Cargo Services Far East Ltd v. Lee King Shun

DCCJ874/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 874 OF 2003

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J U D G M E N T

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1. These are Order 14 proceedings in which the plaintiff seeks judgment in the sum of $300,000 together with contractual interest of $60,283.56 on that amount.

2. Having heard Miss Yiu for the plaintiff, I indicated to Mr Tsui, who appears for the defendant, that I did not need to trouble him on the claim for interest because I was at that stage satisfied that there was a triable issue at all events on this limb of the claim. I will give my reasons for that presently.

3. Although the amount of the claim is relatively modest, it has an element of factual complexity compounded by some points of law which I am required to work through. I am grateful to both counsel for the clarity of their addresses which now makes the case far less daunting than it had appeared to be on a first reading of the papers.

4. It is helpful to begin by indicating the relationship between the main players in the dispute. The plaintiff is a Hong Kong company involved in the freight forwarding and warehousing business. Its holding company is Cargo Services Holdings Limited (CSHL) which is registered in the British Virgin Islands. The defendant, Mr Lee, is a former director of the plaintiff and a shareholder of a company called Cargo Services Limited (CSL) which in turn owns shares in CSHL. As a result, the defendant retains an interest in the plaintiff although he is no longer one of its directors.

5. The claim for the principal amount is for repayment of a loan of $300,000 made by the plaintiff to the defendant. Whilst it is not disputed that as a matter of arithmetic such an amount was owed by the defendant, Mr Tsui, for him, has sought to demonstrate that such a debt has now been more than set off by other related transactions between these parties and the other companies that I have referred to, with the effect that this claim is no longer maintainable.

6. In order to understand how this comes about, I need to examine some of the evidence concerning the other transactions, and it is this which has caused the matter to lose what really should have been a straightforward factual issue. All this goes back to about August 1997, when the Inland Revenue conducted an audit of the accounts of CSL due to discrepancies that it had noticed between CSL's tax returns and those of the plaintiff as to the management fees that had been received by CSL from the plaintiff for the tax years 1993 and 1994. The fees reported by the plaintiff were $3 million more than CSL had actually received.

7. The detail of this investigation appears in the defendant's affirmation at pages 55 and 56 of the bundle. Suffice it to note that a heavy penalty was imposed on the defendant by the Revenue. The defendant was then obliged to ask for assistance from the plaintiff in order to pay that. He was lent $1.3 million, which he says was a non-interest bearing loan. The plaintiff itself was also penalised and had to pay further tax and penalties. And so the case begins with this admitted initial indebtedness by the defendant to the plaintiff.

8. The next stage concerns what is also agreed between the parties, which is that CSL was entitled to a sum of $1.63 million from CSHL, the plaintiff's holding company, by way of dividends for the year ended 31 December 1999. It was then agreed by the parties that the loan of $1.3 million to the defendant would be off set from these dividends owed to CSL, which is the defendant's company.

9. In February 2000, the defendant made a request that only $1 million of his indebtedness should be set off from the dividends. Nevertheless, by the time that he had made that request, Laura Mak of the plaintiff had already deducted the entire indebtedness from the dividends. In order to comply with the defendant's request, she then issued a cheque to the defendant in the sum of $300,000. It is common ground that a cheque in this amount was issued to the defendant and cashed by him on 24 February 2000.

10. From those facts, Miss Yiu rightly submits that where this amount has been admitted and not repaid, that the plaintiff must be entitled to judgment in the absence of the defendant somehow demonstrating that there is a triable issue. As to when such an issue can be said to have been established, both counsel have helpfully drawn my attention to the well-known cases which bear on this point. I do not propose to rehearse these here. I have had regard to them and to the way that they have been deployed as appears in the written skeleton arguments put in on each side.

11. From that outline, which I hope sets the scene, I now need to consider the matters raised by Mr Tsui to see whether each, on an individual basis or in combination, is of sufficient weight to stave off judgment at this summary stage. The core of the defence appears in the defendant's first affirmation to which I have already referred. The material part starts at paragraph 3, page 50, to paragraph 14, page 52. He seeks to establish an alleged debt of $998,675 owed by CSHL to CSL which remains unpaid. This is said to amount to a set-off as between the plaintiff, CSHL's subsidiary, and the defendant, who, as I have already observed, is the owner of CSL.

12. The essential elements of this are the following. In early 1990, the defendant was invited by a Mr John Lau to join him in a freight forwarding business. They established the plaintiff company as well as a number of associated subsidiaries. The shares in the plaintiff are held by three companies: Princetonhall Limited with 8.7 per cent of the shares, Hundred Honest Limited, a nominee of Mr Lau, with 58.7 per cent, and the remaining 32.6 per cent by CSL, the defendant's nominee.

13. In 1997, there was a restructuring of the group. CSHL, the BVI company, was formed and used to replace the plaintiff as the main corporate vehicle holding the various associated subsidiary companies. By a chain of shareholdings, CSHL became the majority shareholder of all the associated and subsidiary companies within the group. The defendant says that when CSHL came into existence in November 1997, it was agreed by the plaintiff's three shareholders that CSHL's paid up capital would be $387,500, whilst the shareholding ratio amongst the shareholders would remain unchanged.

14. It was further agreed that CSHL's paid up capital would be transferred from the plaintiff. The result of that agreement was that the plaintiff's paid up capital, which had been $3.45 million, was reduced by $387,500. This can be seen from the tables at paragraph 6, page 51, and paragraph 11, page 52, of the defendant's first affirmation.

15. A further agreement is then alleged between the shareholders of the plaintiff and CSHL, that the differences between the paid up capital owned by the various shareholders of the plaintiff and CSHL would be treated as loans owed by CSHL to those shareholders. As a result, CSHL owed CSL $998,675, which is the difference between CSL's share of the plaintiff's original paid up capital, $1.125 million, and $126,325 being CSL's share, 32.6 per cent of CSHL's paid up share capital, as transferred to it from the plaintiff. This amount of $998,675 remains unpaid by CSHL and therefore owing to CSL. This, according to the defendant, is how the matter stood in late 1997.

16. At that stage, as Mr Lau and the defendant were on good terms, it appears that this state of affairs was allowed to remain without anybody doing anything about it. Then, in terms of chronology, there came the difficulties with the Revenue, to which I have already referred, these matters occurring at about the same as the restructuring of the plaintiff and the establishment of CSHL. I have made reference to the penalties that were levied against the defendant by the Revenue and it should also be noted that penalties were also levied against both the plaintiff and Mr Lau's interests.

17. The next step in the narrative is what, for the defendant, is a crucial alleged oral agreement concluded at the end of 2000 between the defendant acting for CSL and Mr Lau for the plaintiff and CSHL, whereby CSHL agreed to repay the debt of $998,675 that it owed to CSL. Through the plaintiff, CSHL would pay $698,675 to the defendant, or as he should direct, and that the balance of $300,000 would be paid by CSHL to the plaintiff on the defendant's behalf so as to set off and in fact extinguish the admitted debt owed by the defendant to the plaintiff. It is further alleged that all these debts would carry no interest. As I have already said, so much appears from the defendant's affirmation of which this serves as a summary.

18. To complete the picture, as is apparent from this action, Mr Lau and the defendant have now fallen out, such that in September last year, CSL, as a shareholder of CSHL, issued a petition to wind up CSHL on the "just and equitable" ground which remains to be heard. If the substance of the defendant's evidence is accepted, that CSHL's debt to CSL was to be repaid in the way that I have just described, including a contemplated payment of $300,000 to the plaintiff on the defendant's behalf, then, says Mr Tsui, this must afford a complete answer to the claim.

19. Miss Yiu has raised a number of matters both as to the quality of the evidence said to support this alleged oral agreement and also purely legal issues which, even taking the defendant's case at face value, are said to render such an alleged agreement and its evidential basis, which is also not accepted, non-starters in terms of their validity as a matter of law.

20. Firstly, as to the loan of $998,675 allegedly owed by CSHL to CSL, which is the whole basis of the defence now advanced by the defendant, Miss Yiu submits that this simply cannot form a basis for any set-off of a debt owed by the defendant personally to the plaintiff. The parties are quite distinct. There is simply no mutuality and set-off is not available to the defendant as against the plaintiff. That of course is at first blush an impressive argument. Mr Tsui's response is to say that it is always open to the parties, provided that they all agree, to make the arrangements which the defendant says were actually agreed.

21. I am satisfied that Mr Tsui is correct in that submission purely as a matter of principle without, at this stage, considering whether there is sufficient credible evidence to support the existence of such an arrangement having taken place. Provided all the parties agreed, I see no difficulty in such an agreement, which contemplates other parties' debts being paid, and coming into existence and having legal effect. The defendant has therefore survived the first hurdle.

22. Next, Miss Yiu submits that the creation of such a loan is simply not credible. If she can persuade me that this is so, then this would remove the whole evidential basis for the defence and judgment must therefore be entered. I refer to paragraph 8.2(i) of her written submission. The plaintiff's case is that the difference between the paid up share capital of the plaintiff and of CSHL being $3,062,500, which is the difference between the plaintiff's original paid up share capital of $3.45 million and CSHL's agreed paid up capital of $387,500, was to go into CSHL's share premium account which would serve to reflect the true value of CSHL's shares.

23. Whilst I can see the sense in such a situation, given the fact that CSHL was to be the plaintiff's holding company, my reading of the evidence is that it is equivocal as to the existence of such a premium account. Supporting the defendant's case that the matter was to be treated as a loan, there is the audit confirmation loan at page 119 of the bundle which purports to evidence the existence of a debt of $998,675 due to CSL from CSHL. This is countered by the evidence of the accountant, Miss Yip, whose evidence on behalf of the plaintiff is at page 158. There is a clear dispute of fact on this issue which I simply cannot decide on the basis of these contested affidavits. So, in terms of an application of this sort, this issue must remain live as between the parties.

24. Miss Yiu's next reason, which she says militates against the existence of the loan, is the fact that notwithstanding its size, no attempt was ever made to recover it, nor was any demand made for its recovery. Further, it was never raised until the plaintiff's solicitors had written to demand payment of the debt, which is the subject of this writ.

25. Then Miss Yiu makes the point that there is no mention of its existence in the winding-up petition which one might expect to find as part of the complaints made by the petitioner of mismanagement by CSHL. Mr Tsui has replied to these points by saying that this "debt" is not in the nature of a loan of money but is to be considered as part of the plaintiff's share capital so that its repayment would not be something that one would be expected to see where the plaintiff was a going concern and whilst the parties remained on good terms. Ultimately, whilst these may be persuasive "jury points" by Miss Yiu, they are matters for the trial rather than conclusive unanswerable arguments against the defendant. At this stage these points remain arguable both ways, which is sufficient for Mr Tsui's purposes.

26. The next matter raised by Miss Yiu, in her comprehensive submission, is the clean point of law to the effect that where the defendant alleges that the parties had agreed that part of the plaintiff's paid up share capital was to be transferred to CSHL, such transfer would inevitably involve a reduction in the plaintiff's paid up capital which requires the sanction of the court. So much is beyond doubt (see sections 58 to 60 of the Companies Ordinance). The whole object of the legislation is to maintain a company's capital for the protection of its creditors, hence the statutory requirement of an application having to be made to the court to sanction such a reduction. In the absence of such an application, the scheme advanced by the defendant is to be considered void and therefore of no effect.

27. Mr Tsui has risen to that challenge by drawing my attention to a number of passages from the textbook by Professor Buckley, "Illegality and Public Policy". These passages really do demonstrate a flexible approach to situations of alleged illegality which ultimately must turn on the individual facts and nuances of the particular case. I do not believe it is open to me, on the evidence as it stands at present in this case, to say with the requisite degree of certainty that this particular arrangement should be struck down. With that, the defendant must be held to have survived that particular obstacle.

28. The final matter, if all else fails, so far as Miss Yiu is concerned, is to attack the credibility and indeed the legal viability of the alleged oral agreement at the end of 2000 whereby the debt from CSHL was to be repaid in such a way that, inter alia, $300,000 would go from CSHL to the plaintiff to repay the defendant's debt to it.

29. Where a purely oral agreement is relied on, particularly in a commercial matter where one might normally expect such an agreement to find its way into written form, care must be taken to ensure that the alleged oral agreement is more than just a last ditch attempt at obfuscation by a desperate defendant seeking to put off the inevitable judgment day. I have tested this assertion against the whole of the background to this matter, and where I have held that on the evidence up to this point of the enquiry the defendant has survived the stiff examination set by Miss Yiu, I am bound to say that as a matter of evidence, and whether that evidence is sufficiently credible to be left to the trial judge, the defendant must be taken to have succeeded. His case has been presented in a detailed way throughout and whilst at the end of the day the trial judge may find against him, he has done enough to show that on every question asked of him by the plaintiff, his case should be allowed to go to trial.

30. On this final issue, Miss Yiu has raised matters as to uncertainty or common mistake, these being principally questions of law, but at the end of the day, these will have to go into the melting pot to be determined by the judge. He will have to make precise findings of fact before he can rule on such matters. I do not, at this stage, have that luxury on contested paper evidence.

31. The final issue relates to interest and whether the alleged debt carries contractual interest. I am afraid that Miss Yiu really has come nowhere near to showing any evidential basis for that so that even if I may be held to have been wrong on the question of the defendant's amenability to summary judgment, I still would not have found for the plaintiff on the question of interest. That would, in any event, have needed to go to trial.

32. And so for all these reasons, the defendant must have unconditional leave to defend.

(Discussion re costs)

33. I take the view that on this evidence the plaintiff was entitled to have a go, if I can express it in that way, and I take the view that it really would be unduly harsh to make an order between the parties at this stage. This was an entirely proper application and although at the end of the day it has failed, as I have indicated, I think it was an entirely justified attempt to seek summary judgment, and so the order that I will make is one of costs in the cause with certificate for counsel.