PANG LIN, Administrator of the Estate of KO CHUN WAY WAYNE, deceased v. GOLDEN GATE INTERNATIONAL KINDERGARTEN AND NURSERY LTD

HCA 285/2017

[2019] HKCFI 825

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 285 OF 2017

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JUDGMENT

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1.  Ko Chun Way Wayne (“Ko”) extended loans for the operation of the kindergarten business of the defendant (“Golden Gate”) in 2014. He passed away in 2015. The plaintiff (“Pang”) is the surviving wife and administrator of his estate. She now claims for the repayment of the outstanding balance of these loans. Golden Gate disputes, amongst other things, that the loans were and are repayable.

2.  Golden Gate was absent from the trial.  On as early as 25 May 2018, this court gave written direction to the parties, specifically drawing the attention of Golden Gate to the provisions of Order 5, rule 6 of the Rules of the High Court, and forewarning that the lack of legal representation or leave to appear by a director on the day of the trial would cause the court to treat Golden Gate as absent even if its director is present.  In such event, Golden Gate may not be heard, nor may it lead evidence at the trial.  It now follows that the witness statement of Wong Shuai Fun, Simon (“Wong”) previously lodged on behalf of Golden Gate must be disregarded.  It does not appear that that statement has even been filed.

3.  I saw no reason why Pang should be prevented from proceeding with this trial.

Background

4.  Ko first came to know Wong and his wife, Young Yuen Yee Winnie (“Young”) in about 2013.  They later entered into co-operation in starting a kindergarten education and nursery business in Hong Kong through various companies owned and controlled by DLA Holdings Limited (“DLA”).  Golden Gate is one of them.

5.  Wong and Young together held effectively 67% of the shareholdings in DLA while Ko held the other 33%.  Whilst Ko was a director of two of the companies controlled by DLA, he was not a director ofGolden Gate.  Wong was at all material times the sole director of Golden Gate.

6.  Golden Gate set up a kindergarten in Chatham Road, Hung Hom,Kowloon in 2014.  Soon funds became necessary from time to time for paying for the renovation of the kindergarten premises and the staff salaries.  This led to the following loans extended by Ko to Golden Gate in the same year:

	Date	Loan amount (HK$)
(1)	24 February	1,541,725
(2)	31 March	500,000
(3)	4 April	60,000
(4)	2 May	500,000
(5)	13 May	300,000
(6)	20 May	300,000
(7)	30 June	60,000
(8)	5 August	150,000

7.  The above loans were respectively evidenced by documents called “memorandum of sole director in lieu of board minutes” of the above dates all signed by Wong.  The memoranda recorded the dates, amounts, purposes and modes of payment of the respective loans.  All the loans were unsecured and interest free.

8.  Whilst Golden Gate’s case is that the first loan above has been fully repaid, the memorandum dated 30 June 2014 (“the June Memorandum”) recorded that a balance of HK$6,100 of the first loan remained outstanding.  All the subsequent six loans were recorded to be as at the date of the June Memorandum repayable.  There came the last and the eighth loan above, which was likewise evidenced by the relevant memorandum recording similar terms of the loan.  All made a total outstanding amount of HK$1,876,100.

9.  As adequately evidenced by contemporaneous documents, and not controverted at the trial, the above background is accepted as fact.

Pang’s capacity to sue

10.  By pleading, Golden Gate disputes Pang’s capacity to sue.  Letters of administration was granted to Pang in 2015 (HCAG 013587/2015). She sues in the capacity as the administratrix of the estate of the deceased pursuant to section 20(1) of the Law Amendment and Reform (Consolidation)Ordinance, Cap 23 (“LARCO”).  It is beyond dispute that Ko as the lender had a valid cause of action for repayment against Golden Gate as the borrower, and such cause of action survives his death for the benefit of his estate.  Seealso Lam Ching Sheung v Personal Representative of the Estate of Tam Shui,Deceased & Ors HCA 2234/2008 (22 February 2013) at §§57 – 62, per To J.  The dispute raised by Golden Gate has no basis.

The issues raised by the defence

11.  Regarding the first loan, Golden Gate says that it was fully repaid by cheque drawn on 28 February 2014, which was cashed on 3 March 2014.  It did not appear in the trial to prove and to explain the alleged full repayment.  A bank statement of the relevant time has been disclosed, which contained an entry equivalent to the amount of the cheque.  Such evidence goes no further, in the absence of evidence from Golden Gate.

12.  Further, the alleged full repayment of this loan by March 2014 was also contradicted by the June Memorandum mentioned above, which contained a contemporaneous written acknowledgment of the outstanding balance of HK$6,100 of this loan as at that date.

13.  As to the second to the seventh loans, Golden Gate says that in the course of the weekly meetings between about May 2014 and about early September 2014, Wong, Young and Ko had orally agreed that to facilitate the negotiation with a potential investor, no repayment of loans or reimbursement of funds by Golden Gate until after the company has made a profit; and the repayment or reimbursement has been approved by its board of directors (“the Alleged Agreement”).

14.  Insofar as the Alleged Agreement was made orally, again GoldenGate did not appear at the trial to adduce the requisite oral evidence in support. The statement of Wong, which is excluded, is actually silent on this.

15.  Then there was the memorandum dated 8 September 2014 (“the September Memorandum”), which Golden Gate apparently relied on in support of the Alleged Agreement.  The September Memorandum started by referring to the apparently poor student enrolment and thus business of Golden Gate by then; and that Ko indicated that he would not be able to fund the company any further, so that Wong and Young would have to deal with all the payments on their own.

16.  Amongst other things, the September Memorandum said:

“ 3.1 Simon advised that he has a potential investor may invest into the company and one of the major term and condition is prohibit loan repayments directly or indirectly related to company’s directors,

3.2 Simon advised that the potential investor clearly indicated that Simon, Winnie and Ko needs to agreed that not any of them will be able receive any repayment on their loans or reimbursement in any form related to their loans company until the company is clearly making a profit before the investor will move forward with their investment discussion and proposal,

3.3 Simon also mentioned that investor request any forms or loan repayments will need approval majority vote from the board of directors,

3.4 It was agreed that there will be no director’s loan repayment or any kind of loan repayment or reimbursements to person or persons who is related to Golden Gate International Kindergarten and Nursery Limited or its parent or subsidiary companies, i.e., including relations to all parent and subsidiary companies,

3.5  It was agreed by Simon, Winnie and Ko on the above items, 3.2, 3.3, and 3.4 requested by the potential investor ….”

17.  Essentially, Golden Gate pleaded reliance on the September Memorandum as evidence of the agreement by Ko that the loans would not be repayable until after the company has made a profit and the board of directors have approved by majority the repayment.

Whether the Alleged Agreement existed

18.  As she admitted, Pang has met Wong and Young on a couple ofoccasions social in nature, and she derived her knowledge about the operation of the business from her late husband.  She had no personal knowledge about the conclusion of the Alleged Agreement during Ko’s lifetime.  Nor had she seen the September Memorandum until discovery in this action. Nevertheless, she questioned the genuineness and reliability of this document.

19.  Considering the available evidence, it is perhaps not immediately apparent whether a conclusion may be drawn as to whether the September Memorandum in fact existed at the time or was a post-action fabrication.  However, all the memoranda mentioned above came from Golden Gate and signed by Wong as its sole director.  This will be a factor in considering the reliability of this document, particularly insofar as the same contained self-serving materials.

20.  The allegation that the Alleged Agreement was reached during the period between May and September 2014 will not sit well with the rest of the evidence.  Not only was there a complete lack of mention of such alleged consensus in any of the memoranda recording the loans during this period, there was on the contrary the specific records in the relevant memoranda in respect of the last four loans from May to August 2014 that they were repayable on demand.  In the circumstances, assuming that the September Memorandum in fact existed at the time, the Alleged Agreement which the memorandum sought to record could not have existed during the period between May and early September 2014 as alleged by Golden Gate.

21.  The content of the September Memorandum per se reinforces the above inference.  As explained in the memorandum, the call for Wong, Young and Ko to come to the Alleged Agreement arose entirely out of the request of this potential investor.  This pretext was not to be found in any of the previous memoranda, most probably because this potential investor did not exist until early September 2014.

22.  For the fair disposal of the dispute as pleaded, even though Golden Gate did not come to prove its assertions, I will continue to discuss the various points raised on behalf of Pang in respect of the effect of the Alleged Agreement, assuming that it existed in fact.

Whether the Alleged Agreement was/is binding

23.  Assuming that the September Memorandum accurately recorded what it says, it was argued that the Alleged Agreement was or is not binding. Specifically, it was argued that:

 (1) Golden Gate was a party to the Alleged Agreement;

 (2) Even if Golden Gate was a party to the Alleged Agreement, it has provided no consideration;

 (3) The promise by Ko was personal in nature, which ceased to be binding and not binding on his estate upon his death;

 (4) The conditions for repayment of the loans were uncertain; and

 (5) It is illogical to hold Ko to such promise in the circumstances of the case.

Issues (1) and (2)

24.  Issues (1) and (2) may be considered together.  As far as the Alleged Agreement was one among Wong, Young and Ko, the consideration could be said to take the form of their mutual agreement not to enforce their respective loans against the company.  Mr Chan for Pang submitted that it is unclear what consideration there was from Golden Gate in exchange for the forbearance of Ko.  Whilst he would not rule out the possibility of such consideration to take the form of the company agreeing not to make repayment to any one of Wong, Young or Ko in preference to the others, Mr Chan submitted that this should have been put forward and substantiated by Golden Gate.  I agree that unless the answer to Pang’s argument is clear, it would not be appropriate for the court to formulate the answer for Golden Gate.

Issue (3)

25.  It was argued on behalf of Pang that the Alleged Agreement was personal in nature and binding on Ko personally at the highest.  Here Mr Chan was seeking to distinguish Ko, when alive, and his estate after his death.  He argued that the foundation of the Alleged Agreement must be the consideration of the role that Ko played in the venture.  Upon his death, his estate could no longer be held to such agreement.  Mr Chan borrowed support from Halsbury’s Laws of England (4^thed) Vol 9(1) at §903:

“ Death or incapacity of party. General speaking, the death of a contracting party will have no effect upon either the contract or rights already accrued under it. However, when personal considerations are of the foundation of the contract, prima facie the death of either party puts an end to the relationship and the contract is discharged, as in the cases of principal and agent, or employer and employee, but this is not necessarily the case where the employer is a partnership, one of whose partners dies.”

26.  The above principle applies where the contractual relationship between the parties was founded on the performance of obligation that was personal in nature, for instance that between an employer and an employee.  Such contract will be subject to the implied term that the obligation may be performed only during the lifetime of the promisor.  See also Chitty on Contracts (32^nded) Vol 1 at §23-037.  I therefore have reservation regarding the applicability of the principle to the forbearance by Ko to enforce the repayment of his loans owed by Golden Gate, a corporate body, subject to the terms of the Alleged Agreement.

Issue (4)

27.  It was argued that the Alleged Agreement lacks certainty so as to become valid and binding.  It was argued that the meaning of profit under the agreement was uncertain. So was the timing of when the company would be said to be clearly making a profit.  I do not share such criticism, as this must mean profit calculated in the usual business accounting manner.  Such net balance in the business accounts should amount to prima facie satisfaction of the condition, which would entitle the parties to at least expect repayment.  However, there was the additional condition that any repayment would require majority approval of the board of directors, who in principle might take into consideration matters apart from the existence and level of profits.

28.  Essentially, even if the existence of profits, as a standalone condition, might be said to be uncertain, no real uncertainty would have arisen if the other condition of approval by the board of directors of Golden Gate comes into play.  There was an agreed mechanism under the Alleged Agreement for the determination of whether and, if yes, when the loans would be repaid.

29.  Mr Chan did not insist that if viewed the above way, the Alleged Agreement might not be too uncertain to be binding.  However, he suggested another form of uncertainty as the board of directors of Golden Gate did, and still does, consist of Wong alone.  Wong, pursuant to the terms of the Alleged Agreement, could dictate that the loans would never be repayable.  This is more illogicality than uncertainty—issue (5) below.

Issue (5)

30.  It was argued that the Alleged Agreement is so illogical that it should not be enforced.  The illogicality lies with holding Ko (or in principlethe other Wong and Young, assuming that they have also lent to Golden Gate)to the forbearance subject to the terms of the agreement even as at today.

31.  As discussed above, the loans by Ko were all recognized and acknowledged by Golden Gate by August 2014 to be repayable on demand.  Wong, Young and Ko subsequently gave their commitment not to enforce the repayment of their respective loans by virtue of the Alleged Agreement, which was premised on the request of the potential investor that Wong allegedly located in early September 2014.  As recorded in the September Memorandum, their commitment was given in satisfaction of the pre-conditions set by the potential investor for his agreeing to discuss any proposal to invest in the company.  The Alleged Agreement then came to exist to serve this specific purpose of facilitating the negotiation with this potential investor.  This was the context in which the Alleged Agreement should be construed.

32.  There is no suggestion or evidence that such negotiation with the potential investor since September 2014, if at all carried out, has yielded any fruit.  If anything, the result would seem to be in the negative, because even Wong himself sought to petition for the winding up of Golden Gate on the ground that the company was insolvent in 2017 (HCCW 210/2017), which was the same year of the commencement of this action.  In other words, the purpose for the Alleged Agreement must have already been served, and most probably with no success.

33.  In the circumstances, it could hardly be the mutual understanding of the parties at the time of the Alleged Agreement that they would be held to their forbearance regardless of the fact that the purpose of such forbearance has been served.  To suggest the otherwise, in my view,would defy common sense.  This is so, especially when the board of directors of Golden Gate, contrary to what might have been contemplated under the Alleged Agreement, still consisted of a single director, ie, Wong.  To say that it was the intention that Wong alone would still dictate whether or not to repay the loans regardless, even now, will be illogical.

34.  I am therefore prepared to find that even assuming that the Alleged Agreement in fact existed in terms as set out in the September Memorandum,it would not be enforced as it would be so illogical that it could not have been the intention of the parties to it.

HCCW 210/2017

35.  I should perhaps mention that in HCCW 210/2017, Pang was the opposing party.  Reference was made to Golden Gate’s defence in this action, including the Alleged Agreement.  There counsel for Wong conceded that he was bound by the Alleged Agreement, but the court noted that this was made for the purposes of the hearing before his lordship.  There was no adjudication in respect of the Alleged Agreement, which was obviously a matter for this action.  Hon Harris J dismissed Wong’s petition[1] on the ground that he was not a contingent creditor as alleged even on the basis of the matters suggested in this action.  Wong did not have the locus standi to present the winding up petition.

Demand for repayment and liability

36.  The demand made by Pang through her solicitors on 4 November2016 to Golden Gate for repayment on or before 11 November 2016 amounted to a valid exercise of the right, after the purpose of the Alleged Agreement, even if it existed, has been served.  There is no valid defence to the claim herein.

Disposition

37.  I reject the allegations of Golden Gate, and find for Pang on the factual basis of the claim.  Accordingly, I give judgment in her favour in the sum of HK$1,876,100.

38.  Mr Chan asked for interest from 11 November 2016, which was the deadline for repayment imposed by its formal written demand dated 4 November 2016 mentioned above.  However, that formal demand expressly covered the first seven loans amounting to HK$1,726.100, but no formal demand in respect of the last loan was referred to.  I therefore simply order interest on the above total sum to run from the date of writ.  Taking into account Mr Chan’s submissions, I award interest on the above sum at 4% per annum until judgment, and thereafter at the judgment rate until full payment.

39.  Golden Gate shall pay Pang the costs of this action, including any costs reserved, to be taxed, if not agreed.