SHIEH SHIN JIU v. MAK SHIU KEI, JOHNNY and Another

1991 No. A 9096

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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(By Counterclaim)

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J U D G M E N T

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1. Although both the statement of claim and the counterclaim in this action seek a number of declarations and orders from the Court, there is in effect only one main issue, namely whether there is a binding agreement by the Defendants to sell their two shares in the 3rd Defendant by counterclaim to the Plaintiff for $1.00 each, evidenced by an instrument of transfer, and bought and sold notes, signed by the parties. If not, the Defendants are still shareholders, and, as it is not denied by the Plaintiff that the business of the 3rd Defendant by counterclaim has been transferred to the 4th Defendant by counterclaim, would be entitled at the very least to an account of the profits diverted to the 4th Defendant. But to look at this issue in its proper context it is necessary first to briefly examine the history of the relationship between the Plaintiff and the Defendants and their business dealings.

2. The Plaintiff, Shieh Shin Jiu, is a businessman from Taiwan with interests in a number of companies involved in electronics, and in particular the manufacture of parts for the mechanism of tape recorders.

3. The Defendants, Mak Shiu Kei and his wife, Ma Shuk Hing, have been associated with Mr. Shieh's businesses since about 1986, when, after a short-lived joint venture company, he invited Ms. Ma to work for his firm in Hong Kong, Zheng Kong Enterprises, then not a limited company, and Mr. Mak to assist with the business, on commission. The Defendants became trusted associates of the Plaintiff and were entrusted with the day to day running of Zheng Kong. Ms. Ma was paid a salary and Mr. Mak, as I have said, was on commission and was paid expenses.

4. Zheng Kong Enterprises was then importing from Taiwan for sale in Hong Kong and the PRC cassette deck mechanisms supplied by the Plaintiff's company. With the assistance of Mr. Mak the business prospered, and in 1989 the Plaintiff decided to form a new company to further his plans to import parts from his company in Taiwan, have them assembled by his own factories in PRC, and sell the finished products to cassette deck manufacturers in Hong Kong.

5. The new company was Zheng Yuan Enterprises Co. Ltd., the 3rd Defendant by counterclaim, which, although a separate entity from Mr. Shieh's other companies, was clearly intended to operate as a part of the whole structure. The parts of the cassette deck mechanisms would be manufactured in Taiwan, and sold to Zheng Yuan. Zheng Yuan would then entrust to Zheng Kong the assembly of the parts in its factory in the PRC for which Zheng Yuan would pay Zheng Kong. Zheng Yuan would arrange sale of the assembled deck mechanisms which would be delivered, as I understand it, direct to the customer in Hong Kong or elsewhere. However, in the course of all these transactions, it appears that parts or the assembled decks never came into the physical possession of Zheng Yuan, but remained with Zheng Kong from the time the parts were delivered by their associate in Taiwan, to when the assembled decks were delivered to the customers. The function of Zheng Yuan was to deal with the paperwork and arrange the sales, taking a profit on the sale price over and above the cost of purchase and assembly. Both Zheng Yuan and Zheng Kong shared office premises in Hong Kong owned by the Plaintiff.

6. The setting up and incorporation of Zheng Yuan was left to Mr. Mak. The Plaintiff says that this was because he was not familiar with Hong Kong law, and did not speak or write English, and had his business affairs in Taiwan to see to. I consider that the latter reason was more likely to be the principal one. I do not accept that the Plaintiff was such an innocent abroad in business matters, but he was clearly a successful and busy man.

7. It is in the incorporation of Zheng Yuan that the accounts of the parties as to their dealings with each other first seriously diverge. Mr. Mak maintains that it was agreed that he and his wife would have a half share in the new company, and of the four $1 shares issued, two were allotted to them and the other two to the Plaintiff and his wife. Mr. Shieh, however, maintains that he only intended that the Defendants should have 1% of the company each, and only discovered the allocation of shares when the Defendants sought to leave in 1991.

8. While I accept that the Defendants had become trusted associates of the Plaintiff, and worked closely with him in his Hong Kong operation, I find it difficult to believe that he intended them to benefit to the extent of 50% in the assets and profits of a major part of his business here. He is the head of a large family business group in Taiwan and was setting up a Hong Kong branch of that group which, by 1991, had a turnover of over $150 million a year. I have no doubt that the Defendants were invaluable to him, in their knowledge of the industry, their contacts, and their obvious ability in running a business such as this. They were entrusted with great responsibility, Mr. Mak being given a power of attorney by the Plaintiff, and both having signing rights in respect of the company's bank account, and there is no evidence that the trust placed in them was ever abused.

9. Mr. Mak has sought to say that the fact that he did not receive a salary from the new company is evidence that he was expected to benefit from the profits and capital value of the company. However, this ignores the fact that this company and Zheng Kong were effectively run as one operation, and he was receiving commission from the latter in addition to expenses. He did not deny in evidence that in 1989/90 he received some $400000, and in 1990/91 over $600000.

10. I accordingly consider it more likely than not that the Plaintiff did not comprehend at the time that the shares in the company were divided equally between the Defendants and himself and his wife, and that he understood that he was giving a much smaller share to them.

11. In any event, the company was set up and prospered. Within the two years over which the events the subject of this action unfolded, the turnover increased dramatically, and, although the audited accounts showed an overall loss the first year, which I shall return to later, it moved steadily into profit the second year and there seems to be no reason why that should not have continued. That this was largely due to the efforts of the Defendants also cannot be denied. It is therefore difficult to see why such a successful and amicable arrangement should come to an end, and the parties fall out. But fall out they did.

12. In early 1991 the Defendants told the Plaintiff that they wished to resign as directors and to give up their shares in the company. The reason they give for this is that they were told by Mr. Shieh that he did not intend that the company should pay any tax, and that he proposed to have accounts prepared that showed a loss for the first period from the date of incorporation to 31st July 1990. Mr. Mak says that he refused to give such instructions to the accountants, and he and his wife were concerned that they would be exposed to possible prosecution as directors if they were party to such an attempt to evade tax, and wanted to sever their connection with the company. He says that the accounts which were prepared are in fact not a true picture of the state of the company, and instead of showing a loss of over $3 million for the period, there should be a substantial profit, and he would have been aware of it if it was trading at a loss.

13. However, on the evidence before me, I cannot accept this assertion. The accounts on their face are properly audited, and I have to assume that the accountants had access to the books of the company to prepare them. They have been accepted by the Inland Revenue Department with no suggestion of any wrongdoing, and the Defendants have not produced any evidence that there is a possibility of any action being taken by the Inland Revenue.

14. It is clear that there must have been some reason for the Defendants to leave, and it is likely that this was a dispute over the management or policies of the company, but I have no evidence of any fraud, or intended fraud, on the Inland Revenue. The Plaintiff himself could not throw more light on the situation. He refers to a number of matters which he says caused him to begin to distrust the Defendants, but the evidence here does not support any of them. Indeed, it is if anything rather the opposite, they had many opportunities to take advantage of the trust placed in them, and there is no evidence that they ever did other than act in the best interests of the Plaintiff and the company.

15. Whatever the reason for the Defendants intention to part company with the Plaintiff, it is not in dispute that they proposed to transfer their shares back to the Plaintiff. Mr. Mak instructed the then auditor of the company to prepare a minute of a directors' meeting to approve their resignation and transfer of their shares, two sets of instruments of transfer and bought and sold notes.

16. It is the Plaintiff's case that these were completed with the consideration included as $1 a share, and that they were signed by the Defendants. He says that he signed on the documents in front of the Defendants, and then went to Taiwan where he asked his secretary to photocopy them, and on his return to Hong Kong he showed them to one of the staff of the accounting firm, who was working in the company's office, and asked if they were all that were required to effect the transfer. Shortly after that, he says that he left the documents on his desk, but they were later found to be missing. However, he still had the photocopies that he had had made in Taiwan.

17. The Defendants agree that they signed the minute of the directors' meeting approving transfer of their shares and their resignation, but deny that the instruments of transfer and the bought and sold notes showed the consideration for the shares, or that they signed them. They claim that the copies produced by the Plaintiff are forgeries, and that they accordingly are still shareholders of the company.

18. In support of this, in addition to the evidence of Mr. Mak, they called Mr. Lee Chi Sum of Samuel C.S.Lee & Co., who then provided advice to the company on accounting and management matters. Ms. Ma elected not to give evidence. Mr. Lee agreed that he had prepared the documents of transfer at the request of Mr. Mak, but said that, at that time, no consideration was entered on them. Mr. Mak pointed out that there was no reason to sell shares at $1 in a company that was doing well and had an much higher asset value. However, the accounts referred to above, and which I have found to be properly audited, showed that the company was not then making a profit and had no substantial assets. In addition to this, the Defendants had not provided any capital to the company apart from the $2 paid for the shares, and, after a comparatively short time, may well have agreed with the Plaintiff that they were not entitled to more than their original contribution.

19. The Plaintiff gave evidence that the consideration of $1 was on the documents when the Defendants brought them to him, and that he signed in front of them. He is supported in this to some extent by the evidence of Miss Chan Suk King, who says that she was shown the documents by Mr. Shieh who asked her to confirm whether they were all that was required to complete the transfer of the shares. She said that she read the documents, which were already signed, and told him that they were in order. The Plaintiff's secretary from Taiwan, Miss Wei Mei Ling, also confirmed the Plaintiff's account, and said that she had photocopied the documents, that they were originals, and that they were signed by the Defendants whose signatures she had seen before.

20. In addition to this I also had the benefit of hearing evidence from Dr. Steven J. Strach, an expert in forensic document examination. He said that he found no significant evidence that the signatures appearing on the photocopies were other than genuine, although he admitted that certainty was not possible when dealing with copies rather than the originals. It was suggested to him in cross-examination by Mr. Mak that it was possible to transfer signatures to a photocopied document by making another copy on clear plastic sheet, and placing it on top of the document when copying it again. He said that while this was theoretically possible, photocopying always resulted in marks on the copy, which he called "trash marks", and double copying would increase the number of these. He said that the copies he examined only showed normal trash marks.

21. I am bound to say that I find the Plaintiff's evidence as to these documents overwhelming. While I accept the evidence of the Defendants' witness Mr. Lee that the consideration was not entered on them when they left his office, this must have been added at some stage for Miss Chan to confirm that they were complete and in order. As to whether they were in fact signed by the Defendants, I accept the evidence of Mr. Shieh where it differs from that of Mr. Mak, in addition to that of the Plaintiff's other witnesses which I also accept. I accordingly find that there was an agreement to transfer the shares, that the consideration was $1, and that the Defendants signed the documents of transfer confirming the agreement.

22. It follows from this that I find that the Plaintiff is entitled to the relief sought in the statement of claim, and that the counterclaim must be dismissed.