CHEUNG LIN TAI AND OTHERS v. SUN POWER INTERNATIONAL INVESTMENT LTD

DCCJ 436/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL JURISDICTION ACTION NO. 436 OF 2002

(Transferred from High Court Action No. 6015 of 1999)

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JUDGMENT

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1. The Plaintiffs claim against the Defendants rental for the hiring of two public light buses from 8 November 1995 to 1 May 1996 of $45,000 to 1st Plaintiff and $51,000 to 2nd Plaintiff respectively and for the period 19 June 1996 to 13 September 1996 in the sum of $58,200 of each public light bus totalling $116,400 to the 2nd Plaintiff.

2. The Defendant denies it is liable and counterclaims for $142,925.48 against the 1st Plaintiff; $134,950.78 against the 2nd Plaintiff; and the aggregate of the two sum of $277,876.26 as an alternative claim against the 3rd Plaintiff. The Defendant further seeks to set off its counterclaim against the Plaintiff's claim.

Background

3. In early October 1994, the 1st and 2nd Plaintiffs together with seven other persons applied to the Transport Department to operate Public Light Bus (Scheduled) Services routes number 41, 42, 608, 609 and 610S (hereinafter referred to as "the said routes"). In order to facilitate the application and comply with the Transport Department regulations, the Defendant Company was incorporated in April 1994. Each member being an owner of a public light bus ("PLB") was entitled to be allotted one share in the Defendant Company while Chu Moon Po who had 5 PLBs was allotted 5 shares in Defendant Company.

4. At all material times up to 19 June 1996, the 1st and 2nd Plaintiffs were the registered owners of public light buses bearing registration numbers FU 5244 and FE 4328 respectively (hereinafter called "the said two PLBs"). It is not disputed that the Transport Department encourages registered owners of public light buses to incorporate into a company or register as a partnership business before applying for a license to operate the said routes.

5. Consequently, the Defendant Company was incorporated with the understanding that each registered owner holding one PLB would be allotted one share in the Defendant Company. It was the Plaintiff's case that should any shareholder wish to dispose of his/her share together with his/her respective PLB, the other shareholders of the Defendant Company shall have a pre-emptive right to purchase the PLB and the share.

6. The Defendant Company filed an application to the Transport Department for its approval to run the said routes on 3rd October 1994.

7. On or about 18 October 1994, the 1st and 2nd Plaintiffs each entered into a car hire agreement with the Defendant Company, whereby the Defendant Company agreed to hire the said two PLBs at a daily rental of $500 payable monthly each for a period of 12 months. The 1st and 2nd Plaintiffs would be responsible for their own PLB's repair and maintenance including change of tyres, air conditioner, insurance payments and tax. The Defendant Company would in turn place their PLBs on the said routes and regulate the management of the said routes. The Defendant Company further agreed to be responsible for the installation of money boxes, route signs and posts and the cost of changing the paint colour of their PLBs (hereinafter referred to as "the said hire agreements").

8. About one week before the said routes began operation on 8 November 1995, it is the 1st and 2nd Plaintiffs' evidence that the shareholders of the Defendant Company held a meeting and the shareholders resolved and agreed to the following:-

(a)	the fares collected by all of the PLBs on the said routes would be pooled together by the Defendant Company; each owner would receive a daily rental of $600 and the remaining fares earned would form the profits of the Defendant Company after deduction of expenses; the daily rental payable to the owners was increased to $600 instead of the originally agreed $500;
(b)	since the PLB owners/shareholders' entitlement to company profits is tied directly to the fares collected by all PLBs on the said routes, the transfer of the PLBs on the said routes by any shareholder should correspond with the transfer of his/her share in the Defendant Company. The remaining members of Defendant Company would have the pre-emptive right to purchase the PLB together with the corresponding share in the company;
(c)	should the owner/shareholder fail to find a purchaser for his/her PLB, he/she may look for an outside purchaser, the Defendant Company shall sanction the transfer of the PLB together with the corresponding share in the company;
(d)	a $2 million loan will be raised to comply with the Transport Department's requirement, members may elect to contribute to the formation and operation expenses for the erection of signs, coin boxes, new paints for the PLBs etc. by direct payment or deduction from members' share of profits.

9. Under the public light bus passenger service license (hereinafter referred to as "the said PLB license") granted by the Transport Department to the Defendant Company (as the license holder), the Defendant Company agreed to maintain a minimum of 10 PLBs to ensure regular service of the said routes. In turn, each of the owners of the 10 PLBs registered with the Transport Department a declaration of intention and details of his/her respective PLB to include his/her PLB in the operation of the said routes.

10. The said routes commenced operation on 8 November 1995. One of the Defendant's director and member Mr. Chu Moon Po (hereinafter called "Chu") was appointed the manager and another director and member Mr. Siu Man Shing (hereinafter called "Siu") was appointed the secretary of the Defendant Company by shareholders' resolution at two shareholders' meetings held on 1 October 1995 and 8 October 1995. As Siu's work included route assignments, maintenance and management of the Defendant Company and corresponding with the Transport Department, it was resolved that he would be paid a monthly salary by the Defendant Company at a shareholders' meeting on 19 December 1995.

11. It was further resolved at a shareholders' meeting held on 19 December 1995 that losses incurred since the operation would be financed by the 10 PLBs, which would be reimbursed by the company at a later date.

12. Due to the deficiencies in the Defendant Company's payment of PLB rental, the 1st and 2nd Plaintiffs decided to sell their PLBs for they were both unable to repay the monthly instalments of the bank loans borrowed when their PLBs were purchased. They approached Chu and Siu and through them the other shareholders of the Defendant Company in order to find a member of the Defendant to purchase the said two PLBs. Failing to find any of the Defendant Company's members to purchase the said two PLBs, they were told by Chu and Siu that they could go outside the Defendant Company to find a purchaser.

13. Eventually, 1st and 2nd Plaintiffs were able to find an outside purchaser, the 3rd Plaintiff. The 3rd Plaintiff's director and shareholder Mr. Ma Kiu Sang (hereinafter called "Ma") and the 1st and 2nd Plaintiffs signed an agreement for the sale of the 1st and 2nd Plaintiffs' PLBs to the 3rd Plaintiff on 19 June 1996. Each received full payment for their respective PLB. Prior to the signing of the agreement they had notified Chu and Siu of their intention to sell to the 3rd Plaintiff and requested them to contact the 3rd Plaintiff in order to effect the details of the transfer and notify the Transport Department of the transfer of ownership of the said two PLBs on the said routes. They understood that Chu and Siu would telephone Ma and meet with him.

14. The 1st and 2nd Plaintiffs had further requested the Defendant Company to register the transfer of ownership with the Transport Department and the transfer of their respective shares of the Defendant Company to the 3rd Plaintiff be approved. It is not disputed that the Defendant had never registered the transfer of the 1st and 2nd Plaintiffs' PLBs with the Transport Department. At the meeting between Ma, his father Mr. Ma A Muk, Chu and Siu on 19 June 1996, Chu and Siu failed to complete the notification of transfer form to the Transport Department at Ma's office. Ma claimed that Chu and Siu did not indicate their disapproval of the transfer, they had told him they forgot to bring the company chop for execution of the notification of transfer and that they would convene a meeting with the other shareholders. Chu and Siu on the other hand, denied they had ever agreed to the transfer. They claimed they had only agreed to talk to the other members. It was after that meeting that the 3rd Plaintiff signed the transfer agreements with the 1st and 2nd Plaintiffs.

15. The 3rd Plaintiff retrieved the said two PLBs from the custody of the Defendant Company on 13 September 1996. The Plaintiffs therefore claim against the Defendant for unpaid rental and the Defendant counterclaims for repair costs paid on the 1st and 2nd Plaintiffs' behalf and the contribution of their share of the loss suffered by Defendant Company and further, damages for breach of the car hire agreements being the charges incurred in the hiring of two PLBs to replace the said two PLBs in order to fulfill the license requirements of the Transport Department.

The Issues

16. The issues in this case are:

(a)	Whether under the car hire agreements the Defendant Company is liable to the 1st and 2nd Plaintiffs for rental?
(b)	Whether the 1st and 2nd Plaintiffs are liable to the Defendant for shareholders' contribution of losses made by the company in 1995-1997?
(c)	If the answer to (b) is yes, is the Defendant entitled to set off the contribution from the rental payable?
(d)	Is the Defendant liable to pay rental to the 3rd Plaintiff?

(a) Whether the Defendant is liable to pay car rental to the 1st and 2nd Plaintiff under the car hire agreement?

17. The rental agreements signed between the 1st and 2nd Plaintiffs and the Defendant were for a period of 12 months from the date the PLBs were handed over to the Defendant. As the PLBs were handed over to the Defendant by the two Plaintiffs approximately 1 week before the commencement of operation of the said routes on 8 November 1995, the car hire agreements would have expired in early November 1996 if not for the early repossession by the Plaintiffs on 13 September 1996.

18. The Defendant's defence and counterclaim is that its shareholders had at a shareholders' meeting on 19 December 1995 resolved to finance the losses incurred by the company and the company would reimburse the shareholders at a later date. The meetings' resolution was signed by the 1st Plaintiff; however, she denied she had made any agreement to finance the company by foregoing the monthly rental. The 2nd Plaintiff did not attend the said meeting, her signature is absent from the minutes of meeting. Furthermore, the minutes did not specify in what manner the shareholders would finance the company. In fact, the minutes recorded "the 10 PLBs shall for the moment be responsible for the company's finances and loses which shall be reimbursed by the company later on". （通過暫由拾架車負責公司財務，虧蝕狀況；以後再由公司補償。） There was no mention of the shareholders' being liable at all. Furthermore, there was certainly no mention of the foregoing of rental by any of the PLB owners.

19. It is undisputed that the meeting in December 1995 was a meeting of shareholders of the Defendant Company. So far as the Defendant Company and the PLB owners are concerned, under the car hire agreement, each has her/its own interest to protect. This is particularly so if the owners had bank loans to repay. The Defendant has failed to show that there were any agreement between the 1st and 2nd Plaintiffs as the PLB owners and the Defendant Company as the hirer that the two Plaintiffs would forego the collection of the monthly car rental. It follows that the Defendant Company is bound under the car hire agreement to pay the 1st and 2nd Plaintiffs the monthly rental charges for the two PLBs.

(b) Whether the 1st and 2nd Plaintiffs are liable to pay shareholders' contribution for losses made by the company in 1995-1997?

20. The Defendant claims that it is entitled to call on the 1st and 2nd Plaintiffs as shareholders for their share of the loss suffered by the company between 1995 and 1997. I find, the Defendant has failed to adduce any evidence that it had called for shareholders' contribution or that there were any agreement by shareholders to do so or that any shareholders' loans had been called. On the contrary, the 1996 and 1997 company financial reports specifically provided that no such contribution had been called for. The only related provision is under clause 10 of the Defendant's financial report as at 31 March 1997 where it stated:-

"The directors and shareholders have given written undertakings to the company to provide such financial assistance as is necessary to maintain the company as a going concern. On the strength of these undertakings the financial statements have been prepared on the basis of a going concern notwithstanding the deficiency of shareholders' funds."

This undertaking is found in a letter dated 15 October 1996 signed by Chu, Siu, Man Shing Cheung, Leung Ng Mui and Chan Cheong Wan. It is noted that the 1st and 2nd Plaintiffs did not sign the letter. It is further noted that in the beginning of the financial report the auditors had stated they have not obtained all the information and explanations that they considered necessary for the purpose of the audit. Their opinion is also subject to the following:-

"1. We are unable to substantiate the validity of extent of liabilities included under "amount due to shareholder" amounting to HK$236,912 at 31st March, 1997 as no direct confirmation of the amount have been received nor any settlement after the balance sheet date."

21. On the basis that the 1st and 2nd Plaintiffs had given no undertakings to the Defendant and the company had not called for any shareholders' contributions from any shareholders, it must follow that the 1st and 2nd Plaintiffs are not liable to pay any contributions to the Defendant, therefore the Defendant is not entitled to set off any such non-existing debt against the rental payable to the Plaintiffs under the car hire agreement.

(d) Is the Defendant liable to the 3rd Plaintiff for car rental?

22. The evidence suggested that the Defendant had refused to recognise the 3rd Plaintiff's purchase of the two PLBs from the 1st and 2nd Plaintiffs and further refused to take the necessary steps to notify and seek the approval from the Transport Department of the transfer of ownership. On the other hand, it had continued after 19 June 1996 to deploy the two PLBs on the said routes until the date of repossession. Not only were the Defendant's manager Chu and secretary Siu notified by the 1st and 2nd Plaintiffs of the proposed transfer before the 19 June 1996 meeting, they had met with and were told by Ma of the 3rd Plaintiff of the proposed transfer of ownership at the 19 June 1996 meeting. Mr. Ma A Muk and his son Ma and their companies are owners of 500 PLBs, Mr. Ma A Muk had been in the PLB business since 1967. They are experienced in the purchases and the operations of and details related to the operations of scheduled PLB services and PLB transfers. After listening to the evidence of the two Mr. Mas, Chu and Siu, and observing their demeanor, I accept the evidence of the two Mr. Mas that, neither Chu or Siu, told them they disapproved of the transfer and would refuse to execute the transfer notifications to the Transport Department. If they had done so, the 3rd Plaintiff would not have signed the sale and purchase agreement with the 1st and 2nd Plaintiffs later on the day. Their actions had also led the Plaintiffs to believe the Defendant would honour the car hire agreements. Subsequently, the 1st and 2nd Plaintiffs had repeatedly requested that the rental payment to be paid to the 3rd Plaintiff after 19 June 1996. After these attempts failed to have any effect on the Defendant, the 3rd Plaintiff's solicitor formally notified the Defendant of its intention to repossess the two PLBs after repeated verbal notification yielded no response from the Defendant.

23. I am satisfied that the 1st and 2nd Plaintiffs and their husbands had confronted Chu and Siu and had notified the Defendant of the transfer and requested the Defendant to endorse the transfer under the Defendant's shareholders' resolutions passed at a meeting prior to the 8 November 1995 operation. They had also demanded that car rental should be paid either to them or to the 3rd Plaintiff after the 3rd Plaintiff was told that the Defendant was only accountable to the 1st and 2nd Plaintiffs. Under these circumstances, it is clear the Defendant had ample notice through its manager Chu and secretary Siu of the termination of hire that would take place should rental remained outstanding. Eventually, the Plaintiffs had no choice but to repossess the two PLBs on 13 September 1996.

24. As the Defendant Company refused to recognise the transfer of the 2 PLBs by a directors' meeting held on 20 January 1997 or accept the car hire agreements had been repudiated by its failure to pay car rental despite repeated demands, it is liable to the 1st and 2nd Plaintiffs for the car rental and to the 3rd Plaintiff for damages. On the basis that the car hire agreements were executed between the Defendant and the 1st and 2nd Plaintiffs, the Defendant is bound to account to the 1st and 2nd Plaintiffs. The 1st and 2nd Plaintiffs were entitled to treat the car hire agreements to have been terminated and accept the failure to pay rental as an act of repudiation by the Defendant. As far as the 3rd Plaintiff is concerned, though the two rental agreements were between the 1st and 2nd Plaintiffs and the Defendant, the Defendant had nevertheless benefited from its operation of the two PLBs which it knew beneficial ownership had been transferred to the 3rd Plaintiff. I find the reason the 3rd Plaintiff had failed to register the transfer of ownership was due to the Transport Department's license conditions under the said license prohibiting changes in PLB ownership without good reasons. Correspondence between the Defendant and the Transport Department showed it had applied to substitute the two said PLBs after June 1996. Apparently approval had still not been granted by 13 September 1996 and the Defendant continued to use and operate the two said PLBs without rendering payment of rental to the Plaintiffs. The 3rd Plaintiff suffered loss as a result of the refusal by the Defendant to comply with the members' resolutions held a week before 8 November 1995. Consequently, the 3rd Plaintiff is entitled to recover damages for the Defendant's wrongful use of the two PLBs because the Defendant had failed to pay any rental to either the 1st and 2nd Plaintiffs or the 3rd Plaintiff for the period between 19 June 1996 to 13 September 1996.

25. The Defendant is therefore liable and shall pay rental between 8 November 1995 and 30 May 1996 to the 1st Plaintiff at $45,000, to the 2nd Plaintiff $51,000 and for 19 June 1996 to 13 September 1996 to the 3rd Plaintiff at $116,400.

The Defence's Counterclaim

26. In paragraph 20 above, I have already dealt with the Defendant's claim for contribution from the 1st and 2nd Plaintiff and found the Defendant has failed to prove that it is entitled to demand for contributions from the 1st and 2nd Plaintiffs.

27. As to damages for breach of contract upon the 3rd Plaintiff's repossession of the two PLBs: it was the Defendant which had failed to honour the terms of the hire agreements by its failure to pay to the Plaintiffs any of the $600 daily rental and therefore was in breach of the agreements leading to the Plaintiff's repossession of the 2 PLBs. Consequently, no damages are recoverable from the Plaintiffs. As to the claim for repair, the receipts the Defendant produced are highly suspect. The receipt numbers are in sequence but the dates of issue were three years apart. They were either rarely issued by the garage Keung Kee or they were issued purely for the purpose of these proceedings at the Defendant's request. Whatever was the reason, it fortified the evidence of PW1 that the garage would only issue an invoice after the garage had repaired the vehicle upon payment and no receipts would be issued. I accept PW1's evidence that he had paid for the repair in 1995 and 1996 for the repair work set out in the invoices from Keung Kee. Further, I find it difficult to accept that Keung Kee would issue a receipt in 1999 for repair work done in 1996 on PLBs which were regularly maintained at the Keung Kee garage. I find the evidence of Chu and Siu totally unacceptable and unreliable.

28. For reasons given above, I dismiss the Defendant's counterclaim. I allow the Plaintiff's claim in full. Interest at 1/2 judgment rate from date of writ to date of judgment and thereafter at judgment rate until payment in full.

29. Costs nisi to the Plaintiffs to be taxed if not agreed with certificate for Counsel.