KONG KIM POR PAUL v. LAI KIN TO JOSEPH

DCCJ 3909/2020

[2024] HKDC 1421

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3909 OF 2020

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JUDGMENT

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INTRODUCTION

1.  The plaintiff, who is a university lecturer, entrusted the defendant with money to invest in a newly formed company based on his trust and confidence in the defendant. However, the investment in the company was never as promised by the defendant. As a result, the plaintiff is suing the defendant for the return of his money, citing two personal guarantees made by the defendant.

BACKGROUND

2.  Although there were some disputes mentioned in the pleadings, I believe that the plaintiff's closing statement fairly summarized the background of the parties.

3.  The plaintiff holds a doctorate degree and has been a full-time and part-time lecturer at various universities for over 10 years. He specializes in cultural studies, cultural theories, and literature (文化研究、文化理論、文學). During the time of the incident, he worked as a part-time lecturer from the end of 2015 to June 2020.

4.  The defendant obtained a master's degree in business administration from a university in the United States in 1985. After returning to Hong Kong in 1986, he worked in financial and accounting systems for several multinational companies. Around 1996, he joined an insurance company and primarily worked as a financial planner (and as a registered insurance broker) until July 2014.

5.  The defendant went on to work for Lexton International Wealth Management and became the plaintiff's financial planner in 2002. He then formed his own company, Henyep International Wealth Management Limited, with other partners in 2004 and served as a Responsible Officer before becoming the CEO. Around 2008, he worked as the CEO of Libra Wealth Management Limited. The defendant claimed to have left the insurance industry in 2014.

6.  The plaintiff and the defendant first met in the 1990s, and they became acquainted in 2002 when the plaintiff's previous financial planner resigned from Lexton, and the plaintiff's account was transferred to the defendant. Since then, the defendant has provided the plaintiff with formal and informal advice on fund investments, and a relationship of trust has developed between the parties. Whenever the defendant moved to another firm, the plaintiff followed as a client of the defendant.

7.  I accept the above background as true. I find that the parties knew each other for over 20 years before the plaintiff joined the present investment in 2015. They were friends, and the defendant had been the plaintiff’s financial advisor throughout the years.

THE PLAINTIFF’S CASE

8.  In December 2015, when the plaintiff inquired about an investment opportunity, the defendant proposed to set up a new company to do business in Hong Kong. The defendant personally guaranteed, among other things, a full return of the plaintiff's money within 3 years (referred to as "the 1^st Personal Guarantee").

9.  On 21 December 2015, the plaintiff paid RMB500,000 (“the Sum”) to the defendant via a cashier’s order deposited into the defendant’s personal bank account held with HSBC.

10.  The defendant does not dispute the receipt of the Sum.

11.  After making the said deposit, the plaintiff was asked by the defendant to sign a contract called an Authorization Letter (委托接款书) (“the Authorization Letter”). The Authorization Letter stated that the defendant was expressly authorized to receive the Sum for and on behalf of the company Ample Wealth Group Holdings Limited (華財萬通集團控股有限公司) (“the Company”) pending the opening of the Company’s bank account. The defendant also undertook the transfer of the sum to the Company’s bank account once it was ready. The Authorization Letter was signed by one Mr Chiang Ling Fai Stanley (“Mr Chiang”) representing the Company as Party A, the plaintiff as Party B, and the defendant as Party C, and it was back-dated by Mr Chiang or the defendant to 18 December 2015.

12.  On 8 March 2016, the Company was incorporated by the defendant with a paid-up capital of HK$10,000, and the plaintiff was allotted 3% of the Company’s shares.

13.  However, the plaintiff claimed that the defendant failed to deposit the sum into the company. Additionally, the plaintiff alleged that the company had never carried on any actual business, and had not filed any auditor's report to show its financial position. In breach of the Authorization Letter, the defendant has still failed to produce a receipt showing that the Sum was paid into the Company’s bank account.

14.  In late 2018, the plaintiff began seeking repayment from the defendant.

15.  On or about 2 January 2019, the defendant reassured and promised the plaintiff that the Sum would be repaid to the plaintiff on 30 June 2020, together with an additional 20% as compensation and another 20% as damages for any late payment after 30 June 2019 (referred to as “the 2^nd Personal Guarantee”).

16.  On 1 June 2019, the plaintiff reported the incident to the police and was advised to wait to see if the defendant would honour the 2^nd Personal Guarantee on 30 June 2020 before taking legal action.

17.  The plaintiff claimed that the defendant, in breach of the 1^st and 2^nd Personal Guarantees, had and received the Sum without consideration and has failed to return it to the plaintiff. As to the allegation of “no consideration”, the plaintiff averred that the 3% shares of the Company transferred to him were not valued at RMB500,000.

18.  During the trial, the plaintiff decided not to pursue the claim of fraudulent conspiracy. The plaintiff clarified that the causes of action on which the plaintiff relied were breach of the 1^st and 2^nd Personal Guarantees and, alternatively, unjust enrichment.

19.  The plaintiff claims for the return of the Sum of RMB500,000 (or its equivalent of HK$600,000), or damages and/or any other relief.

THE DEFENDANT’S CASE

20.  In December 2015, the defendant told the plaintiff that his friend was in the course of setting up a new company in Hong Kong, which would be used as an investment vehicle to provide services relating to resource integration and marketing. The plaintiff was interested and wanted to invest in the company by purchasing a certain number of shares.

21.  The defendant then told the plaintiff that the shares in the company to be set up were fully subscribed by other investors, and that the defendant would see any subscribers who would wish to release some of their entitlements. Eventually, one of the subscribers was willing to release an entitlement for the subscription of 3% of the shares, and the consideration would be HK$600,000.

22.  The defendant denies that there was any so-called 1^st Personal Guarantee.

23.  The defendant confirmed that he received from the plaintiff RMB500,000 in his bank account.

24.  The defendant pointed out that, in March 2016, when the Company was incorporated, the name of the Company was registered as Ample Wealth Group Limited (華財萬通集團有限公司), leaving out the word “Holdings”.

25.  The defendant averred that the plaintiff had become a shareholder of the Company and received 3% shares of its entire share capital in March 2016. The defendant himself was appointed as one of the directors.

26.  The defendant denies that he had never deposited the Sum into the Company. He contends that the Sum which he received from the plaintiff was given to one of the subscribers in exchange for 3% shares of the Company, and the plaintiff was fully aware and agreed to it.

27.  The defendant denies personally giving the 2^nd Personal Guarantee. The defendant claims that the so-called 2^nd Personal Guarantee was a letter issued by the Company to the plaintiff dated 2 January 2019, not a letter issued by him.

28.  The defendant’s case is primarily that, as pleaded, the plaintiff received the 3% of the shares in the Company for RMB500,000 in March 2016, as arranged by the defendant.

29.  The defendant denies that the plaintiff is entitled to the return of the Sum and claims that the Sum was the consideration for the 3% of the Company’s shares, which are still held by the plaintiff.

ISSUES

30.  Mr Leo Yu of counsel appears for the plaintiff, while Mr Andrew Lau is the counsel appearing for the defendant. I appreciate their effort in agreeing on the trial issues, which are as follows:-

(1)  Whether the defendant gave the 1^st Personal Guarantee in or around December 2015. If so, whether there has been a breach of the same by the defendant and what damages should be awarded to the plaintiff;

(2)  Whether the defendant gave the 2^nd Personal Guarantee on 2 January 2019. If so, whether there has been a breach of the same by the defendant and what damages should be awarded to the plaintiff; and

(3)  Whether the plaintiff’s claim for unjust enrichment was properly pleaded. If so, whether the defendant was unjustly enriched by receiving the Sum from the plaintiff.

THE PLEADING POINT

31.  Perhaps it may be convenient for me to first deal with the pleading point of unjust enrichment.

32.  Counsel for the defendant argues that the money had and received by the defendant was pleaded in the same sentence by the plaintiff as the breach of the 1^st and 2^nd Personal Guarantees (paragraph 10 of the Statement of Claim). In the premises, the defendant submits that unjust enrichment has not been sufficiently pleaded by the plaintiff as a restitution claim cannot be based on a contract.

33.  However, in my view, this paragraph clearly states that the defendant had and received the sum "without or without corresponding consideration". The plaintiff further clarified in the Reply that the 3% shares given to the plaintiff were not consideration for the Sum paid by the plaintiff because the paid-up capital of the company was only HK$10,000 and the company did not have any actual business activities.

34.  In both paragraphs 10 and 12 of the Statement of Claim, the plaintiff sought the return of the Sum. I am of the view that a claim for damages for breach of the personal guarantees is different from a claim for the return of the Sum for lack of consideration. The plaintiff's use of the phrase "return of the plaintiff's money" in relation to his claim for damages for breach of the guarantees does not negate the fact that the claim was for restitution of money.

35.  In my view, the plaintiff’s pleaded facts for money had and received, lack of consideration, and the return of money would support his unjust enrichment claim.

36.  Having read the pleadings as a whole (in particular paragraphs 10 and 12 of the Statement of Claim and paragraph 22 of the Reply), I find that the claim of unjust enrichment has been sufficiently pleaded and is a live issue for this trial.

APPLICABLE PRINCIPLES

37.  It is well established that the law of unjust enrichment involves asking the following four questions: (a) Was the defendant enriched? (b) Was the enrichment at the plaintiff’s expense? (c) Was the enrichment unjust? (d) Are any of the defences applicable? (Shanghai Tongji Science and Technology Industrial Company Limited vs Casil Clearing Limited (2004) 7 HKCFAR 79).

38.  However, I consider that the main dispute in our case concerns only the question of whether the enrichment was unjust. This is particularly so where the plaintiff alleges that there was a failure of consideration for the amount he paid.

39.  In Chitty on Contracts Vol 1, (2023) 35^th Ed, para 33-063, re Failure of Basis:

“General principles. Where an enrichment has been transferred under a transaction that is or becomes ineffective, the payer may recover the value of the money provided that the basis for the payment has totally failed. Although this ground of restitution is traditionally called ‘failure of consideration’, increasingly the courts are replacing the language of consideration, with its contractual connotations, with that of basis. … Although the ground of failure of basis is not confined to contracts, most of the cases are concerned with failed contracts. In that context failure of basis occurs where there has been a complete failure of that performance for which the payer had bargained. Thus, the failure is judged from the payer’s point of view and:

‘… when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is generally speaking, not the promise which is referred to as the consideration, but the performance of the promise.’

…”

40.  In para 33-068:

“Comparison with damages. Where the payee is in breach of contract the unjust enrichment claim is an alternative to an action for damages for breach of contract. This will be an attractive option in cases in which the payer has made a bad bargain or where the damages will be limited or irrecoverable. This may be the result of requirements such as remoteness, the duty to mitigate and restrictions as to the kind of loss that is recoverable. Restitution, therefore, has a clear advantage over a claim for compensation for reliance losses, since such a claim will not succeed if the defendant shows the reliance loss is greater than the expected profit. Apart from this, the unjust enrichment claim has procedural and evidential advantages in that it is a liquidated claim. It will also be attractive in those exceptional cases in which a total failure of basis is established despite the receipt of a benefit by the payee. This is because an action for damages, but not an action for money had and received, would take account of such benefits. …”

CREDIBILITY OF WITNESSES

41.  Both the plaintiff and the defendant gave evidence before the court. Mr Wong Lai Kun is the friend of the plaintiff and gave evidence for the plaintiff only in relation to the 2^nd Personal Guarantee. Mr Chiang is the promoter and consultant of the Company, and he gave evidence for the defendant.

42.  I find that the plaintiff is an honest and truthful person. He gave evidence in a very confident and straightforward manner. His evidence was consistent with the witness statements and throughout the trial. I also find Mr Wong to be a credible witness. I accept both of their evidence.

43.  Conversely, I find that the defendant lied throughout the trial. Not only did he change his evidence on many occasions, but he was evasive on all issues. Unless otherwise stated, I reject his evidence entirely.

44.  Mr Chiang is also not a credible witness. I find that his evidence is no less fabricated than that of the defendant. I also reject his evidence in its entirety.

FINDING OF FACTS

The 1^st Personal Guarantee

45.  It is the plaintiff’s evidence that, in or about mid-December 2015, when he asked the defendant for an investment opportunity, the defendant told him that a friend of his, Mr Chiang, was in the process of setting up a new company, later identified as Ample Wealth Group Limited (華財萬通集團有限公司), ie the Company.

46.  The plaintiff received an email from the defendant on 16 December 2015, containing four attachments, which the defendant invited the plaintiff to discuss further if the plaintiff was interested in it. The attachments are: (1) A business prospectus of the new company (“the Prospectus”); (2) An investment agreement (華財萬通股份有限公司參股合股協議書) (“the Investment Agreement”); (3) The Authorization Letter (委托接款书); and (4) a blank form for providing the shareholder’s personal information. (Although there has been some dispute between the parties as to the discrepancy in the name of the company as set out in these attached documents, I do not consider this to be a material issue because the Company was ultimately registered as Ample Wealth Group Limited and the plaintiff was registered as a 3% shareholder of that company. I have no doubt that the parties were referring to one and only one company, ie the Company).

47.  The plaintiff said that he had a meeting with the defendant in a coffee shop a few days later. The content of the discussion was evidenced by the defendant's handwritten note (“the Handwritten Note”). The defendant’s offer was discussed as follows: (1) The plaintiff would become one of the shareholders of the Company; (2) The defendant would issue the plaintiff a certain number of shares of the US OTC stocks in the value equivalent to the amount of plaintiff’s investment in the Company, ie the Sum, and these OTC stocks would be transferred to be listed on NASDAQ in the future; and (3) the Company would return the entire investment as a reward to the investor in less than 3 years.

48.  The plaintiff said that, during the meeting, the defendant emphasized to him that he would get his principal back within 3 years, and the plaintiff would be given the gratuitous OTC stocks as an incentive. The overall investment in the Company would be divided into 20 parts of RMB500,000 each.

49.  The plaintiff said that he decided to invest at the meeting, but he said that the decision he made was based only on the trust and confidence he had in the defendant and the defendant’s assurance that “大家識咗咁耐、咁多年，你信我啦，如果公司俾唔到，我私人俾返你”. In essence, the defendant personally guaranteed to the plaintiff that if the Company could not pay the full amount within 3 years, the defendant would return the Sum to the plaintiff. The plaintiff said that this was the 1^st Personal Guarantee.

50.  The plaintiff explained that he had no experience in opening/forming a limited company. He had only previously bought some investment funds through the defendant. He has no business experience and has only limited financial knowledge. The defendant was his financial advisor. The plaintiff said that he did not know that the defendant had left the insurance or financial industry in 2014. He still regarded the defendant as his financial advisor and had invested based on his advice. (The defendant accepts that the plaintiff lacked business and financial experience).

51.  The plaintiff said that the only questions he asked the defendant (other than about the prospects of the Company) were whether there would be shareholders’ meetings and whether there would be auditor’s reports. The plaintiff said that he had never previously deposited money into the defendant’s personal bank account, and that he did not know Mr Chiang or any other investors in the Company. He stated that when the defendant noticed his hesitation, the defendant eagerly made the aforementioned oral promise (ie the 1^st Personal Guarantee) to him. Consequently, this gave him the confidence to deposit the money into the defendant’s personal bank account. I carefully observed the plaintiff as he testified in court. He gave evidence in a confident and straightforward manner. I believe that he is a truthful witness, and I accept his evidence.

52.  The plaintiff said that he signed the Authorization Letter during the meeting as requested by the defendant, but it was taken away by the defendant for Mr Chiang to sign, who was not present at the meeting. The plaintiff was only given a copy of the signed Authorization Letter when the Company was incorporated in March 2016.

53.  After the meeting, the plaintiff then proceeded to deposit RMB500,000 into the defendant’s bank account on 21 December 2015.

54.  The defendant, on the other hand, denies that he had ever made the alleged oral promise. However, several significant features of his evidence and some subsequent events cause me to find it hard to believe the defendant.

55.  First, the defendant admitted that the plaintiff did not rely on the Prospectus and the Investment Agreement to invest in the Company.

56.  The defendant explained that the business nature of the Company is “資源整合”. I noted this term was used repeatedly by the defendant and Mr Chiang in their evidence. The defendant referred to the Prospectus which stated that the business to be carried on by the Company would be “创新金融。 联营配资、联合经营、联合销售。 配予资金、配予资源、配予综合股票， 合作上市。 推动大众创业、万众创新。” Mr Yu stated that he did not understand what it meant.

57.  Following the above discussion, Mr Yu asked the defendant why the plaintiff would not sign the Investment Agreement, which appeared to provide all the protections the plaintiff needed, but rather chose to sign the Authorization Letter only.

58.  The defendant admitted that the plaintiff refused to sign the Investment Agreement because the plaintiff found that the Prospectus and the terms set out in the Investment Agreement were too complicated to understand. The defendant said that the plaintiff would prefer to sign the simple Authorization Letter instead. The defendant then stopped to explain what else the plaintiff was relying on.

59.  In my view, it is clear that the plaintiff did not rely on the Prospectus or the Investment Agreement, nor did he rely on the OTC stocks incentive (which I will discuss below). The only thing on which the plaintiff relied must be the 1^st Personal Guarantee given by the defendant.

60.  Secondly, the subsequent events show that the defendant or the Company made considerable efforts to either return or delay the return of the Sum to the plaintiff. Since the Investment Agreement was not signed, the Company should not be obliged to allow the plaintiff to withdraw the Sum in stages over the three-year period, as provided for in the Investment Agreement.

61.  In my view, it is reasonable to conclude that there was an oral agreement between the plaintiff and the defendant regarding the return of the Sum within 3 years. If there was no such agreement, the defendant or the Company would not have been engaged in the disputes with the plaintiff over the years, and there would be no reason for the alleged 2^nd Personal Guarantee to have been made (as will be discussed below). I do not accept the defendant’s assertion that the return of the Sum was simply a friendly gesture on the part of the Company.

62.  Thirdly, it is also noteworthy that in December 2015, when the plaintiff decided to invest, the Company did not even exist. There is simply no way that the defendant could have made any promises on behalf of the Company.

63.  In essence, I find that this must be the defendant personally making the promise that the Company would be able to return the plaintiff’s investment in full (ie the Sum) within 3 years, failing which the defendant would repay the Sum to the plaintiff by himself. The simple reason for this is that when the plaintiff agreed to invest in the Company in December 2015, the Company had not yet incorporated, and the defendant was not yet a director of the Company. The defendant was only appointed as a director on 8 March 2016. Therefore, any promise or guarantee of the Company’s return on investment must have come from the defendant, not the Company.

64.  Lastly, it is also important to note that the transaction in which the plaintiff subscribed for the shares was never a quid pro quo share purchase agreement in the Company’s shares (as will also be discussed below). It is the plaintiff’s evidence, and I accept, that the plaintiff did not even know how many number of shares he was purchasing. He was subscribing to one part of shares for RMB500,000. I find that the plaintiff must have relied on the defendant’s promise for the return on investment.

65.  Therefore, I find that the defendant did in fact make the 1^st Personal Guarantee to the plaintiff, and that the plaintiff relied on the said guarantee to deposit the Sum with the defendant.

Breach of the 1^st Personal Guarantee

66.  As shown in the 2017 auditor’s report disclosed by the defendant in these proceedings, the Company was trading at a loss and it had no income. There is no dispute that the situation remained the same and the Company had never been able to make any return on investment to the plaintiff.

67.  The defendant also disclosed at trial that the Company had been closed down since 2021.

68.  Therefore, I find that the Company failed to pay any reward on the plaintiff’s investment and the defendant failed to repay the Sum to the plaintiff in breach of the 1^st Personal Guarantee.

69.  In the circumstances, I would award damages in the sum of RMB500,000 in favour of the plaintiff.

Unjust enrichment (failure of basis)

70.  I think it is now appropriate to address the issue of unjust enrichment.

71.  The terms of the Authorization Letter are as follows:-

“甲方: 華材萬通集團控股有限公司

乙方： 江剑波博士

丙方： 赖建涛

鉴于乙方有意愿入股的甲方的银行户口尚在办理中， 故特授权丙方代表甲方接受乙方的投资款人民币伍拾万元正,（¥500,000） 。

银行户口名称： HSBC

户口号码： 004 ...

戶口持有人： LAI Kin To Joseph

丙方承诺于收妥款项后，配合甲方的进度， 转款存入甲方的银行户口，完成乙方投资甲方的程序。

…

本协议于2015年12月18日， 于香港签署。

（三方签署）”

72.  According to the above terms, the defendant was required and undertook to pay the Sum received from the plaintiff into the Company’s bank account in order to complete the process of the plaintiff’s investment in the Company.

73.  Whether the defendant did so, or did not do so at all, is hotly contested at trial.

74.  The plaintiff says that although the defendant informed him that the Company was later incorporated in March 2016, the defendant has never provided any receipt that the Sum had been deposited into the Company’s bank account despite repeated requests. Nor the defendant has ever provided him with any auditor’s report of the Company. The plaintiff said that he did not even know whether the Company had any bank accounts. He said that the defendant only disclosed a copy of the Company’s bank statement (of September 2016) for the 1^st time during the defendant’s filing of his supplemental witness statement. He said that, worse still, the transactions on the said bank statement were all redacted. (It was the defendant’s evidence that the Company was only able to open its bank account in August or September 2016).

75.  As no annual general meeting was held and no auditor’s report was provided throughout the years, the plaintiff began to suspect whether the Sum was being invested in the Company and whether the Company had ever conducted any business. Towards the end of the three-year investment period, the plaintiff started to believe that it might have been a scam.

76.  As to the defendant’s evidence, I will give my assessment by reference to different topics canvassed at trial.

Share subscriptions

77.  According to the Incorporation Form of the Company (NNC1) filed to the Companies Registry on 2 March 2016, the details of the Founder Members of the Company, out of the total of 10,000 issued shares at HK$1 per share, are as follows:-

(1)  Ms KWOK Lai Kuen (4,400 shares) [the defendant’s wife];

(2)  Ms KWAN Shuk Kuen (4,150 shares);

(3)  Ms LAU Chi Shun (350 shares) [Mr Chiang’s friend];

(4)  Ms LAM Lai Hung (800 shares); and

(5)  Mr KONG Kim Por Paul (300 shares) [the plaintiff].

78.  It is important to note that, as pleaded in the Defence, the defendant’s case was that, in December 2015, the shares of the company to be established were fully subscribed, “one of the subscribers” was willing to release an entitlement of 3% of the shares and the consideration was HK$600,000. However, the identity of the said “one of the subscribers” was never disclosed until the defendant’s supplemental witness statement was filed in October 2020. It was the defendant’s wife Ms Kwok.

79.  I find that the defendant’s claim of a 3% subscription rights release by Ms Kwok was a complete lie. First, it was contradicted by the Handwritten Note, which recorded the parties’ discussion a few days after the emails. There was never any mention of the Company being fully subscribed. If that was the case, there was never any need to present the Company to the plaintiff. Or if it were the case, the discussion would have focused on how to justify the value of shares transfer, not on inviting the plaintiff to join. It was also contradicted by the terms mentioned in the written Authorization Letter and the Investment Agreement (not signed). It was also contradicted by the documents filed to the Companies Registry. It stated clearly in the Incorporation Form (NNC1) that the plaintiff was one of the Founder Members (創辦成員). I disagree with Mr Lau’s submissions that there was an offset (對價) between the plaintiff’s Sum and Ms Kwok’s 3% shares. I accept the plaintiff's evidence that the defendant never mentioned anything about buying the subscription rights from the defendant's wife and that he would not have invested if it was that complicated.

80.  I find that there was nothing in the contemporaneous documents to suggest that the plaintiff’s share subscription would be 3%. Rather, it only stated that each part of the investment would be RMB500,000. I reject the defendant’s evidence that the shares of the Company were fully subscribed and that his wife had to release 3% of her entitlement to the plaintiff.

81.  Further, the defendant has given 3 different versions of the whereabouts of the Sum. The 1^st version is the same as that of the Defence and witness statements that the Sum belonged to his wife and that the defendant had already paid the Sum to her. The 2^nd version is that his wife, being the major shareholder of the Company, was generous enough to ask the defendant to keep the Sum in his personal account for the Company’s use. The 3^rd version is that the Sum was still remained in the defendant’s personal bank account, because the defendant borrowed the Sum from his wife in order to lend it to the Company for the Company’s use, and therefore the defendant was not required to transfer the Sum to his wife. I find that the defendant has fabricated and changed his evidence, and I completely reject his 3 versions of stories.

82.  It is also the defendant's evidence that Mr Chiang was the one who decided how many shares of the company each founder member was entitled to subscribe to at the time of the company's establishment. The defendant could not even answer when he knew that his wife would become a shareholder of the Company and how much his wife paid for those shares. I do not believe the defendant’s evidence that at the time he introduced the new business or investment opportunity to the plaintiff, all shares of the Company had already been subscribed. It is far too easy for the defendant to, and I find the defendant did fabricate a case in which someone (or his wife) was willing to relinquish some of his/her entitlement and divert the Sum to the defendant himself. I also find that, in the absence of any supporting documents, there was no justification or proper valuation for Ms Kwok to charge HK$600,000 for the so-called release of the share subscription entitlement.

83.  In view of such circumstances, I take the view that there was no share purchase agreement or share entitlement transfer agreement made between the plaintiff and the undisclosed defendant’s wife. I find that the whole scheme of releasing an entitlement was a mere pretext or scheme to extract the Sum from the plaintiff.

84.  In any event, I consider that as the Sum which was originally intended to be invested in the Company was diverted or misappropriated by the defendant or his wife, and the Sum was never used for the Company. As a result, the value of the Company or, in fact, the value of the 3% shares of the Company was never the same as agreed. By depriving the Sum from the plaintiff or the Company, the defendant had never completed the investment process as required under the Authorization Letter, and the 3% shares arranged by the defendant or Mr Chiang to be allotted to the plaintiff were nothing more than some shares of an empty shell company (as it turned out that the plaintiff was the only shareholder or subscriber willing to pay cash for the share capital, which I will discuss below). I find that there was a total failure of basis in this case.

Share capital

85.  The company has only one auditor’s report, dated 8 January 2018, for the year ended March 2017. The report revealed that the Company’s share capital was only HK$10,000 (10,000 shares issued at HK$1 per share).

86.  When asked by the court whether the Sum ie the RMB500,000 (less the $300 paid-up capital) contributed by the plaintiff should also be reflected as share capital (or at least as share premium if under the old regime of the Companies Ordinance which had been abolished in March 2014) in the auditor’s report, the defendant admitted that it should have been, but it was not. He said it was an oversight. I do not accept the defendant's explanation. On this evidence alone, I find that the sum was never paid into the company's bank account and was never treated as the company's share capital. It is consistent with my finding above that the defendant diverted the sum to himself or his wife.

87.  The plaintiff also pointed out that if his 300 shares were worth RMB500,000, then the company's total share capital should have been around RMB16 million.

88.  On this issue, the defendant and Mr Chiang were questioned extensively under cross-examination as to how much each of the founder members had paid for their shares. Neither the defendant nor Mr Chiang could provide any answer or rough figures. They were not even able to indicate whether the figures were high or low. They mumbled that they could not recall. They could not remember how much each founder member had contributed or the total contribution of all the founder members to form the Company.

89.  Nevertheless, the defendant attempted to explain that there could be intangible skills that a shareholder could contribute to justify the allotment of shares, and that these did not necessarily have to be cash. Mr Chiang also gave evidence to the same effect. The following information is drawn from their evidence:-

(1)  Ms Kwok was the major shareholder of 4,400 shares, the defendant said that he did not recall how much she paid, but she had “contributed him” to the Company (ie sending the defendant to work in the Company);

(2)  Ms Kwan had previously worked in the food industry before and she could contribute her expertise in the food industry;

(3)  Ms Lau held 350 shares, approximately the same number of shares held by the plaintiff. She did not have to provide any cash because she allowed the Company to share another Mainland company’s office in TST for 3 months. I can immediately reject this evidence as there is no way that 3 months of rent shared by the Company could amount to more than RMB500,000 contributed by the plaintiff; and

(4)  Ms Lam was entitled to 800 shares free of charge as she could contribute her connections with other Mainland companies in Qianhai (前海).

90.  I find that the evidence of the defendant and Mr Chiang is totally unbelievable and a fabrication of evidence. The case put forward by the defendant is hardly supported by any credible evidence and is inconsistent with all the contemporaneous documents.

91.  Again, I reject the defendant’s evidence. If it were the case that other intangible skills were contributed in lieu of cash, I would expect that there would be a shareholders’ agreement or similar documentation to record this.

92.  I accept Mr Yu’s submission that apart from the RMB500,000 invested by the plaintiff, no money was invested by any of the other shareholders.

93.  Mr Yu describes Mr Chiang’s conduct as “空手套白狼” (Capturing the wolves with bare hands; to gain something with nothing). Of course, Mr Chiang disagrees. I will leave this for the defendant’s witnesses to consider for themselves.

Amounts due to directors

94.  As shown in the auditor’s report, the amounts due to directors were HK$900,131.

95.  The plaintiff denies that his investment (ie the Sum) was treated as part of the “amounts due to directors”.

96.  Since the auditor's report does not provide further details of the amounts due to directors, I repeat my findings above in relation to the director’s loans alleged by the defendant, and I find that this issue is inconclusive and irrelevant to the present case.

OTC stocks

97.  The defendant was asked whether the OTC shares given to the plaintiff in equal value to the Sum could be realized in the market. The defendant answered yes, but he said that the catch was that there would be a lock-up period, and at the expiry of the lock-up period, the shares would be worth a different amount. He clarified that it would then be worth $1, or it could be worth up to $500 million.

98.  Mr Chiang’s evidence in this regard is that the OTC shares given to the plaintiff had already been discounted from the market value of RMB1,000,000 to match with the Sum in RMB500,000. He said that it was a good package given to the plaintiff when the plaintiff decided to invest in the Company.

99.  However, when the court inquired why the Company was endeavouring to repay the plaintiff’s investment when the plaintiff had already got more (the OTC shares) than what he had invested. Mr Chiang could not give any answer.

100.  In the premises, it is clear that the OTC shares provided to the plaintiff have little or no significant value. The defendant (including Mr Chiang) utilized these OTC shares as a means to encourage the plaintiff to invest in the Company, and more importantly, to put the plaintiff at ease regarding the money he invested.

Ample Wealth FinTech

101.  In May 2017, the plaintiff was given 12% shares of a related company called Ample Wealth FinTech Company Limited (華財萬通科技綜合有限公司). The transaction was gratuitous. The defendant said that FinTech was very popular nowadays and that the company had expected a very good future. However, this company also has no assets except the paid-up capital of HK$10,000. The defendant confirmed that this company was also operating at a loss.

102.  I find that this is just another example of the defendant issuing shares of empty shell companies to comfort the investors and to buy time.

Business activities

103.  The defendant produced some photographs showing that the Company had attended several press conferences in Mainland China and Malaysia from 2016 to 2018, either as a sponsor or an invitee. He said that the plaintiff also participated in these trips as a representative of the Company, together with the defendant and Mr Chiang.

104.  The plaintiff said that the defendant only invited him to attend these activities as a guest. He provided English translation services for some documents, as requested by the defendant. He did not know what business the Company was conducting at those press conferences. He describes these activities as only “飲飲食食”.

105.  As to the defendant’s suggestion that the Company was the strategic partner for overseas sales of the drink products named “核桃黑芝麻露” and “植的爱 - 金银花桔梗茶,” the plaintiff said that apart from the fact that he was only given two cans of “植的爱” to try when he visited the Company’s office, he knew nothing about this business.

106.  As can be seen from the auditor’s report for 2017, the Company’s revenue was nil with a loss of HK$1 million, and the defendant has never been able to produce any invoices or contracts (if any) relating to the Company’s business. In this regard, I accept the plaintiff’s evidence that the Company did not carry on any business or any actual business.

107.  However, in making such a finding, I do not mean to suggest that the defendant was at fault if the Company could not generate any business. It is simply consistent with my findings above that the defendant (and Mr Chiang) used the so-called business activities to create a false impression that the Company was making efforts but without success. What the defendant did was merely part of the scheme anticipated to explain or justify how the plaintiff's money was spent and to postpone repayment to the plaintiff. In fact, the plaintiff’s money (ie the Sum) was never credited to the Company.

108.  The defendant said that both the Company and Ample Wealth FinTech no longer existed as they had been closed down since 2021.

109.  All in all, I find that the defendant has to return the Sum to the plaintiff as the basis for the payment has totally failed.

The 2^nd Personal Guarantee

110.  On 2 January 2019, the plaintiff and his friend, Mr Wong Wai Lun, went to the Company's office to discuss the repayment with the defendant and Mr Chiang. They asked the defendant to honour the 1^st Personal Guarantee.

111.  Mr Wong said that the plaintiff was very emotional at that time, and the defendant eventually promised to repay the Sum with 20% compensation (totalling RMB600,000) and another HK$200,000 by way of instalments before 30 June 2020. And there would be an additional 20% compensation on the outstanding sum if there was any further delay. He said that Mr Chiang had also agreed to this. The plaintiff refers to these repayment terms as the 2^nd Personal Guarantee.

112.  The defendant said that the 2^nd Personal Guarantee was given only by the Company, not by him personally.

113.  It is not disputed by the parties that the terms of this 2^nd Personal Guarantee were reduced into writing as a guarantee letter issued by the Company to the plaintiff during the meeting. The plaintiff and Mr Wong testified that they had read the said letter and noted it was a letter from the Company. They thought that it gave them at least some protection in addition to the defendant’s oral promise.

114.  I find that the 2^nd Personal Guarantee was reduced to writing and was given by the Company, not the defendant.

115.  Although I found that the 2^nd Personal Guarantee was given by the Company, I have to state clearly that it has no consequence on my view that the plaintiff was telling the truth. The circumstances giving rise to the 2^nd Personal Guarantee were quite different to the 1^st Personal Guarantee. At the time the defendant gave the 1^st Personal Guarantee, the Company had not been formed yet and there were still three years to go before he fulfilled his promise. As it occurred to me, the defendant and Mr Chiang still had sufficient time to paint the picture of how the business failed or how the money was spent on the business activities.

116.  However, the situation with the 2^nd Personal Guarantee is quite different. The plaintiff was pressing to report to the police, and the three-year investment period had expired. There was simply no room for the defendant to delay the repayment any further. As I see it, the defendant and Mr Chiang were very “smart” persons; they would have been careful not to make any personal promises at this late stage. In fact, it will be very difficult to discern whether the oral promise was made by the defendant personally or made through the defendant as a director of the Company.

117.  I also take into account that the plaintiff was very emotional at that time. It would be difficult for him or Mr Wong to listen clearly to whether the defendant was indeed making any personal promises. Therefore, I find the plaintiff has not proved that the 2^nd Personal Guarantee was given by the defendant personally.

118.  More importantly, the relief prayed by the plaintiff was only RMB500,000, which does not include the additional amount under the 2^nd Personal Guarantee. Therefore, I dismiss the claim with respect to the 2^nd Personal Guarantee.

CONCLUSION

119.  For the above reasons, I find in favour of the plaintiff that the defendant was in breach of the 1^st Personal Guarantee and thus needs to pay damages to the plaintiff for RMB500,000. I also find in the alternative that the defendant was unjustly enriched for the Sum (ie RMB 500,000) and ought to return it to the plaintiff.

120.  I reject all the defences put forward by the defendant.

121.  Therefore, I give judgment for the plaintiff that the defendant shall pay RMB500,000 to the plaintiff forthwith, plus interest at the judgment rate from the date of judgment until payment.

122.  I also make an Order nisi that the defendant shall pay the plaintiff’s costs of the action with certificate for counsel, and such costs to be taxed if not agreed.