KWOK HON MING v. CHOW KWOK FAI

IN THE COURT OF APPEAL

1996, No. 191

(Civil)

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J U D G M E N T

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Ching, J.A. (giving the judgment of the Court) :

1. By a promissory note dated 19th August, 1996, the Defendant promised to pay the Plaintiff the sum of $850,000 on demand. The Plaintiff sues upon it. His evidence is that he lent the Defendant $250,000 on 5th February, 1994, and the remaining $600,000 on 19th August, 1995, the date appearing on the promissory note. Demands were made on 10th and 27th February, 1996, but evoked neither response nor payment. The Defendant admits the receipt of the money by way of personal cheques of the Plaintiff and he admits that he signed the promissory note. He raises a number of defences. Master Chu gave the Defendant unconditional leave to defend. This was reversed by Cheung, J., who entered summary judgment for the Plaintiff. The Defendant now appeals.

2. The Plaintiff and Lam Kwok Hung were the only two beneficial shareholders of Waysuntone Communication, Ltd., which carries on business in electronic communications equipment. Its parent company is Waysun Holdings, Ltd., which has another subsidiary called Dancia Investments, Ltd. The Defendant was one of the sales managers for Waysuntone with responsibility for the Hong Kong market. Another sales manager, Ho Kwok Hing, had responsibility for the China market. In September of 1993 the Plaintiff and Lam offered the Defendant a 5% shareholding in the company on terms which the Defendant accepted. The Plaintiff and Lam, described as beneficiary, and the Defendant, described as the trustee, then entered into a deed of trust dated 10th November, 1993. By the terms of that deed it was acknowledged that the Defendant had become entitled to 550,000 fully paid up shares in the company which he was to hold in trust for the Plaintiff and Lam. Clause 1 provided in part that,

"The Trustee is beneficially entitled to the dividends and interest accrued and to accrue on the said shares."

Clause 6 provided in part that,

"After the determination of his employment or on his death, the said shares shall be transferred into the name of the Beneficiary or otherwise as the beneficiary shall direct ..... On transfer of the said shares as aforesaid, the Trustee shall be paid by the Beneficiary a sum equivalent to the increase in value of the said shares at the time of such transfer as certified by the Certified Public Accountant of the company whose determination shall be final and conclusive."

On the same date as that appearing on the deed the Defendant took a loan from the company in the sum of $180,000 and signed a promissory note to repay it on demand. That promissory note was explained and interpreted to him by a solicitor. The loan has been fully repaid by monthly instalments of $20,000 each. In early 1994 Lam disposed of his beneficial shareholdings in the company to the Plaintiff who thereupon became the sole beneficial shareholder. In February of 1996 the Defendant resigned.

3. It was not the practice of the company to declare dividends. The Defendant says that notwithstanding clause 1 of the deed the agreement was not that he should be paid dividends but that he would be paid his share of the net profits on an annual basis shortly before the Chinese New Year. In this he is supported by the evidence of Lam. The Plaintiff does not directly address the point but he does say in paragraph 19(b) of his third affirmation that,

"After Lam left Waysuntone, it was agreed between I and the Defendant that the Defendant's 5% net annual profit of Waysuntone would be paid over to him on a monthly basis. As such, Waysuntone had since early 1994 up to the end of 1995 through Dancia Enterprises advanced to the Defendant various monthly sums in replacement of the annual profit payable to him. The state of account between Waysuntone and the Defendant will be straightened out in High Court Action No. A8866 of 1996."

The Defendant asserts that he has not been paid by the company any of his profit entitlement except for the sum of $850,000 the subject of the promissory note. He says also that that payment came from the company although it was made through the Plaintiff who had taken the company funds for that purpose. He says that the Plaintiff has not paid him the increase in value of his shares as required by clause 6 of the deed. High Court Action No. A8866 of 1996 mentioned in the third affirmation of the Plaintiff is one where the present Defendant claims for an account and for payment of all sums of money found due to him. In that action he gives credit for the $850,000 claimed in this action. There is no dispute, according to the evidence, that the Defendant was entitled to profits rather than dividends.

4. The first defence put forward by the Defendant is that the $850,000 was paid to him by the company on account of his profits. The Plaintiff himself admits that the money with which he paid it came from the company. However, that does not assist the Defendant. The Plaintiff is the sole beneficial owner of the company and, subject to its Articles of Association and to legislation, can arrange the affairs between the company and himself as he pleases. The source of the money which the Plaintiff claims to have lent to the Defendant is nothing to the point. It remains that the money was paid over to the Defendant by personal cheques of the Plaintiff and that the Defendant signed the promissory note in favour of the Plaintiff. The second defence is the mirror image of the first. It is that since the money was in fact paid over by the company there was a total failure of consideration for the promissory note. If the first defence fails then so must the second.

5. The third defence is one of non est factum. The Defendants says that his command of the English language is not good. He claims he does not know the meaning of the words "Promissory Note". He admits to having signed the previous promissory note but points out, correctly, that the form of the two notes is different. He says he signed the promissory note sued upon because the Plaintiff represented to him that it was a receipt. In the Court below there appears to have been substantial argument as to whether a Defendant is required to show that he was not careless before he can avail himself of the defence of non est factum. It is not necessary to decide that, for before us Mr. Robert Tang, Q.C. rightly conceded that if this Court accepted that the Plaintiff may have misrepresented as alleged then the Defendant must have leave to defend. As against the Defendant's evidence of his lack of command of the English language the Plaintiff says, as was the fact, that the Defendant had previously worked as a sales manager of a camera shop in Tsimshatsui where it is to be expected that he would have to deal with tourists. The Plaintiff also exhibited a number of letters, an invoice and a circular all in the English language. Two of the letters are marked for the attention of the Defendant. The invoice and the circular appear over the signature of the Defendant. All but the invoice bear a distribution chop initialled by the Defendant. The Defendant has explanations for these matters into which it is not necessary to go. These matters would not incline a Court to find that the Defendant's version of events was at all credible although on their own it may be that the Court would find the matter inconclusive. However, there are other matters. First, the Defendant's allegation that he did not know the meaning of the words "Promissory Note" is incredible. Secondly, he claims to have signed it trusting the Plaintiff and without query. He does not say that he did not read it. It is equally incredible that he did not read it and, if he did, he must have seen that it was not a receipt but a promise to pay and that it was addressed to the Plaintiff, not the company. Thirdly, he failed to respond to the two letters of demand. Finally, he gave a cheque to the Plaintiff, undated and with the payee left blank in the sum of $250,000. This strongly supports the Plaintiff's case that the $850,000 was lent in two tranches. The Defendant accepts that this related to the $250,000 received by him. He says that it was given on the basis that it would not be presented for payment unless his entitlement for the year fell below that sum. In the circumstances that is an explanation that defies belief. The plea of non est factum cannot succeed on this evidence.

6. The final defence was one which was not put forward in the Court below and which was not directly raised in the Defendant's evidence. It was that in all of the circumstances there was an implied condition that the loan, if it was a loan, would not be repayable unless the Defendant's share of the profits for the year did not exceed $850,000. There is nothing in this. It proceeds on the basis that the Defendant owed the money to the company. More importantly, it is basic that terms cannot be implied simply because they may be reasonable and can be implied only if they are necessary for business efficacy. There is no such necessity here. It may be added that the Defendant exhibited a large number of documents, including affidavits, from an action which the other sales manager, Ho Kwok Hing, has launched. Whatever the propriety or impropriety of his having done this, it does not assist him. He says that Ho Kwok Hing was in a position very similar to his. That may be, but their positions were not the same.

7. This appeal is dismissed and there will be an order nisi that the Defendant will pay the Plaintiff's costs.