TSUN FAT FINANCE CO LTD v. FOOK CHAK TRADING CO

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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INTRODUCTION

1. The Plaintiff, Tsun Fat Finance Co. Ltd. ("Tsun Fat"), is a licensed money-lender. It claims that it made a number of loans to Fook Chak Trading Co. ("the firm"). Some of those loans have not been repaid. Accordingly, Tsun Fat now sues the firm for the outstanding balance and interest. However, the case is not quite as straightforward as that. The firm had two partners, Richard Sy and Ng Chao Mu. Mr. Ng denies the firm's liability to Tsun Fat, but Mr. Sy admits it. Moreover, Mr. Sy is related by marriage to the family whose members have a controlling interest in Tsun Fat. It is against that background that Mr. Ng's case is that the true recipient of the loans was Mr. Sy, the money was lent to him to further his other business interests, but the money was recorded in Tsun Fat's books of account as having been lent to the firm so that Mr. Ng could have been rendered liable for its repayment.

THE FORM OF THE PROCEEDINGS

2. Ord. 81 r. 1 of the Rules of the Supreme Court permitted Tsun Fat to sue Mr. Sy and Mr. Ng in the name of the firm. However, permitting the partners of a firm to be sued in the name of the firm is a matter of convenience only. A firm is not a legal entity, and when partners of a firm are sued in the name of the firm, it is important to remember that it is the partners who are the actual defendants. It follows that the actual Defendants in this case are Mr. Sy and Mr. Ng.

THE HISTORY OF THE PARTNERSHIP

3. Of the two partners in the firm, only Mr. Ng gave evidence. Although Mr. Sy was aware of the proceedings, and knew that the trial was taking place, he did not attend the hearing, and was not called as a witness. I do not blame Tsun Fat for not seeking to call Mr. Sy as a witness. It did not have to do so, in view of the fact that its case was that it knew nothing of the firm's and Mr. Sy's affairs. But the consequence is that the only evidence about the firm's business came from Mr. Ng. I have therefore scrutinised Mr. Ng's evidence on the topic with care, but in the end my findings of fact are these.

          (i) The establishment of the partnership. Mr. Ng and Mr. Sy went into business together in 1989. They were 50/50 partners. The business traded in sea-food. Mr. Ng was responsible for buying the sea-food, checking its quality, finding purchasers and selling the sea-food to them. Mr. Sy was responsible for the administration of the business, including the preparation of documents, the maintenance of the firm's records, and the raising of finance. Mr. Sy's wife, Susan Sy, helped out in the business. She kept the firm's books of account.

          (ii) The financing of the business. Mr. Sy provided the start-up capital. That was used to buy the first consignment of sea-food, and the proceeds of sale were used to buy subsequent consignments. However, the firm was regularly in need of the short-term injection of finance. Mr. Ng believed that Mr. Sy borrowed some money from his father-in-law for that purpose, but it is clear that the firm also borrowed money from other sources:

          (iii) The ledger Mr. Ng drew modest sums from the business for his own living expenses, and assumed that Mr. Sy did as well. He knew that Madam Sy kept a record of his drawings, and assumed that she did the same for Mr. Sy's drawings. However, in about April 1992, Mr. Ng wanted to know how profitable the business was, and he asked Madam Sy to show him the firm's books of account. She produced a ledger, but only allowed him to look at it for a few minutes, and refused to let him take copies of it. However, Mr. Ng had seen enough of it to arouse his suspicion. The ledger was kept in a drawer which was not locked, and Mr. Ng surreptitiously copied it.

4. The ledger recorded (a) a large number of payments by the firm to various persons, firms and companies, and (b) a number of repayments to the firm. Many of these payments were made in the normal course of the firm's business, but there were some payments which Mr. Ng knew nothing about. The payments which Mr. Ng knew nothing about amounted to a net figure of about $1.7m. It is not suggested that there was any legitimate business reason for these payments. Indeed, a number of payments were recorded as having been made to "Popular Life". Popular Life Trading Ltd. was a company with which Mr. Sy and his wife were associated.

5. Mr. Alan Leong for Tsun Fat described the ledger as simply a record of Mr. Sy's borrowings from the firm, and the repayments he made. I do not think that that is an accurate description of the ledger, but whether it is or not, what the ledger shows is that Mr. Sy habitually used the firm's money for his own purposes, and kept Mr. Ng completely in the dark about it.

          (iv) The dissolution of the partnership. Having studied the ledger, Mr. Ng asked Madam Sy about the money which had been paid out. She told him that it was her family's money, that she and Mr. Sy were entitled to use it however they liked, and that it was none of Mr. Ng's business. Mr.Ng realised that it was pointless carrying on in partnership with Mr. Sy, and he and Mr. Sy agreed that the partnership should be dissolved. The partnership was in fact dissolved on 1st June 1992.

          (v) The dissolution accounts. Mr. Sy arranged for dissolution accounts to be prepared. The person who prepared them, Louie Lui, was not called to give evidence. The accounts purported to have been agreed by Mr. Ng. In fact, they were not. He was simply provided with a copy of them. They purported to record that the firm had suffered a net loss of just less than $1.9m. during the period it had traded. In addition, they purported to show a debt of $2,584,324.81 to Tsun Fat. However, Mr. Ng did not appreciate that latter fact at the time. He only realised that when he received a letter before action from Tsun Fat's solicitors in November 1992.

THE DEALINGS WITH TSUN FAT

6. It is against the background of the history of the partnership that I turn to the firm's dealings with Tsun Fat. The evidence about the firm's dealings with Tsun Fat was given by Wong Chung Tak. He is Madam Sy's brother. His family owned 50% of the shares in the company of which Tsun Fat was a wholly-owned subsidiary, and he is a director of Tsun Fat. His role was to deal with applications by customers for loans and credit facilities.

          (i) Mr. Wong's evidence. Mr. Wong's evidence was that Mr. Sy, Madam Sy and Mr. Ng came to Tsun Fat's office in Lane Crawford House, Queen's Road Central. He could date that meeting by the dates on the documents which were signed on that day - 1st July 1991. It was Mr. Sy who did the talking. Mr. Sy said that they wanted to borrow money for their business, and were looking for credit facilities of $3m. They wanted to improve their business' cash flow, and wanted to have a credit facility from Tsun Fat rather than to pay for products with letters of credit, because they wanted to avoid the bank charges which letters of credit attracted. Mr. Wong was content to give the firm the credit facilities which it sought, and two documents were drawn up:

7. Mr. Wong's evidence was that it was usual for an applicant for a loan to provide a copy of his identity card. When Mr. Ng was asked to provide his identity card, he produced a form acknowledging that he had on 10th June applied for a new identity card because he had lost his previous one. That form was copied, and the copy was retained by Tsun Fat.

          (ii) Mr. Ng's evidence. Mr. Ng claimed to know nothing of the meeting in Lane Crawford House on 1st July 1991. He had been to Tsun Fat's office there once or twice, but that was to meet Mr. and Madam Sy. He had never seen Mr. Wong there. His evidence was that the meeting described by Mr. Wong never took place. Mr. Ng claimed that he had never seen the memorandum.

8. As for the guarantee, Mr. Ng's evidence was that towards the end of June 1991, when he was in the firm's office in Connaught Road West, Madam Sy gave him the document to sign. She said that it related to money which the firm was borrowing from Tsun On, which Mr. Ng was told was one of her family's companies. Mr. Ng claims that apart from that he knew nothing about the nature of the document he was signing; he did not realise that he was taking on personal liability for some of the firm's debts, nor did he realise that his liability was different from that of Mr. Sy. He knows that it was the guarantee which he signed on that occasion, because Mr. Sy was there, and after Mr. Ng had signed it, Mr. Sy had commented that since Mr. Ng did not understand English, Mr. Ng for all he knew might have signed away his own son. Mr. Ng says that his wife and 10 year old son were in the office at the time, as well as Hung Sing Ka, one of the firm's employees. None of them have been called to give evidence, and Mr. Ng did not refer in the witness statement he signed on 24th May 1995 to their presence when he signed the document, nor to that of Mr. Sy.

9. As for how a photocopy of the acknowledgement of his application for a replacement identity card came to be in Tsun Fat's possession, he claims that two or three days later, Madam Sy asked him for a photocopy of it in connection with the money which was being borrowed.

          (iii) The sums paid by Tsun Fat. Apart from the sum of $2,846,792.46 paid to Man Tai Hong on 1st July 1991, Tsun Fat's books record two other sums as having been paid by Tsun Fat purportedly on the firm's behalf: a sum of $130,000.00 to Promson International Ltd. on 12th March 1992, and a sum of $750,000.00 to Wong Sai Wai on 25th April 1992. Those sums were paid by cheque, and were recorded in Tsun Fat's books or on Tsun Fat's cheque stubs as paid on behalf of the firm. In addition, Tsun Fat's books record Tsun Fat as having paid 19 sums totalling $5.05m. to the firm between 11th October 1991 and 15th September 1992. These payments were made either by cash into the firm's bank account, or by cash drawn from Tsun Fat's bank account by cash cheques (in which case the cash might have been drawn by Tsun Fat or the firm), or by transfer from Tsun Fat's bank account to that of the firm. All these sums amount to $8,776,792.46. Mr. Wong's evidence was that he did not know what the firm wanted any of the individual sums for.

10. To complete the picture, Tsun Fat's books refer to the firm having made 18 separate repayments totalling $5,536,023.13 to Tsun Fat, and the sum claimed in this action is therefore $3,240,769.33 plus such interest as accrued both before and after the issue of the writ.

11. Two of the payments are particularly interesting:

12. Mr. Ng claims that he knew nothing of any of the payments which made up the sum of $8,776,792.46. He believed that the firm was only indebted to Tsun On, and Mr. Sy had told him that the firm owed Tsun On only a few hundred thousand dollars. Moreover, he claims that he knew nothing of any of the 18 repayments which made up the sum of $5,536,023.13. He admitted that of those 18 repayments 4 were made by cheques, signed by him, drawn on the firm's bank account. The name of the payee on each cheque was left blank. He cannot now recall what these cheques were for, but he thinks that he might have thought at the time that some of them represented repayments to Tsun On. He also admitted that 2 of those 18 repayments were made by cheques drawn in favour of the firm being endorsed on their reverse over to Tsun Fat, and that he signed the endorsements. However, he claims that he signed the cheques on their reverse at Madam Sy's request, so that the bank could set them off against the sums owed to it under letters of credit. Apart from the initial advance of $2,846,792.46, I have no reason to doubt that part of Mr. Ng's evidence at all.

THE PAYMENT OF $2.846.792.46 TO MAN TAI HONG

13. In order to show that the payment of $2,846,792.46 which Tsun Fat made to Man Tai Hong related to a debt of the firm, Tsun Fat relied on an audit of transactions between Man Tai Hong and the firm, which was prepared since the issue of the proceedings by Man Tai Hong's auditors. That there was a trading relationship between Man Tai Hong and the firm is not in dispute: not only did the firm obtain credit facilities by borrowing in the name of Man Tai Hong for a commission of 1.5%, but Man Tai Hong also sold sea-food on the firm's behalf for a commission of 3%. According to the audit, the sum of $2,846,792.46 was the amount which inter-company trading had resulted in the firm owing to Man Tai Hong by 1st July 1991.

14. The second largest of the 140 entries in the audit which resulted in the debit balance of $2,846,792.46 was a sum of $692,352.00 which according to the audit was a sum paid by Man Tai Hong to Chung Kiu on the firm's behalf. The fact of that payment was evidenced by a receipt issued to Man Tai Hong by Chung Kiu dated 19th July 1990, though there is nothing on the face of the receipt which suggests that the party on whose behalf it was paid was the firm. However, Man Tai Hong's own ledger tells a different story. It is in Chinese, and although my interpreter was unable to read the two Chinese characters which named the recipient of that sum, the certified translation of the two Chinese characters by an interpreter appointed under section 27(2) of the Evidence Ordinance (Cap. 8) is "Popular Life". Since there was no legitimate business reason for the firm to be indebted to Popular Life, there was no legitimate reason for Man Tai Hong to pay that sum to Popular Life on the firm's behalf. Since Popular Life was a company with which Mr. and Madam Sy were associated, I can only conclude that the sum was indeed paid by Man Tai Hong to Chung Kiu, but instead of paying the sum on behalf of the firm, Man Tai Hong paid the sum on behalf of Popular Life. If that was the true nature of just one of the transactions referred to in the audit, I can, I think, be forgiven for being suspicious that there have been other transactions referred to in the audit which might have been similarly misdescribed.

FINDINGS

15. Mr. Ng was a not unimpressive witness in his humble and uneducated way. I did not regard him as particularly reliable when it came to dates or the precise sequence of events, but he gave me the impression of a man who was doing his best to tell me his story as he remembered it. Mr. Wong was a much more sophisticated man. He was not unimpressive as a witness either, but there were a number of things which he told me which I regard as too implausible to be true.

16. I state at the outset that I prefer the evidence of Mr. Wong to that of Mr. Ng in relation to the meeting on 1st July 1991. I am quite sure that Mr. Ng was at the meeting, and I accept Mr. Wong's evidence of it, save that I do not accept Mr. Wong's reason as to why the credit limit was not referred to in the memorandum, and I do not believe that Mr. Ng refused to sign the memorandum. I do not think that he was ever asked to sign it. I find that Mr. Wong believed that it was sufficient for Mr. Sy to sign it. It follows that I reject Mr. Wong's explanation for the need for the guarantee. I believe that Mr. Wong wanted a guarantee signed by the two partners of the firm because he was at the time dealing with his sister and brother-in-law as if there was no family connection between them, and as if they were normal applicants for credit facilities. He treated the transaction at arm's length, and required the security of personal guarantees from the partners for that reason. I do not regard the fact that Mr. Ng was not asked to sign the memorandum as significant: Mr. Ng was content to let Mr. Sy deal with the raising of finance, and Mr. Sy's sole signature on the memorandum was sufficient to bind both partners to the agreement.

17. However, to the extent that I reject Mr. Ng's evidence about the meeting, I do not find that he was deliberately telling me what he knew were untruths: the lapse of time, and the fact that the finances of the business were managed by Mr. Sy, have resulted in his memory letting him down.

18. It follows that I find that it was to the firm that Tsun Fat granted credit facilities of $3m, and it was to the firm that Tsun Fat lent the sum of $2,846,792.46 which it paid to Man Tai Hong on the firm's behalf. It is true that the firm did not owe the whole of that sum to Man Tai Hong (because at least $692,352.30 was owed to Man Tai Hong by Popular Life), but I accept that Mr. Wong was not aware of that.

19. However, that is by no means the end of the matter. On three significant parts of Mr. Wong's evidence, I am afraid that I did not believe him:

20. Against this background, I have come to the clear conclusion that Mr. Wong became aware that Mr. Sy was using the firm's money for his own purposes, and that Mr. Sy was keeping Mr. Ng in the dark about it. If the ledger is anything to go by, Mr. Sy was using money lent by Tsun Fat as if it was his own, repaying what he took from the firm as and when he chose. However, since Mr. Wong knew that Mr. Sy was going to use the money lent by Tsun Fat for whatever he wanted to do with it, and that Mr. Ng was to be none the wiser, he knew that Mr. Sy was not authorised by Mr. Ng, apart from the initial advance of $2,846,792.46, to borrow money from Tsun Fat for such a purpose. Accordingly, although the initial advance of $2,846,792.46 had been made to the firm. all subsequent advances were made through the firm to Mr. Sy. but were described in Tsun Fat's books of account as being made to the firm, because it was to the firm that the credit facility had originally been granted.

21. Accordingly, I find that apart from the initial advance of $2,846,792.46, which was lent by Tsun Fat to the firm, the balance of $5.93m. was lent by Tsun Fat to Mr. Sy. There is no evidence before me that any of the 18 repayments were appropriated to any particular loan. In those circumstances, the law presumes that they were to be appropriated to the debts in the order in which they were incurred. Accordingly, I must treat the firm's debt to Tsun Fat for the initial advance as having been repaid, and what remains outstanding is the balance of Mr. Sy's debt to Tsun Fat.

CONCLUSION

22. The result is that the Plaintiff's claim against Mr. Ng in his capacity as a partner of the firm must fail, because the one sum which I have found was lent to the firm was repaid with interest some time ago. However, Mr. Sy has admitted Tsun Fat's claim against him, and although Tsun Fat's pleaded case was against Mr. Sy in his capacity as a partner, I regard Mr. Sy's admission in para. 3 of his affirmation of 8th February 1993 of Tsun Fat's claim against him to be a sufficient basis for giving judgment against him in favour of Tsun Fat under Ord. 27 r. 3. Indeed, he expressly consented to judgment being entered against him. Admittedly, Tsun Fat's application for judgment against him was not made by motion or summons, but I do not read Ord. 27 r. 3 as requiring a motion or summons to be issued. Accordingly, by consent, I give judgment for Tsun Fat against Mr. Sy in the sum of $3,953,034.01, which includes interest of $712, 264.68 up to 20th October 1992 when the writ was issued, with interest thereafter until payment at the rate of 1.5% per 30 days.

23. I make an order nisi that Tsun Fat pays to Mr. Ng his costs of the action to be taxed if not agreed, and an order nisi that Mr. Sy pays to Tsun Fat the costs of the action against him to be taxed if not agreed.