WING FAI CONSTRUCTION CO LTD v. YIP KWONG ROBERT

HCA4251/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4251 OF 2003

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J U D G M E N T

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1. The plaintiff company, Wing Fai Construction Company Ltd (“Wing Fai”), is now in liquidation.  Provisional liquidators were appointed in July 2002.  The defendant was a director of Wing Fai until July 2001.  He was also the director and substantial shareholder of Wing Fai’s parent company, China Rich Holdings (“China Rich”).

2. It is not in dispute that for 17 consecutive months, from December 2000 to April 2002 inclusive, Wing Fai paid to the defendant $100,000 a month.  Wing Fai was sold for $5 million on 22 April 2002.  The liquidators asked the defendant for an explanation concerning the 17 cheques totalling $1.7 million.  The unfolding saga of the defendant’s explanation has been the subject matter of this litigation in which Wing Fai claims the repayment of that sum.

3. At trial, the simple explanation given by the defendant was that in late 2000 the directors of Wing Fai met and agreed to pay the defendant $100,000 a month for expenses incurred or to be incurred in promoting Wing Fai’s business in China in connection with their attempt to secure a contract for the maintenance and repairs of the runways at the new airport being built near Guangzhou.  Wing Fai had had such a contract at the old Kai Tak Airport in Hong Kong.  The money, it is claimed, was spent on entertainment of businessmen including PRC officials, in restaurants, karaoke lounges and so on in and around Guangzhou.

4. It is accepted by the defendant that no documentary evidence has been produced evidencing the meeting of the Wing Fai directors, the agreement of the Wing Fai directors or how, when and where any of the money was spent, save for about $45,000 on the defendant’s American Express Card.  Neither has the defendant produced any evidence of the level of expenses incurred by Wing Fai prior to the agreement, nor any bank statements showing previous payments for expenses incurred or cash payments paid out after the agreement which would support his claim that he spent substantial amounts in cash in China during his frequent visits across the border at the material time.

5. It was the defendant’s case that at least 80% of the spending was in cash because many places in Guangzhou did not accept credit cards.  No receipts were provided because often in the PRC receipts were not given and, in any event, his agreement with Wing Fai was that there was no requirement or necessity to provide receipts.  The $100,000 was paid as a fixed sum.  Some months he spent more, some months he spent less.

6. Wing Fai’s claim is based firstly on the payments being “advances” within the meaning of section 157H of the Companies Ordinance, Cap. 32 which fall for repayment within the provisions of section 157I or alternatively by way of restitution of money had and received by the defendant.  The defence (re-amended in August 2007) relies on the “unanimous agreement” of the directors in or about December 2000 to make such payments and because Wing Fai was a party to it, it is estopped from claiming repayment.

The law

7. The relevant parts of section 157H upon which Wing Fai relies are as follows :

(a)      Sub-section 2(a) provides that a company shall not, directly or indirectly :

“make a loan to a director of the company or of its holding company.”

(b)     Section 3(c) states that the following transaction is exempted from subsection 2 :

“a company’s doing anything to provide any of its directors with funds to meet expenditure incurred or to be incurred by him for the purposes of the company or for the purpose of enabling him properly to perform his duties as an officer of the company;”

However the 3(c) exception only operates if the conditions set out in subsection (4) are satisfied :

“(a)   the thing in question is done with the prior approval of the company given at a general meeting at which the purpose of any expenditure and the amount of any loan to be made by the company or the extent of the company’s liability under any guarantee to be given by the company or, as the case may be, in respect of any security to be provided by the company are disclosed; or

(b)    that thing is done on condition that, if the approval of the company is not so given at or before the next following annual general meeting, the loan shall be repaid or that liability discharged with 6 months from the conclusion of that meeting.”

8. Wing Fai, through their counsel, Mr José-Antonio Maurellet, submits that because the exception in subsection 3(c) caters for precisely the situation under consideration in this case the legislation must have considered all such advances to be in the nature of loans as prohibited by subsection 2.  Section 157H is therefore directly applicable.  The defendant, through its counsel, Mr Johnny Mok, SC, submits simply that the agreement made by the directors was not to make a loan, it was to fund company expenses.  Section 157H does not apply.

9. In my judgment, it was a loan for the purposes of section 157H of Cap. 32.  It was company money advanced by the company to a director.  It remains company money in the defendant’s hands.  The requirement to return the money is only avoided if subsections 3(c), 4(a) and 4(b) apply.  In the present case there is no suggestion that the conditions in subsection 4(a) or (b) were satisfied.  Section 157I creates the liability on the defendant to repay in full.

The evidence

10. Although the plaintiff is entitled to repayment under the Companies Ordinance, the evidence in the case has focused more on the plaintiff’s alternative limb based on unjust enrichment.  I have come to the conclusion in this case that little reliance can be placed on the defence evidence.  I will therefore deal with it, and the criticisms made of it, in some detail.

11. In my judgment the plaintiff has also established the basis for its unjust enrichment claim.  Because of the total lack of any documentation the plaintiff can do no more than point to the 17 cheques and seek an explanation.  There is an onus of proof on the defendant to provide that explanation and satisfy the court that the payments were spent in the manner alleged by him.  This explanation relies on the existence of the agreement as its foundation.

12. Keeping in mind that the defendant’s case is that :

(a)         there was a meeting of directors in December 2000;

(b)         at that meeting an oral agreement was reached;

(c)         the agreement was to pay the defendant $100,000 a month;

(d)         it was to be used promoting a specific project in China; and

(e)         no receipts would be necessary or required;

the following criticisms of his evidence can be validly made.

13. (1)     The early response to the liquidators was materially different from his present position.  The first request for an explanation was in respect of the last three cheques (February, March and April 2002) prior to Wing Fai being sold on 22 April 2002.  Six weeks passed before the liquidators received a letter from the defendant’s solicitors.  The letter contained the following :

“As you have confirmed that your enquires were not made within the ambit of the examination proceedings under Section 221 of the Companies Ordinance, we are instructed to reply that the 3 sums of HK$100,000 each were paid to Mr. Yip on account of and/or for reimbursement of expenses incurred on behalf of Wing Fai.  Such expenses included those in relation to entertainment of contractors/sub-contractors or other parties involved in Wing Fai’s construction work/contracts, traditional ‘lai see’ money paid in the Chinese New Year to those contractors/sub-contractors/parties, and expenses of Mr. Yip’s trip to mainland China in exploring the business opportunities of Wing Fai there and entertainment of potential customers/business partners of Wing Fai.  We are also instructed to confirm that the sums concerned have been used up in the above-mentioned expenses with shortfalls paid by our client himself.  The relevant invoices, receipts and claim forms for reimbursement of those expenses have been submitted to Wing Fai and our client does not have a copy.”

This response differs from his present evidence in at least five respects :

(i)       it says expenses were incurred on Wing Fai projects (which were in Hong Kong at the time);

(ii)      its says expenses were incurred by lai see payments;

(iii)     its says that invoices were submitted to Wing Fai (whereas the “agreement” was that none were necessary);

(iv)     it does not say that the payments were made pursuant to a directors’ agreement;

(v)      it does not mention the Guangzhou airport project which, according to his evidence, was the sole target of his expenses.

The defendant, in evidence, said that the letter was a misunderstanding between himself and his solicitors.  I reject this explanation.  There have been numerous opportunities; by correspondence, by pleading amendments, by court appearances, in affirmations and in witness statements to state that it was a misunderstanding and to explain it, but none were taken.

(2)     One of the four directors of Wing Fai at the material time was Mr Vincent Lo.  His alleged participation in the agreement has also varied with time.  The first affirmations of the defendant and his financial director, Ms Kelly Cheng, place Mr Lo at the meeting in late 2000 when the agreement was made.  This later changed to a position where he was not at the meeting but later agreed to the arrangement.  In evidence Ms Cheng modified it yet again by saying he did not comment or had voiced no objection to it.  All this is to be contrasted with the liquidator’s evidence (Mr D.J. Kennedy) who said that Mr Lo had informed the liquidators that he had no knowledge of any such arrangement ever having been made.  (When making this finding I have not overlooked the fact that Mr Lo’s evidence is hearsay from Mr Kennedy.)

(3)     It was claimed by the defendant that the fixed sum of $100,000 was agreed upon because prior thereto it had been very troublesome providing a very large number of invoices from China which the accounting staff had to spend much time sorting out.  It was therefore an arrangement of convenience which reflected what had already been happening.  However, no invoices from the pre-agreement regime were produced and no cheques to the defendant for reimbursement of such alleged expenses were produced.

(4)     If the meeting and the agreement did in fact occur there would be no reason not to record the fact in some way.  It was a significant amount of money which, if it had been formally dealt with, would have appeared as, at least, an item in an agenda or an item in some minutes of meetings.  There is none.  The relatively large amount in issue, $100,000 a month, takes on greater significance when placed in the context of the company losing money in the two years prior to its sale.  The accounts show debts exceeding assets by $9 million in July 2001, more in the following year.  Mr Kennedy however stated that the true position was much worse.

(5)     The defendant’s evidence that it was very difficult to use credit cards in the Mainland and that large cash payments were regularly made with any document being received in support must be viewed with a degree of cynicism.  He has produced evidence of when he did use his American Express card.  These transactions total RMB45,000.  He is therefore suggesting that he was only able to use his credit card for less than 3% of his expenses.  This all adds to the highly tenuous and disingenuous nature of his evidence. 

(6)     The defendant’s contention, at trial, that all the money was spent in China on his efforts to secure one project (the airport runway) is inconsistent with the undisputed fact that Wing Fai had no licence to undertake such construction work on the mainland (albeit that it did have a Hong Kong licence).

(7)     In the records of company meetings since 1999 there is no written reference to the plaintiff’s endeavours to secure this contract.

Findings

14. The sum of the evidence leads me to the firm conclusion that there was no meeting or agreement as alleged.  The claim of such a meeting has, in my judgment, come much later and has been modified with time to fit in with the unfolding picture, all in an attempt to justify the defendant’s conduct of treating company money as his own.  It is not suggested that he spent all the money on self indulgent hedonistic pursuits.  Some may well have been spent, as is claimed, on entertainment in restaurants and karaoke lounges.  Moreover, the plaintiff does not dispute that this can be a feature of the way business is conducted in some places.  The plaintiff is not taking the moral high ground, it is simply relying on the Companies Ordinance, the circumstances in which the money was paid over, the lack of credibility as to the explanations provided and the total lack of documentation, in support of its claim that the defendant has no legal entitlement to retain the money.

15. Thus, on the finding of fact that no meeting took place and therefore there was no agreement at the time, it follows that (i) no money could have been paid over in consequence of such an agreement and (ii) neither was there any “understanding” (as pleaded in the Re-amended Defence in August 2007).  The attempt to justify the payments on the basis of there having been an “understanding” have also materalized much later, when pressed to explain.

Quantum

16. Regardless of the fact that, on the balance of probabilities, the whole of the evidence shows that the alleged meeting and agreement did not occur, it is nonetheless probable that the defendant did go to Guangzhou to promote the plaintiff’s business during the material time, namely December 2000 to April 2002.

17. I accept that the defendant was, amongst other things, attempting to secure the repair and maintenance contract on the new airport.  Money (how much, when, where, to whom and for what, it is impossible to say) would have been spent to this end.  On average, he crossed the border about once a week and stayed in the PRC for short periods.  The Companies Ordinance entitles the defendant to make a claim for the reimbursement of such monies.  In my judgment it would be both expeditious and proper to address that issue in these proceedings.  It is true that no set-off is pleaded but it would be surprising if it was because the defendant’s defence does not entertain the notion of a partial repayment. 

18. Nonetheless, there is sufficient evidence for this court to make an assessment.

19. He has produced his American Express statements for the relevant period.  It is reasonable to assume no other credit cards were used.  If they had been he would have produced those as well.  The relevant transactions total about RMB45,000.  In evidence he said that, at least 80% of his expenses were in cash.  Being generous and calling it 90% a total figure of $450,000 would have been spent.

20. Accepting, for the purpose of this exercise, the truth of his evidence on this issue, I shall reduce the plaintiff’s claim by this amount.

21. There will be judgment for the plaintiff in the sum of $1.25 million plus interest from the date of the writ at prime rate plus 1%.  There will be a costs order nisi to the plaintiff.