TAM NGAK CHOU SIMON AND ANOTHER v. WONG KAM WAI

HCA 6109/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 6109 OF 1999

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J U D G M E N T

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Background

1. In 1993, Simon Tam Ngak Chou (the 1st Plaintiff), Wong Kam Wai (the Defendant) together with Lee Wing Hee and Wong Kam Wai were the shareholders and directors of Lun Kei Shiu Cheong (Group) Ltd (the Lun Kei Group). The 1st Plaintiff was in charge of the Lun Kei Group. It is a Hong Kong registered private limited company.

2. The 1st Plaintiff is also the beneficial owner of a Hong Kong registered private limited company called Moon Shun Trading (International) Co Ltd (the 2nd Plaintiff).

3. The Defendant was, at all times material to this case, the beneficial owner of a Hong Kong registered private limited company called Kam Wah Hong Ltd (Kam Wah Hong).

4. In the spring of 1993, the 1st Plaintiff and the Defendant entered into an oral joint venture agreement to sell building materials in Guangzhou in the Mainland. They set up Cheong Construction Material Company Limited (Construction) to do this. Construction was established under Mainland law. It is accepted that under Mainland law Construction has a separate legal personality from its owners.

5. The Defendant was entrusted with setting Construction up and with its overall management and operation. A Mr Wong Ching, a PRC citizen, managed its day-to-day affairs. Construction had no separate bank account, it was agreed that Kam Wah Hong's bank account be used as Construction's bank account for 'convenience'.

6. At some time before 1998 the 1st Plaintiff transferred his interest in Construction to the Lun Kei Group. In 1998 his relationship with his fellow shareholders deteriorated and he bought out their interests in the Lun Kei Group, including the holding in Construction, and wrote off accumulated debts amounting to $2,100,000.

7. The dispute between the 1st Plaintiff and the Defendant is over whether or not the 1st Plaintiff lent the money to the Defendant to pay for his capital contribution in Construction.

8. The dispute between the 2nd Plaintiff and the Defendant is whether or not the Defendant agreed to procure Construction to pay the 2nd Plaintiff for eight consignments of ceramic tiles it sold to Construction.

The Plaintiff's case

9. It is not disputed that the 1st Plaintiff made the following payments, by means of cheque, for the purposes of setting up Construction and buying its two shop premises in Guangzhou. All the cheques were made payable to Kam Wah Hong.

18 May 1993	$	550,000
18 May 1993	$	236,000
19 May 1993	$	20
28 May 1993	$	314,000
8 September 1993	$	500,000
2 July 1994	$	611,000
Total	$	2,211,020

10. It is the 1st Plaintiff's case that that $1,100,000 of the total of $2,211,020 that be paid represents his investment in Construction, while the balance of $1,111,020 represents loans he made to the Defendant so that he could pay his capital contribution in Construction. This sum remains outstanding.

11. It is the 2nd Plaintiff's case that it sold and delivered eight container loads of ceramic tiles, worth $2,527,773.28 to Construction. They were sold and delivered on the basis that Construction need not pay the 2nd Plaintiff for them until they were sold. However, the Defendant agreed to procure Construction to pay for them once they were sold. Construction has never paid for them and that amount remains owing.

The Defendant's case

12. The Defendant's case is that the 1st Plaintiff never lent him any money to invest in Construction. He says that on 23 July 1993 and 13 September 1993, he injected the respective sums of $600,000 and $500,000 into Construction by way of capital contribution.

13. As far as the 2nd Plaintiff's claim is concerned; the Defendant says that he never agreed to procure Construction to pay the 2nd Plaintiff for the ceramic tiles it sold and delivered to Construction. The sale and purchase agreement for each of the eight consignments was between the 2nd Plaintiff and Construction and he was not party to any of them, neither was he a guarantor of any of them.

14. There is no counterclaim.

Issues

15. Against that matrix the issues requiring determination are, whether the 1st Plaintiff lent $1,111,020 to the Defendant and, whether the Defendant agreed to procure Construction to repay the 2nd Plaintiff for the price of the goods it sold and delivered to Construction, amounting in value to $2,527,773.28.

The trial

16. Only the 1st Plaintiff and the Defendant gave evidence at trial, neither called other witnesses.

The 1st Plaintiff's claim

17. If the 1st Plaintiff is to be believed, Construction was a 50/50 venture between the Defendant and he; but he was its sole financier. That is a very easy claim to make, but the very great difficulty I faced - and it would be one that any judge who tried this case faced - was that the parties never bothered to reduce their agreement about the establishment and funding of Construction into writing. Further there are no audited annual accounts showing Construction's capital structure. And there are no returns of shareholders that may shed light upon how its equity was divided between the 1st Plaintiff and the Defendant. What few documents there are were prepared by the parties for their own purposes and, save for two, which I deal with later, remain silent on Construction's capital structure.

18. It appears to be the case that, save for one cheque, all cheque payments that the 1st Plaintiff made, about which I have heard evidence, were to Kam Wah Hong. As I have said, it is agreed that Kam Wah Hong's bank account was used as Construction's bank account. The sole cheque that was made payable to the Defendant personally was for him to buy a Mercedes Benz motorcar. It was for $500,000 and is dated 3 March 1993. The Defendant repaid this loan by cheque in October 1997 and the 1st Plaintiff accepts that he did so. This particular loan forms no part of his case against the Defendant.

19. There appear to have been only two sets of what, charitably, may be described as annual capital and profit & loss accounts drawn up for Construction. One is dated for 23 December 1995 the other for 30 September 1996. Both appear to deal with major financial transactions in the 12 months preceding their date. The Defendant drew both of them up. The 1st Plaintiff accepts that he received them. Both have an entry reading: "Lun Kee Group cash investment in Lun Cheong $1,100,000 ...Kam Wah Hong cash investment in Lun Cheong $1,192,000". It is accepted that the reference to 'Lun Kee' is to the Lun Kei Shiu Cheong (Group) Ltd - the Lun Kei Group. Neither set of accounts refers to Kam Wah Hong's investment being a loan from the Lun Kei Group, or the 1st Plaintiff.

20. The 1st Plaintiff produced another set of undated accounts, or rather more accurately a set of calculations, which, apparently, were produced in 1998 when he bought out the interests of the other shareholders in the Lun Kei Group following the dispute with them. These show, without explanation, an investment in 'Lun Cheong' (Construction) of $2,100,000. And, in a handwritten note, there is reference to: "Part of investment in Guangzhou Lun Cheong amount which $500,000 was Tam's lending to Wong Kam Wai as personal loan, not to be recorded in the account and thus the amount of investment should be $4,738,793.28" (sic). As I have said, the Defendant accepts that the 1st Plaintiff loaned him $500,000 in March 1993 to buy a Mercedes Benz motorcar. So far as I can see nowhere else in this account is there any mention of further debts being due from the Defendant.

21. It is for the 1st Plaintiff to establish his case on a balance of probabilities. In seeking to do so he has only been able to make protestations claiming that of the $2,211,020 he paid into Kam Wah Hong's bank account between May 1993 to July 1994, $1,100,000 was by way of a loan to the Defendant. Those claims do not appear to be supported by the very few documents that were relied on in support of his claim. I find that the 1st Plaintiff has been unable to establish his claim against the Defendant and it is dismissed.

The 2nd Plaintiff's claim

22. As stated, the claim is in respect of eight consignments of ceramic tiles sold and delivered by the 2nd Plaintiff to Construction on various dates between 6 June 1994 and 24 August 1994.

23. It was not pleaded, neither was it any part of the 1st Plaintiff, or the 2nd Plaintiff's, case, that the Defendant was a party to any of the eight separate sale and purchase agreement between the 2nd Plaintiff and Construction relating to the sale of the tiles; it is accepted that each of the sale and purchase contracts were between the 2nd Plaintiff and Construction. Rather it was the both Plaintiffs' case that, by virtue of the early 1993 joint venture agreement, the Defendant had effectively agreed to guarantee payment of Construction's orders from the 2nd Plaintiff.

24. It is said in the Statement of Claim that the 2nd Plaintiff was party to the joint venture agreement entered into in, ' ... early 1993' between the 1st Plaintiff and the Defendant to engage in the selling of building materials in the Mainland. It is also claimed that the 1st Plaintiff entered into that agreement on behalf of himself and the 2nd Plaintiff. The Statement of Claim goes on to say that Construction was incorporated in the Mainland pursuant to that agreement 'in or about May 1993'. It is then claimed that part of the same agreement was that the 1st Plaintiff would procure the 2nd Plaintiff to sell building materials to the joint venture and that the Defendant would procure Lun Cheong (Construction) to "...settle the price for goods sold and delivered owed to the 2nd Plaintiff" (sic), which, as Construction was not yet incorporated and was only incorporated as a result of the agreement, would have been an impossibility.

25. In cross-examination the 1st Plaintiff accepted unequivocally that Construction was not a party to the agreement. He thus resiled from what had been pleaded on the 2nd Defendant's, and his own, part.

26. It is also the case, as may be seen from the Companies Registry documents exhibited at trial, that the 2nd Plaintiff itself was not incorporated in Hong Kong until 8 February 1994. It is therefore very hard - in fact it is impossible - to see how the 2nd Plaintiff could have been a party to the joint venture agreement, which, allegedly was made eleven months before it came into being. It is as equally impossible to see how, in 1993, the 1st Plaintiff could have agreed to procure this non-existent company to sell goods to the joint venture, or the company formed pursuant to the joint venture. And as equally impossible to see how the Defendant could have agreed to procure Construction to pay for goods to be sold and delivered to it by the same non-existent company.

27. The only explanation that the 1st Plaintiff could give in answer to these conundrums was that "...if Lun Cheong doesn't pay Kam Wah Hong has to pay - simple as that". That may have been his wish, indeed it may have been his understanding of what had been agreed in the early part of 1993. However, the over-informal way in which these matters were handled, both then and later, and the complete lack of any written agreement, or memorandum, of what the 1st Plaintiff and the Defendant agreed when they entered into their joint venture means that I cannot be satisfied on a balance of probabilities that this is what the 1st Plaintiff and the Defendant agreed would be the case. It is clear that once Construction was incorporated (in May 1993) and once the 2nd Plaintiff was incorporated (in February 1994) and once they started trading with each other (in June 1994) the sale and purchase contacts in question were entered into between the two of them and no one else - two incorporated legal personalities with full legal capacity dealing with each other - and there is no evidence that, once trading started and contracts were entered into between them, the Defendant guaranteed performance of the purchaser's obligations under any of the eight contracts in question.

28. I was referred - after trial and in a letter from the Plaintiff's solicitors, which is not a practice I encourage - to section 32A(1) of the Companies Ordinance, Cap 32; which provides:

"(1) Where a contract purports to have been made in the name or on behalf of a company at a time when the company has not been incorporated-

(a) subject to subsection (2) and any express agreement to the contrary, the contract shall have effect as a contract entered into by the person purporting to act for the company or as agent for it, and he shall be personally liable on and entitled to enforce the contract accordingly;

(b) the company may, after incorporation, ratify the contract to the same extent as if it had already been incorporated at that time and as if the contract had been entered into on its behalf by an agent acting without its authority."

29. That section, however, does not meet the facts of this case. It was not pleaded, neither was it claimed at trial, that the Defendant in the name, or on behalf of, the yet-to-be incorporated Construction entered into an agreement to purchase goods from the yet-to-be incorporated 2nd Plaintiff. The claim is very specific; it is that the Defendant himself, in his personal capacity, agreed to procure Construction to meet its contractual liabilities to make payment to the 2nd Plaintiff for any goods it supplied to Construction.

30. I find that the 2nd Plaintiff has been unable to establish his claim against the Defendant and it is dismissed.

31. Judgment is entered for the Defendant against the 1st and 2nd Plaintiffs. The 1st and 2nd Plaintiffs are to pay the Defendant's costs or this action. The costs to be taxed unless agreed.