after the trial. D objected[7]. Then, in its written closing submission[8], P, without explanation, sought (1) damages in the total sum of HK$3,456,907.31, comprising (a) loss of profit margin of HK$2,623,790.32, (b) loss of earnings on the SkyCity Project of HK$782,361.20 and (c) loss of profit on the excluded variation works in the SkyCity Project of HK$50,755.79; and (2) aggravated damages of HK$1,000,000.

C.  The Defendants’ Defence

15.  First, Ds claim that the present proceedings are instituted by P without proper authority, and are therefore invalid, irregular, and/or liable to be struck out or dismissed[9]. Ds assert, as defence, a counterclaim against P, and a claim against the 3^rd Party on the same basis, that the documents signed by D2 for (1) transfer of 2,500 shares to the 3^rd Party[10], (2) his resignation as P’s director[11] and (3) the appointment of the 3^rd Party as P’s director[12], are invalid and not binding on him. Therefore, Ds assert that D2 is still P’s director and the holder of 2,500 shares in P.

16.  Second, in defence to P’s claim against D1 for the alleged unlawful Withdrawals and Account Suspension, whilst admitting that D1 did make the Withdrawals, Ds contend[13] that:

(1)  The 1^st Withdrawal was made at Mr Chan’s request and on his behalf. He gave the HK$60,000 withdrawn to Mr Chan.

(2)  The 2^nd Withdrawal was a distribution made to D1 as shareholder, as agreed between Ds, Mr Chan, and the 3^rd Party.

(3)  The 3^rd Withdrawal was made to prevent the HK$700,000 from being taken by Mr Chan and/or the 3^rd Party. D1 alleges that since early October 2019, he discovered that Mr Chan, by himself or through his son, the 3^rd Party, had withdrawn or transferred P’s money in amounts totalling over HK$1 million without explanation or authorization. In view of such unauthorized transfers or withdrawals, and in order to protect P’s interests and funds and to ensure that P would have sufficient cash to meet its obligation to pay wages, D1 made the 3^rd Withdrawal. On the next day, 10 December 2019, D1 had remitted HK$700,000 back to the Current Account for P to pay wages.

(4)  The 4^th Withdrawal was another distribution made to D1 as shareholder, as agreed between Ds, Mr Chan, and the 3^rd Party.

(5)  For the same reason as the 3^rd Withdrawal, D1 asserts that in view of the unauthorized transfers or withdrawals by Mr Chan, either by himself or through his son, and in order to protect the Plaintiff's interest and funds and avoid potential loss on P, D1 sought to temporarily suspend P’s bank accounts (i.e. the Account Suspension) to prevent any further unauthorized withdrawals by Mr Chan.

(6)  The 5^th Withdrawal was made pursuant to the settlement agreement reached between Ds and the 3^rd Party on 19^th and 20 January 2020 (the “Settlement Agreement”).

17.  In the Amended Defence and Counterclaim[14], D1’s Witness Statement dated 17 December 2020 (“D1’s 1^st Witness Statement”) [15] and D1’s Witness Statement dated 24 June 2021[16] (“D1’s 2^nd Witness Statement”)[17] , D2’s Witness Statement dated 17 December 2020 (“D2’s 1^st Witness Statement”)[18] and D2’s Witness Statement dated 24 June 2021[19] (“D2’s 2^nd Witness Statement”), Ds claim[20] that the Settlement Agreement between P, the 3^rd Party, Mr Chan and Ds was reached at a branch of BoC in To Kwa Wan on 20 January 2020, in full and final settlement of the following disputes:

“(a) the amount of distribution to be made to the various shareholders of the Plaintiff [i.e. the 2^nd Withdrawal and the 4^th Withdrawal];

(b) the aforesaid disputes/issues including the matters/transactions stated in paragraphs 7 and 8 of the Statement of Claim and paragraphs 6, 7(a) to 7(c) of the Defence and Counterclaim [i.e., the 5 Withdrawals];

(c) the outstanding salary for January 2020 owed by the Plaintiff to the 1^st Defendant and a staff member of the Plaintiff called 許佳宗 (“Mr Hui”);

(d) some outstanding disbursements for various material expenses owed by the Plaintiff to Mr. Hui, and

(e) a debt in the amount of HK$100,000 owed by Mr. Chan to the 1^st Defendant.”[21]

However, during cross-examination, D1 and D2 stated that on 19 January 2021, when D1, D2 and the 3^rd Party met and started to negotiate at a restaurant in To Kwa Wan, the terms of the Settlement Agreement had already been reached orally, and that the on 20 January 2021, the parties were to put down the figures in a written memo and to complete the settlement terms.

18.  Ds claim that the terms of the Settlement Agreement were as follows[22]:

“(1) the 1^st Defendant shall be entitled to keep the distributed amounts referred to in paragraph 7(b) hereinabove (i.e. HK$300,000 and HK.$50,000); in addition, a further amount of HK$350,000 shall be distributed by the Plaintiff to the 1^st and 2^nd Defendants;

(2) an amount of HK$80,000 shall be distributed by the Plaintiff to Mr. Chan, but this amount shall instead be paid by the Plaintiff to the 1^st Defendant in full and final settlement of an outstanding loan (in the amount of HK$100,000) owed by Mr. Chan to the 1^st Defendant;

(3) the 1^st Defendant shall receive HK$22,500 from the Plaintiff to settle the said outstanding salary for January 2020 owed by the Plaintiff to the 1^st Defendant;

(4) the 1^st Defendant shall receive HK$48,500 on behalf of Mr. Hui from the Plaintiff to settle the said outstanding salary owed to Mr. Hui;

(5) the 1^st Defendant shall receive HK$ 1,150 on behalf of Mr. Hui from the Plaintiff as disbursement for the various outstanding material expenses; and

(6) the 1^st Defendant shall make a cash withdrawal for the amounts stated in paragraphs 7(f)(l) to 7(f)(5) from the Plaintiff's account in the total amount of HK$502,150 (“the said total amount”) (i.e. HK$350,000.00 + HK$80,000.00 + HK$22,500.00 + HK$48,500.00 + HK$1,150.00).

(7) Upon full receipt of the said amounts by the 1^st Defendant,

(i) Mr. Chan, Mr. Chan’s Son, the 1^st Defendant, the 2^nd Defendant and the Plaintiff will be discharged from their respective liabilities (if any) with regard to the said disputes,

(ii) the 1^st Defendant shall cease to be a shareholder and/or director and/or employee of the Plaintiff; and

(iii) the 2^nd Defendant shall cease to be a shareholder and/or director of the Plaintiff”.

D.  The Defendants’ Counterclaim and Claim against the Third Party

19.  Ds’ counterclaim against P and claim against the 3^rd Party are essentially the same. In their counsel’s submissions[23], Ds contend that:

(1)  The 3^rd Party was not validly appointed as P’s director.

(2)  D2 did not validly resign as P’s director.

(3)  D2 did not transfer his 2,500 shares in P to the 3^rd Party for HK$2,500.

(4)  As the 3^rd Party was not validly appointed as P’s director, he has no authority to, on P’s behalf, institute the present proceedings against Ds. Hence, the Writ of Summons and the Statement of Claim filed herein are “invalid and/or irregular and/or without proper authority and/or liable to be set aside, invalidated, struck out and dismissed”[24].

20.  Ds’ contentions are primarily based on one ground: that D2 signed documents presented by Mr Chan out of trust, without examining their contents, which he never agreed to. These allegedly unknowingly signed documents, now termed as “Purported Documents”[25] by Ds, were only discovered later by D2:

“(1) an undated document, entitled “Written Resolution of all the sole director made pursuant to Article of the Articles of Association of the Company” (“the Purported Written Resolution”);

(2) an undated document, entitled “Minute of the Board of Director(s)' Meeting” (“the Purported Board Minutes”);

(3) a Form ND4 “Notice of Resignation of Company Secretary and Director” dated 6 September 2019 (“the Purported Form ND4”);

(4) an Instrument of Transfer dated 18 September 2019 (“the Purported Instrument of Transfer”), and

(5) a Bought and Sold Note dated 18 September 2019 (“the Purported Bought and Sold Note”).”

21.  D2 claimed he never agreed to the contents of the “Purported Documents”; and even if they were signed by D2, he signed them without knowledge or consent to the contents. D2 never agreed to resign as P’s director, appoint the 3^rd Party in his place as P’s director, or transfer all his shares to the 3^rd Party. All these documents are false, and his signatures were obtained through the fraud of Mr Chan or Mr Chan and the 3^rd Party. Hence, the “Purported Documents” are not binding on him. Furthermore, the “Purported Written Resolution” and “Purported Board Minutes” are “legally invalid and should be set aside and/or declared null and void” because they were “purportedly attended to and signed by one director only, contrary to Article 8(a) of the Articles of Association of the Plaintiff”[26].

22.  P’s and the 3^rd Party’s defence, relying on Mr Chan’s evidence[27], is that D2 signed the “Purported Documents” voluntarily, in the presence of Mr Chan and other members of P’s staff[28], having thoroughly read through and examined them, and therefore knew what he was signing.

E.  Discussion

E1  Overview - Absence of Corporate Governance in the Plaintiff

23.  The first observation that I should make is this: an important context of the dispute between Ds on the one hand and P, the 3^rd Party, and his father Mr Chan on the other is the appalling absence of corporate governance within the company. As explained below, the evidence shows that money was withdrawn from P’s bank accounts from time to time. Apart from the Withdrawals made in cash to D1 or transferred to his personal account, there were numerous withdrawals made to Mr Chan and Lee Kai (Building) Engineering Co. Limited (“Lee Kai”), which is related to Mr Chan. All withdrawals lacked written approval records, let alone P’s board resolutions. The 3^rd Party stated in his oral evidence that after he became P’s director, he approved those withdrawals. However, neither P nor the 3^rd Party produced a single agreement or invoice from Lee Kai. There was simply no evidence of what the money paid to Lee Kai was for. Moreover, substantial amounts of payments to Mr Chan were for entertainment expenses at nightclubs and saunas or luxurious dinners. There were no written records of whether, and if so, which customers were being entertained and for which business or job, and neither the 3^rd Party nor Mr Chan could recall any details when asked in court. Unfortunately, D1 did the same, albeit for only a few occasions and for much fewer amounts.

E2  Mr Chan’s appropriation of P’s moneys

24.  A key issue underlying Ds’ defence is their discovery, around August or September 2019, from P’s accountant that Mr Chan, either himself or through his son, the 3^rd Party, had, from time to time (at least since May 2019) and without explanation or authorization, taken P’s money, totalling over HK$1 million. During cross-examination, the 3^rd Party stated that he approved those transactions after he became P’s director on 18 September 2019. However, he could not provide any details of the transactions and admitted there were no written records or board resolutions.

E2.1  Mr Chan’s Miscellaneous Expenses Tables

25.  Ds produced two sets of documents to substantiate their allegation. Firstly, Ds produced a few tables entitled 「陳前成雜費單」 and 「每月什支單－陳前成」 (“Mr Chan’s Miscellaneous Expenses Tables”), which were given to D1 and D2 by Mr Chan in or about December 2019, together with some receipts and invoices showing those expenditures of Mr Chan which were paid with P’s money[29]. Ds assert that many of the expenditures listed therein were unauthorized, including, amongst others, “交際費：新俏佳人夜總會”, “交際費：東方棕泉桑拿”, “顧問費－航天城”, various “餐費”, “交通費-CEO Karaoke Box”, “交際費．日本城卡拉OK”, “DUTY ZERO：酒”, “運費－旺角-> 機場”, “衛訊：華為P30 Pro VOGUE-L29D(8HB/2256GB)”, “寶威貿易有限公司：海參” and “豐澤：電腦1部”. Ds assert that neither D1 nor D2 nor P had ever agreed or consented to those items of expenditures.

26.  Secondly, Ds produced P’s bank statements from January 2019 to January 2020[30]. Ds pointed out that all the transfers or withdrawals to Lee Kai were unauthorized by P because P had never carried out any project or engaged in any business relationship with Lee Kai. There was no reason for P to make any payment to Lee Kai at all. Those transfers or withdrawals made to Lee Kai were not made or authorized by D1 or D2. Ds assert that all those transfers or withdrawals to Lee Kai were done by Mr Chan.

27.  In this connection, D1’s evidence was that Mr Chan repeatedly gave D1 a batch of P’s blank cheques to sign. Mr Chan represented to D1 that they were for P’s expenses, such as the payment of contractors’ salaries[31]. Trusting Mr Chan, D1 signed those cheques, even though they were blank.

E2.2  Mr Chan’s Dinner, Nightclub, Sauna, Karaoke Expenses etc.

28.  Regarding Mr Chan’s Miscellaneous Expenses Tables, during cross-examination, the 3^rd Party was questioned about the dinner, alcohol drinking, and entertainment expenses at restaurants, nightclubs, saunas, karaoke clubs listed in Mr Chan’s Miscellaneous Expenses Tables, which were claimed by Mr Chan after the 3^rd Party became P’s director. The 3^rd Party admitted that there was no record of who attended those dinners or nightclub events, for what specific business or work they were, and even the names of customers or potential customers were not recorded. There were no records of name cards either. Similarly, for all taxi fees claimed by Mr Chan, there were no records of the destinations or the purposes of the trips. In other words, all expenses were open-ended. They could have been spent on anything, including Mr Chan’s self-entertainment or personal benefits. The 3^rd Party stated that he approved those expenses. This clearly indicates recklessness.

29.  The 3^rd Party equivocated and struggled to explain that the dinner and entertainment expenses listed under the column of “A2航天城” (the A2 Skycity project) in Mr Chan’s Miscellaneous Expenses Tables were incurred for dinner and nightclub and sauna events with artisans, contractors, and suppliers of the project. However, he again failed to provide the names of the attendees, their companies or the purposes of each event. This does not mitigate his recklessness in approving the expenses incurred by his father.

30.  Therefore, the 3^rd Party is not a credible witness.

31.  One notable example is a sum of HK$50,000 claimed by Mr Chan as “顧問費” (consultancy fee) on 3 June 2019, as shown in Mr Chan’s Miscellaneous Expenses Tables[32]. No contract or invoice was produced, and there was no explanation on how this sum was calculated. There was also no mention of what kind of consultancy work had been done. A receipt from P for HK$50,000 was produced[33], but it did not bear the name of the recipient or a signature. During cross-examination, Mr Chan rambled and claimed, rather hesitantly, that D1 and D2 had requested him to pay a person called楊清松 (Mr Yeung) because Mr Yeung had introduced business to P. In my view, Mr Chan’s explanation is not credible. There is no reason why D1 and D2 could not have paid Mr Yeung directly for consultancy work. Additionally, Mr Yeung’s name does not appear on the receipt. Furthermore, this explanation was absent from Mr Chan’s witness statement of Mr Chan and, judging from his demeanour, seemed to have been conjured up spontaneously.

32.  I should also mention that many of the expenditures such as dinner, nightclub and sauna expenses incurred by Mr Chan and paid by P were spent in a very extravagant and inexplicable manner. Typical examples are as follows[34]:

(1)  On 8 June 2019, the following expenses were incurred by Mr Chan:

(a)  “餐費-星薈：晚膳” – HK$900,

(b)  “餐費-鉅記海鮮酒家” – HK$6,000,

(c)  “餐費-海王潮州樓：晚膳” – HK$15,000, and

(d)  “交際費：新俏佳人夜總會” – HK$16,000.

(2)  Four days later, on 12 June 2019, the following expenses were incurred by Mr Chan:

(a)  “餐費-海王潮州樓：晚膳” – HK$12,000, and

(b)  “交際費：新俏佳人夜總會” – HK$18,729.

(3)  On the following day, 9 June 2019, Mr Chan claimed “交際費：CEO Karaoke Box” of HK$2,793.

(4)  On 18 October 2019, Mr Chan claimed the following expenses:

(a)  “餐費-鉅記海鮮酒家” – HK$9,000,

(b)  “餐費-鉅記海鮮酒家” – HK$5,500,

(c)  “交際費：東方棕泉桑拿” – HK$10,000, and

(d)  “交際費：東方棕泉桑拿” – HK$5,000.

(5)  On the following day, 19 October 2019, Mr Chan further claimed “交際費：東方棕泉桑拿” of HK$4,000.

33.  It is inconceivable that Mr Chan incurred:

(1)  expenses for three dinners on the same evening of 8 June 2019,

(2)  expenses for two dinners on the same evening of 18 October 2019,

(3)  entertainment expenses so frequently, i.e., two visits to a nightclub and one visit to a karaoke box within 5 days, at incredibly high costs (HK$16,000 and HK$18,729 for nightclubs and HK$6,000 and HK$12,000 for dinners),

(4)  three sauna expenses over two consecutive days at again the incredibly high costs of HK$10,000, HK$5,000 and HK$4,000.

These amounts are exceedingly high by normal standards for a dinner or a gathering.

34.  This Court asked Mr Chan the names of the persons he gathered with. Without specifying the occasions, Mr Chan stated a subcontractor called “阿偉” and another subcontractor called “阿權”. He did not know their full names or recall when or on which occasions these two persons attended these entertainment events. He did not even remember the names of their companies. I find that this is incredible and unbelievable.

35.  Mr Chan also equivocated and struggled to explain the sauna expenses. He stated that for the two incurred on 18 October 2019, HK$10000 was for a “入會費卡” (membership card entrance fee) and HK$5,000 was for “小費” (tips). While he did not explain what “membership card entrance fee” means, the record shows that before 18 October 2019, he had already incurred HK$2,800 (on 3 June 2019) and HK$3,800 (on 13 July 2019) at the same sauna. As for a tip of HK$5,000, it is blatantly extravagant and outrageous to seek reimbursement from P for such a sum.

36.  The tables show that Mr Chan claimed numerous taxi fees. At times, multiple travel expenses within a single day were claimed. For instance on 9 June 2019, Mr Chan claimed taxi fees for four journeys. He stated that he travelled to various places such as To Kwa Wan and Kwun Tong but did not record or recall the purpose of each trip.

37.  Mr Chan’s evidence is equivocal and evasive. When the documentary evidence contradicts his statements, he rambled and resorted to excuses such as lack of recollection, claims that P did not ask for further details, or assertions that D1 and/or D2 asked him to incur the expenses or approved them. I find that his evidence is incredible and not believable.

38.  In conclusion, based on the above analysis, I find that most of the expenses claimed by Mr Chan and paid by P were Mr Chan’s personal expenses or for his personal benefit, and/or were not P’s expenses, not for P’s conduct of business and not for P’s purposes or benefits.

39.  P and the 3^rd Party rely on the fact that it was always D1 who approved the expenses claimed by Mr Chan and that D1 was the one who signed the cheques in Mr Chan’s favour. This reliance does not assist their case, because:

(1)  As mentioned above, D1’s evidence was that he signed blank cheques of P as its director and signatory and passed them to Mr Chan. Thus, Mr Chan could effectively use P’s money without restraint.

(2)  The evidence of Mr Chan and the 3^rd Party did not go so far as to suggest that D1 conspired with Mr Chan to misappropriate P’s money. If D1 was not Mr Chan’s accomplice, then the likelihood can only be that when D1 signed P’s cheques, he did not know that the money would be used for the expenses listed in Mr Chan’s Miscellaneous Expenses Tables, or otherwise, when he learnt of Mr Chan’s misappropriation of P’s money from P’s accountant around August or September 2019, he would not have sounded it out.

(3)  I therefore find it to be likely that he signed P’s cheques in blank and, when he signed them, he did not know what Mr Chan would do with the money.

(4)  In any event, while D1’s passing of signed blank cheques to Mr Chan was obviously unwise, unprofessional, and indeed negligent in ensuring the proper use of the company’s money and assets, such negligence does not cover or absolve Mr Chan’s misdeed. It does not exempt Mr Chan’s impropriety in misappropriating P’s money.

E2.3  Mr Chan’s transfers of P’s money to Lee Kai

40.  P’s bank statements[35] show that the following sums were withdrawn from P’s account and paid to Lee Kai:

Date of Withdrawal	Amount (HK$)
8 May 2019	500.00
10 May 2019	105,000
15 May 2019	48,775
9 September 2019	350,000
25 October 2019	50,000
12 November 2019	50,000
	85,000
	25,000
	90,000
14 November 2019	80,000
19 November 2019	20,000
29 November 2019	10,000
24 December 2019	40,000
20 January 2020	320,000

41.  It should also be noted that there were two transfers of HK$200,000 (on 28 June 2019) and HK$250,000 (on 23 September 2019) into P’s account from Lee Kai.

42.  It can be seen from the above that there were frequent transfers of money to and from P and Lee Kai. From May 2019 to January 2020, within a span of nine months, there have been 14 transfers out of and 2 transfers into P’s account. Comparing the amounts withdrawn and the amounts deposited, more than HK$800,000 net of P’s money was transferred to Lee Kai.

43.  The transfers were dubious and improper for the following reasons.

44.  First, there is no evidence showing that P had any business relationship with Lee Kai. No written contracts, invoices or even receipts were produced. There were no documents explaining why each payment was made and how each amount was calculated. Such documentation is essential for verifying the legitimacy of business transactions.

45.  During cross-examination, the 3^rd Party claimed that P engaged Lee Kai for work, and vice versa. However, the only example provided was that Lee Kai assisted P with site clearance (“清場”) and transportation (“搬運”) in the Skycity project. He did not provide any specifics regarding the work or the contract. When asked whether P engaged Lee Kai for other projects apart from the Skycity project, he responded ambiguously, stating he was unclear about the relationship. He further offered the equivocal responses, “there was such a chance” (“有機會係”), but “there might not be any” (“都可能係無”).

46.  When asked about the transfer of HK$350,000 to Lee Kai on 9 September 2019, the 3^rd Party stated that he was not clear about the reason for advancing the money to Lee Kai.

47.  Furthermore, Mr Chan admitted to the Court that there were no business dealings between the Plaintiff and Lee Kai.

48.  Second, when cross-examined, the 3^rd Party agreed that Lee Kai’s bank account was controlled by Mr Chan.

49.  It is telling to note that Mr Chan, quite frankly, told the Court that when Lee Kai was lack of money, he would cause P to lend money to Lee Kai. If P did not have sufficient funds, Mr Chan would personally lend money to Lee Kai or arrange for P to do so, likely seeking reimbursement later. This indicates that he regarded himself as having the authority to P’s money as he saw fit, either by directly lending P’s money or by lending his own on P’s behalf. His evidence clearly shows that he saw no need to seek P’s board approval for using P’s funds for purposes unrelated to P, including his own personal benefit.

50.  Third, it is remarkable that on 20 January 2020, the date when, according to Ds’ case, the parties reached the Settlement Agreement and D1 was to resign the next day on 21 January 2020, Mr Chan caused another transfer of HK$320,000 to Lee Kai. When cross-examined, the 3^rd Party admitted that he authorized the transfer. However, he stated to the Court that he could not recall the reason for the transfer. In this respect, I consider the 3^rd Party’s evidence is also incredible. In my view, it is likely that the 3^rd Party aided or participated with Mr Chan in the misappropriation of P’s money for Mr Chan’s own purposes or personal benefits.

E2.4  A Record of Payments to Mr Chan

51.  For completeness, I should mention that a record of payments[36] that P made to Mr Chan on various dates between May and December 2019 was produced. Some of the payments overlap with the payments transferred to Lee Kai as discussed in Section E2.3 above. This record shows, and the 3^rd Party admitted, that Mr Chan received a total sum of HK$1,264,275 from P.

52.  Again, these expenses were claimed by Mr Chan in an ambiguous manner. For example, when cross-examined, the 3^rd Party attempted to explain that the three sums of money: HK$30,000, 50,000 and 15,000 respectively paid to Mr Chan on 16, 25 and 31 October 2019, might be costs and expenses. He then supplemented that the payments could be petty cash for Mr Chan’s claims, and that there was a chance for them to be advanced payments to assist in operation. But then he changed and stated that the sums paid represented amounts to be paid to other employees because some contractors only took cash, and that some of the payments were for meals and transportation fees.

53.  These answers were equivocal and open-ended. The 3^rd Party did not produce any receipts, invoices or records. This is not what one would expect from a director who had duly verified the propriety of the payments.

54.  In my judgment, for the above reasons, I find that there were repeated misappropriations of P’s money by Mr Chan since May 2019, and that the 3^rd Party, after he became P’s director, assisted or participated with Mr Chan in the misappropriations.

E3  Validity of the Plaintiff’s commencement of the present action

55.  As mentioned above, Ds claim that the present proceedings are instituted by P without proper authority because, in a nutshell, the “Purported Documents” signed by D2 for, inter alia, the appointment of the 3^rd Party as P’s director are invalid. Hence, the 3^rd Party was not validly appointed as P’s director and cannot authorize P to bring this action.

56.  There is no merit in Ds’ arguments.

57.  The 3^rd Party, Mr Chan, and Ds provided conflicting evidence to explain why D2 would or would not wish to leave the directorship. This is a red herring. D2, in his evidence, admitted he signed the “Purported Documents”. He claims he had no knowledge of their contents. This does not automatically enable him to denounce the validity of what he signed.[37]

58.  D2 did not plead misrepresentation. Whilst fraud is briefly mentioned in the pleadings[38], no particulars of the fraud alleged were ever provided despite the 3^rd Party’s complaint[39]. So D2 is left with the ground of non est factum, where he would need to prove (a) that he made a fundamental mistake that the document he was signing bore no relationship at all to that which he thought that he was signing, and (b) that he was not negligent or careless or recklessly careless in failing to understand what he signed, see Cheung Pik-wan & anor v Tong Sau-ping & ors [1986] HKLR 922, p.926H to 927F, per Hunter J, referring to the two essential ingredients in a plea of non est factum in Gallie v Lee [1971] AC 1004[40]. Merely not reading the document thoroughly or not understanding its legal implications usually would not suffice. D2 would need compelling evidence of being misled or confused about what he was signing.

59.  D2 made it clear during cross-examination that he did not read the documents. He said he signed them without reading them because he trusted Mr Chan as a long-standing business partner. In my view, this is clear carelessness, without considering whether he made a fundamental mistake regarding what he was signing. According to his evidence, he simply did not care what he was signing. His testimony suggests that whatever Mr Chan gave him to sign, he would sign without reading. Even if Mr Chan had any fraudulent intent, it was D2’s own reckless carelessness that led him to sign. Particularly for the “Purported Form ND4” and the “Purported Board Minutes”, which are in both Chinese and English, had D2 read them – having also been a director of another company and being used to the preparation and submission of tender documents – he would certainly have known what he was signing. Therefore, even if D2 had pleaded non est factum, the plea would fail.

60.  Ds’ counsel submit that the Purported Written Resolution and the Purported Board Minutes are, in any event, void because they did not comply with the Articles of Association[41]. I reject this argument because, having validly resigned as its director and signed the instrument of transfer to transfer all his shares to the 3^rd Party, D2 has lost the standing to challenge the validity of a board resolution of P.

61.  Lastly, in any event, at the time when the Writ of Summons was issued against D2 in March 2020, D2 was no longer P’s director or shareholder. As mentioned in paragraph 18 above, it is D2’s own case that pursuant to the Settlement Agreement, upon P’s payment of the agreed sum of HK$502,150 to D1 (i.e. the 5^th Withdrawal), inter alia, D2 should cease to be a shareholder and director of P. As the 5^th Withdrawal was made, D2 was not P’s shareholder or director.

62.  For the above reasons, P’s commencement of this action cannot be impeached.

E4.  The Withdrawals and Account Suspension by D1

63.  I should mention here first of all that in section E4 below, I have found that P and Ds did reach the Settlement Agreement in full and final settlement of the disputes set out in paragraph 16 above, which include, inter alia, the Withdrawals (except the 5^th Withdrawal, which was in performance of the terms of the Settlement Agreement) and the Account Suspension. Nonetheless, in case I am held to be wrong, and for completeness, I shall address each of the Withdrawals and the Account Suspension claimed by P against D1 in sequence, against the above background and my determination regarding the propriety of the conduct of Mr Chan and the 3^rd Party.

64.  To recapitulate, in a nutshell, P claims against D1 as P’s director and signatory of its bank account for misappropriation of P’s money in the five Withdrawals and the Account Suspension.

65.  Regarding the 1^st Withdrawal, D1 explained that he withdrew HK$60,000 from P’s account “on behalf of and upon the request of Mr Chan”[42], and that he had given the withdrawn money to Mr Chan per his request.

66.  This is an alarming defence, considering that Mr Chan was not P’s director and had no right to withdraw funds from P’s bank accounts. As P’s director, D1 should have questioned how Mr Chan could have any authority to instruct D1 to draw money from P “on his behalf”.

67.  As mentioned in paragraph 7 above, Mr Chan was never a director of P. He was only beneficially entitled to some of P’s shares, which were held by D1 in trust for him. The fact that he was a beneficial owner of some of P’s shares did not give him any right to withdraw money from P. D1 did not enquire with Mr Chan about the basis and purpose of the withdrawal and simply acted on his instructions. While this aligns with D1’s evidence mentioned above that he repeatedly signed blank cheques for P and handed them to Mr Chan without question, such conduct constitutes gross negligence and a dereliction of his duties as P’s director, notwithstanding the impropriety of Mr Chan as determined above.

68.  During cross-examination, D1 stated that the money was given to Mr Chan for entertaining customers. P and 3^rd Party’s counsel criticized this explanation as lacking in detail. Rather ironically, Ds’ counsel criticized the reasons provided by the 3^rd Party and Mr Chan for Mr Chan’s withdrawals of P’s money from its account in the same manner. As discussed above, I accepted the criticism. D1 effectively shot himself in the foot by attempting to explain Mr Chan’s withdrawal in the same way as the 3^rd Party and Mr Chan did.

69.  I therefore hold that D1 has failed in his duties as a director in effecting the 1^st Withdrawal.

70.  Regarding the 2^nd Withdrawal, D1 explained that he made the 2^nd Withdrawal of HK$300,000 because it was a distribution made to him as a shareholder, as agreed between Ds, Mr Chan, and the 3^rd Party[43]. Remarkably, this is the entirety of his explanation. He did not clarify why there was a distribution at that time, how the amount of HK$300,000 was calculated[44], nor whether this distribution included a portion that he should account for to Mr Chan. He did not explain whether there was a distribution to the other shareholder, i.e. the 3^rd Party. Additionally, he did not provide any particulars regarding when and how this distribution was agreed upon. Whilst D’s counsel relied on the 3^rd Party’s evidence that it was difficult for each transaction to have a director’s resolution, a distribution to shareholders is a substantive business of the board involving the disposal of the company’s assets in terms of money, and certainly a board resolution or a directors’ written resolution was essential.

71.  In the absence of all the above, I find that it is likely that (1) the alleged distribution to D1 was not genuine and that (2) this was a misappropriation of P’s money by D1, similar to how Mr Chan had misappropriated P’s money, as determined above.

72.  Regarding the 3^rd Withdrawal, D1 asserts that he withdrew HK$700,000 from P’s account to prevent P’s money from being taken by Mr Chan or the 3^rd Party again, ensuring that P would have sufficient cash to meet its obligation to pay wages.

73.  In section E2 above, I have determined that Mr Chan did misappropriate P’s money from P’s account. Here, whilst D1’s worry was justified, D1 still had to comply with his duties as P’s director. At that juncture, P had two directors: he and the 3^rd Party. He did not represent the entire board of P. He should not have handled the matter by taking P’s money himself without following any lawful procedure such as convening a directors’ meeting or seeking legal advice. Nonetheless, he had deposited the HK$700,000 back into P’s account the following day, and the 3^rd Party also agreed in his evidence that P suffered no loss in this incident.

74.  Regarding the 4^th Withdrawal, D1 alleged that his withdrawal of HK$50,000 from P’s account was another distribution made to him as a shareholder, as agreed between Ds, Mr Chan, and the 3^rd Party. Again, like the 2^nd Withdrawal, D1 gave no further explanation or details. For the same reasons as stated in paragraphs 70 and 71 above, I find it likely that (1) the alleged distribution to D1 was not genuine and (2) this was a misappropriation of P’s money by D1, similar to how Mr Chan had misappropriated P’s money, as determined above.

75.  Regarding the Account Suspension, D1 wrote a letter to BoC dated 9 January 2024[45] on P’s behalf, instructing the bank to suspend all withdrawals from P’s accounts and that all future instructions from P to the bank could only be processed with the joint instruction of D1 and the 3^rd Party. The letter also stated that the reason for this instruction was to prevent P’s money in the accounts from being taken by the 3^rd Party.

76.  Given the determination in section E2 above that P’s money was misappropriated from P’s accounts with BoC, there was an obviously risk that further misappropriation would occur. To eliminate this risk and avoid further loss, it would be appropriate to have P’s bank accounts temporarily suspended until the issue was satisfactorily resolved and the risk fully eliminated. As such, I agree that it was prudent and in P’s best interest for D1 to temporarily suspend P’s accounts until there were joint instructions from D1 and the 3^rd Party, i.e. all directors of P’s board. In fact, the suspension was lifted subsequently upon the joint instruction of D1 and the 3^rd Party on 20 January 2020.

77.  Regarding the 5^th Withdrawal, Ds stated it was in performance of one of the terms of the parties’ Settlement Agreement, specifically point (6) as set out in paragraph 18 above. As mentioned in paragraph 63 above and explained in section E5 below, the Settlement Agreement was indeed reached and binding on P and Ds. Therefore, the 5^th Withdrawal is not subject to challenge.

E5.  The Settlement Agreement

78.  In my judgment, I find that the Settlement Agreement was reached by (1) P (through the 3^rd Party on its behalf), (2) Mr Chan (through the 3^rd Party), (3) the 3^rd Party, (4) D1 and (5) D2, in terms as set out in paragraph 18 above, in full and final settlement of the disputes as set out in paragraph 17 above.

79.  Out of caution, I should add that I make the above finding solely as a matter of fact-finding. I did not, as I am not asked to, make any finding on whether, in entering into the Settlement Agreement, the 3^rd Party (who then was and still is a director of P) or D1 (who then was a director of P) breached their duties as P’s directors. This is not an issue in dispute before me.

80.  I make the above finding for the following reasons:

(1)  In their evidence, D1, D2 and the 3^rd Party agreed that they met on 19 January 2020 at a restaurant. D1 and D2 were clear that they met to negotiate a settlement, reached an agreement, and thus agreed to meet again at the following day to lift the Account Suspension. The 3^rd Party denied that they were there to negotiate an agreement, but only stating repeatedly that they met to “deal with the account closure”. He could not explain why if no agreement was reached, why D1 would agree to meet again the following day at BoC. He only repeatedly speculated that D1 was afraid of legal consequences. In this respect, in my judgment, D1 and D2’s oral evidence is much more logical and credible than the 3^rd Party’s.

(2)  D1 and the 3^rd Party met on the following day (20 January 2020) at BoC to request the bank to lift the suspension. At the bank’s request, they, as P’s directors, handwrote a board resolution instructing the bank to unfreeze P’s accounts and that any business of P could proceed with only one of the authorized signatories[46]. Given what D1 had discovered about the impropriety of Mr Chan and the 3^rd Party, and his actions as discussed above, it is inconceivable for D1 to have agreed to sign this board resolution without having reached the Settlement Agreement with the 3^rd Party. The 3^rd Party could not provide a credible explanation, only repeatedly stating that he was not in a position to explain but thought D1 was wary of the legal consequences. In my judgment, the 3^rd Party’s explanation was not credible.

(3)  D1 then signed on the documents for the transfer of his 7,500 shares in P to Mrs Chan and his resignation as P’s director. Similarly, it is inconceivable for D1 to agree to sign these documents without having first reached the Settlement Agreement with the 3^rd Party. D1 stated that since all matters were resolved with P’s payment, he was willing to transfer and resign. This explanation makes sense to the Court. In contrast, the 3^rd Party could not explain why D1 agreed to resign as director and transfer all his shares to Mrs Chan, again only speculating that D1 was afraid of legal consequences of the Account Suspension. That speculation is neither sensible nor believable. Therefore, I prefer D1’s evidence.

(4)  The handwritten memo[47] recorded only a few figures and a signature (which Ds alleged to be the 3^rd Party’s signature). The figures include all the amounts that were agreed to be paid by P to Ds: HK$350,000, HK$80,000, HK$22,500, HK$48,500, HK$1,100, and the total amount of HK$502,150. There is no evidence showing that it is a fabrication. While it cannot serve as proof of the Settlement Agreement, it does corroborate Ds’ evidence rather than the 3^rd Party’s.

(5)  D1 withdrew HK$502,150 from P’s account on 20 January 2020, right after the Settlement Agreement was reached and the BoC accounts were unfrozen. There was no record of P’s or the 3^rd Party’s protest until the present action. If there had not been a Settlement Agreement, P or the 3^rd Party should have protested as soon as possible. Further, HK$502,150 is not a round figure. Ds were able to explain how the figure was composed and provided its breakdown.

81.  Since the Settlement Agreement was reached in full and final settlement of the disputes and was performed, P’s claims in this action in respect of the Withdrawals and the Account Suspension must fail.

E6.  The Letter alleged to be defamatory

82.  I have recited the contents of the Letter in paragraph 12 above.

83.  In my view, P’s defamation claim is on the verge of frivolity and must fail.

84.  Firstly, the Letter focuses clearly on P’s internal problems. It was sent by D1 as P’s director and D2, who mistakenly considered himself still a director of P, to a Mr An of New World, a major customer of P. In the Letter, Ds informed New World that P had an internal problem about New World’s work payments – that when payments were made to P’s account, Mr Chan would privately ask his son to withdraw and told other directors that there was not much money from New World, which was insufficient for P’s expenses, thus necessitating Ds to incur money to compensate. Therefore, Ds asked New World to freeze P’s account, pending resolution of P’s internal problems. Although these contents suggest that the source of P’s internal problems originated from Mr Chan and the 3^rd Party, in my view, it does not lower the commercial integrity or reputation of P as a company.

85.  Secondly, the contents of the Letter did not suggest impropriety on P’s part. Whilst it suggested Mr Chan privately asked the 3^rd Party to withdraw New World’s payment from P’s account, and the use of the word “privately” may imply that proper procedures were not followed by Mr Chan and/or the 3^rd Party for the withdrawals, this does not necessarily indicate dishonesty or unlawful misappropriation by Mr Chan or the 3^rd Party. Furthermore, it is too remote to suggest that this implication extends to any defamatory connotation on P. I do not find that, in the context explained above, the Letter is understood to mean what P alleges in paragraph 13 above.

86.  Thirdly, Ds’ suggestion of “pending resolution of P’s internal problems” naturally implies that New World could resume payment after these issues were resolved. The Letter did not suggest that New World should terminate its business relationship with P.

87.  Therefore, in my judgment, I do not consider there is merit in P’s defamatory claim regarding the Letter.

88.  Even if I am held to be wrong and the contents of the Letter are defamatory of P, in light of my finding in section E2 above, that there was misappropriation of P’s money in P’s bank account by Mr Chan by himself or through the 3^rd Party repeatedly, I would hold that Ds’ defence of justification succeeds, as what the Letter said about Mr Chan and the 3^rd Party was true. Therefore, P’s claim against Ds for defamation must also fail.

89.  Therefore, it is not necessary to deal with the assessment of P’s alleged damages as mentioned in paragraph 14 above. For completeness, I should mention that for the loss of profit margin of HK$2,623,790.32, the loss of earnings on the SkyCity Project of HK$782,361.20 and the loss of profit on the excluded variation works in the SkyCity Project of HK$50,755.79, P has failed to prove causation. In other words, P has failed to provide proof of how these figures represent losses caused by the Letter alone. The 3^rd Party baldly asserted that these losses occurred because there were fewer works and hence lesser revenue after the Letter. Remarkably, P provided no evidence to show that other negative factors which were not caused by the Letter, such as the COVID-19 pandemics and their aftermath, and/or the downturn in the economy, were excluded from the calculation of the damages claimed. Therefore, in my view, these figures should be rejected. Regarding the aggravated damages of HK$1,000,000, this is a figure plucked out of the air, with no basis and no rationale, such as what was the unreasonable conduct of Ds and what additional injury caused by Ds unreasonable conduct. In my view, this amount claimed should also be rejected.

F.  Conclusion & Disposal

90.  For the above reasons, particularly:

(1)  as explained in sections E2, E4 and E5 above, P’s claims against Ds for the Withdrawals and the Account Suspension fail;

(2)  as explained in section E6 above, P’s claims against Ds for defamation fail; and

(3)  as explained in section E3 above, D’s counterclaims against P and claims against the 3^rd Party in respect of the alleged Purported Documents and the validity of the commencement of the present action fail.

91.  Accordingly, I make the following orders:

(1)  The Plaintiff’s claim against the 1^st and the 2^nd Defendants be dismissed.

(2)  The 1^st and 2^nd Defendant’s counterclaim against the Plaintiff be dismissed.

(3)  The 1^st and 2^nd Defendants’ claim against the Third Party be dismissed.

92.  Regarding costs, I see no reason why costs should not follow event. I make the following order on a nisi basis:

(1)  The Plaintiff shall pay the 1^st and 2^nd Defendants costs of the action, to be taxed if not agreed.

(2)  The 1^st and 2^nd Defendants shall pay the Plaintiff costs of the counterclaim, to be taxed if not agreed.

(3)  The 1^st and 2^nd Defendants shall pay the Third Party costs of the third party proceedings, to be taxed if not agreed.

The order nisi shall become absolute unless an application for variation is made within 14 days from the date of this Judgment.