PROGRESSIVE FOUNDATION LTD. v. LING KAI FUNG AND ANOTHER

HCA 251/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 251 OF 2000

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J U D G M E N T

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INTRODUCTION

1. The Plaintiff is a company acquired for the purpose of investing in the business of a pub. There were two registered shareholders in the plaintiff company, namely Mr Fok and Mr Chan, and four "equitable partners", including Mr Wong and Ms Lai, who contributed to the working capital of the Plaintiff but are not registered as its shareholders. The Defendants and Ms Cheung were the shareholders of Chiefluxe Investments Limited ("Chiefluxe") which at the material times was and still is the owner of the You 2-In Pub in Tsimshatsui ("the Pub"). In about June 1999, Cheung expressed to the 1st Defendant her intention to sell all of her shares in Chiefluxe. Between July and August 1999, through the introduction of Mr Chun Fei Pang, who is a member of the Yau Tsim Mong District Board and a common friend of Fok, Lai and the 1st Defendant, the Plaintiff began negotiating with the Defendants for the sale and purchase of 50% of the shares in Chiefluxe. The arrangement was that Cheung would sell her shares to the 1st Defendant who would re-sell those shares together with some of his own making up 50% of the share capital of Chiefluxe to the Plaintiff.

2. On 23 August 1999, Chan as promoter of the Plaintiff and the 1st Defendant, on behalf of Chiefluxe, entered into a provisional agreement ("the Provisional Agreement") for the Plaintiff to acquire 50% of the shares in Chiefluxe by injecting $750,000 into Chiefluxe. Wong issued a cheque in favour of Chiefluxe in the amount of $200,000 as deposit. Under the terms of this Provisional Agreement, the balance of $550,000 was to be paid on 30 August 1999 when a formal joint venture agreement ("the Formal Agreement") would be entered into. Chun signed as witness on the Provisional Agreement.

3. On 30 August 1999, the Plaintiff, represented by Fok, Wong and Lai had a meeting with the Defendants. Chun was also present. Wong gave the 1st Defendant two cheques, one drawn by him in the amount of $450,000 in favour of Chiefluxe and another drawn by Chun in the amount of $100,000 also in favour of Chiefluxe. Chun's cheque was subsequently dishonoured on presentation. The Plaintiff and the Defendants then signed the Formal Agreement. The Formal Agreement provides, inter alia, that the Defendants shall cause the Plaintiff to be registered in the Companies Registry as 50% shareholder of Chiefluxe, that the bank account of Chiefluxe after the re-organisation shall be operated jointly by the Defendants and the Plaintiff and that Chiefluxe shall pay the Plaintiff and Defendants each $10,000 every month as management fee. At the same time, the 1st Defendant signed a guarantee ("the Guarantee") guaranteeing that he will settle all the debts of Chiefluxe prior to the re-organisation on 1 September 1999. Chun also signed as witness on the Guarantee.

4. With effect from 1 September 1999, the Plaintiff and the Defendants jointly managed the Pub. Three savings accounts in the joint names of Fok and the 2nd Defendant were opened for the purpose of receiving separately tips, ordinary receipts and credit card payments. One joint current account was also opened. Fok received, on behalf of the Plaintiff, the management fee for the three months from September to November 1999. Lai joined the Pub as a manageress in October 1999. In November, the Plaintiff and the Defendants began negotiation for the sale and purchase of the balance of the Defendants' shares in Chiefluxe. For that purpose, both parties instructed solicitors for the preparation of the agreement.

5. On 8 December 1999, Fok discovered that since 1 December 1999, the receipts of Chiefluxe had not been paid into the three joint accounts. He protested to the 2nd Defendant who told him she banked the receipts into the former accounts of Chiefluxe on the instruction of the 1st Defendant. On 10 December 1999, Fok faxed a written protest to the Defendants. In their reply dated 16 December 1999, the Defendants' then solicitors, Messrs Josip Ma & Co, alleged that as the Plaintiff was in breach of the Formal Agreement in failing to pay the purchase price it had not acquired any share-holding in Chiefluxe. Messrs Josip Ma & Co also threatened to seek an injunction against the Plaintiff restraining it from interfering with the management of the Pub. The 2nd Defendant also ceased paying management fee to the Plaintiff.

6. The Plaintiff instituted the present action seeking return of the $750,000 paid under the Formal Agreement and 50% of the profits of the Pub from 1 September 1999 to 5 January 2000. The Plaintiff does not dispute that Chun's cheque had been dishonoured. Its case is that the cheque was issued as a security for Lai's deferred payment of her contribution to the purchase price, an arrangement which the 1st Defendant had agreed on an occasion before the signing of the Formal Agreement on 30 August 1999. The Plaintiff also alleges that on 13 September 1999 Lai paid the 1st Defendant the sum of $100,000 and redeemed Chun's dishonoured cheque. The Defendants denied that there was such an agreement for deferred payment and disputed the payment on 13 September 1999. They counterclaimed for forfeiture of the $650,000 paid under the Formal Agreement, return of management fee paid to the Plaintiff and release of the funds held in the joint accounts of Fok and the 2nd Defendant. The principal issues in dispute are whether Chun and Lai had reached an agreement with the 1st Defendant for deferred payment of $100,000 of the purchase price and whether Lai had duly paid the Defendants $100,000 on 13 September 1999 in full payment of the price under the Formal Agreement.

The Plaintiff's case

7. Lai is an equitable partner of the plaintiff company. She is a good friend of Chun who introduced her to work in the 1st Defendant's New Flower City Night Club in April 1999. Initially, she agreed with the partners to contribute $50,000 towards the acquisition of Chiefluxe. However, the partners later decided that her share should be $100,000 and she was short of funds. Thus, on an occasion before 30 August 1999, she suggested to the 1st Defendant to pay her contribution to the purchase price by cheque to be presented after one month. The 1st Defendant rejected her suggestion but would accept a guarantee by Chun as Chun was a member of the District Board and a friend of the 1st Defendant. It was then agreed that Chun would issue a cheque in the amount of $100,000 to the Defendants as security for Lai's contribution to the purchase price, but the cheque would not be presented within a month during which time Lai would raise $100,000 to pay the 1st Defendant. It was under those circumstances that Chun's cheque was handed over to the 1st Defendant on 30 August 1999. When Chun wrote out the cheque, he left the date blank as it was not going to be presented and he also reminded the 1st Defendant not to bank the cheque.

8. However, the 2nd Defendant presented the cheque which was then dishonoured. When the bank advised Chun on 1 September 1999 that his cheque was returned, he informed Lai and told her to raise the money as soon as possible. He also telephoned the 1st Defendant and blamed him for having banked the cheque.

9. On the same day, Lai pawned her Rolex watch for $40,000 to raise funds for paying the 1st Defendant. This is supported by a receipt from Tai Yick Pawnbroker. She raised $100,000 by borrowing $30,000 from her parents and the balance from the pledge and her savings. On 13 September 1999, she and Chun met the 1st Defendant in Carrianna Chiu Chow Restaurant for dinner. The restaurant was on the floor above New Flower City Night Club where the 1st Defendant worked. On that occasion, Lai gave the 1st Defendant $100,000 in cash. The 1st Defendant returned the dishonoured cheque to Chun who then tore it up. Chun did not inform Fok about the dishonoured cheque and how Ms Lai made good the payment as it was settled.

The Defendants' case

10. The Defendants' case is that Chun had told the 1st Defendant that he was one of the purchasers. On 30 August 1999, when the Formal Agreement was signed, Chan handed over the two cheques in payment of the purchase price. One of the cheques was issued by Chun and was in respect of his contribution to the purchase price and not as a security for Lai's deferred payment. There was no agreement not to bank Chun's cheque. He gave the cheques to his daughter, who is the 2nd Defendant, and told her to bank them. On the night of 1 September 1999, while he was in the Pub with Chan, Fok and Chun, the 2nd Defendant told him that the cheque for $100,000 bounced. He knew it must be Chun's cheque because of the amount. Chun must have heard about that as Chan had responded saying it was impossible.

11. On the next day, after the 2nd Defendant had collected the bounced cheque, the 1st Defendant spoke with Chun. Chun said the cheque bounced because his wife forgot to deposit money in the bank. Chun asked the 1st Defendant to return him the bounced cheque so that he would issue him a new one. The 1st Defendant trusted Chun as he was an old friend and a member of the District Board; so he returned the bounced cheque to Chun, but Chun did not issue him a new cheque. He chased Chun a number of times and also informed Chan and Fok in the Pub about the bounced cheque, but Chun never paid him. He did not take the matter seriously as he had already been paid the majority of the price in the amount of $650,000.

Assessment of the parties' case

12. This is a case of one man's word against another. The parties' cases stand or fall on my assessment of the credibility of their respective witnesses, particularly Chun and Lai on the side of the Plaintiff and the 1st Defendant on the side of the Defendants. Chun had known the 1st Defendant before coming to know Fok and his partners. He also introduced Lai to work in the 1st Defendant's night club in April 1999 before bringing the parties together in the sale and purchase. He is now torn between the two parties.

13. The Defendants' allegation that Chun was one of the purchasers and not just a go-between and that his cheque was part of the payment for the purchase price and not a security is utterly inconsistent with the contemporaneous documents. Chun signed as a witness on the Provisional Agreement dated 23 August 1999 and on the 1st Defendant's Guarantee dated 30 August 1999 that the 1st Defendant would be personally liable for the debts of Chiefluxe prior to 31 August 1999. If Chun was one of the purchasers, he was a person interested in the transaction. It simply defies common sense that a member of one of the parties interested in the transaction should be asked to witness the execution of the Formal Agreement and the Guarantee. Chun's signing as a witness on these two documents is consistent with his position as a go-between, known to and trusted by both parties.

14. Mr Lee for the Defendants submitted that the event on 13 September 1999 was fictitious and it was an unusual business practice to pay such a large sum of money without obtaining a receipt. But the same argument applies with even greater force against the 1st Defendant's allegation that he had unconditionally returned Chun's dishonoured cheque without having received cash payment or another cheque as a replacement because he trusted Chun as a member of the District Board. It would be more logical for the 1st Defendant to return the cheque only upon payment in cash than for Chun and Lai to demand a receipt when the dishonoured cheque was returned. In my view, Chun's and Lai's evidence that Lai paid cash to redeem the dishonoured cheque and as the cheque was returned they did not consider a receipt necessary highly credible and it renders the 1st Defendant's evidence that he returned the dishonoured cheque to Chun on the basis of trust without asking for payment incredible.

15. The 1st Defendant never complained about the alleged outstanding payment. He said he did not worry as he had been paid the majority of the price already and that he trusted Chun. Equally, if the Plaintiff had paid the majority of the purchase price, there was no reason why it should neglect in paying a small balance. It is also unlikely that the Defendants would have negotiated with the Plaintiff for the sale of the balance of their shares if the Plaintiff had not even paid the full price under the earlier Formal Agreement. Despite the 1st Defendant's evidence that he had repeatedly chased for payment, the earliest documented complaint of non-payment was his then solicitors' second letter dated 3 December 1999. It would be more convenient to begin with his then solicitors' first letter of the same date. That letter was issued at a time when the negotiation for the sale of the balance of the shares was near conclusion and the parties then referred the transaction to their solicitors. The Plaintiff's solicitors, Messrs Philip Ng & Wong ("Ng & Wong") wrote on 30 November 1999 to the Defendants' then solicitors, Messrs Josip Ma & Co, setting out certain terms to be included in the sale and purchase agreement. Messrs Josip Ma & Co replied denying, on behalf of the Defendants, that any agreement has been reached for the sale and purchase of the shares. The letter essentially blamed Ng & Wong for their inaction and alleged that the terms proposed by them on 30 November 1999 were different from those previously agreed. Messrs Josip Ma & Co then concluded by saying that they had instructions from their clients to confirm that their clients did not intend to sell their shares. There was no complaint at that stage that the purchase price under the Formal Agreement has not been paid or fully paid.

16. Then on the same day, in reply to Ng & Wong's letter dated 2 December 1999, suggesting an inventory check for the purpose of the proposed sale and purchase, Messrs Josip Ma & Co replied in its second letter as follows:

"To enable you to fully appreciate the events happening between our client and yours, we are instructed to inform you the following :-

(1) In the month of August, 1999, by a written contract (in Chinese) entered into between one Mr Chan Siu Ming and Mr Fook Kam Wah, the representatives of your client before your client had been incorporated and/or acquired, as the intended purchaser and one Mr Ling, the representative of our client, as the intended vendor, your client has agreed to purchase 50% of the share-holding of our client for the consideration of HK$750,000.00 subject to and upon certain terms contained therein.

(2) In breach of the terms of the said Chinese contract, your client has failed to pay the said sum of HK$750,000.00 by the stipulated time to our client. Thus your client wrongfully repudiated the said Chinese contract and such repudiation was accepted by our client. Our client reserves all rights against your client under the said Chinese contract.

However, entirely without prejudice to our client's rights aforesaid and subject to contract, we are instructed that our client is still prepared to sell all the shares of our client to yours subject to and upon terms to be agreed between our respective clients through solicitors."

17. This is the first complaint by the Defendants of non-payment. Despite Messrs Josip Ma & Co went into great details about the pre-incorporation negotiation, they did not mention how much was still unpaid but merely alleged the Plaintiff "has failed to pay the said sum of HK$750,000.00 by the stipulated time". This is extremely ambiguous. It could be interpreted to mean the full amount has never been paid at all, or the full amount has been paid but not within the stipulated time, or only part of the said sum has been paid. It would not have been difficult for the Defendants to tell their solicitors that Chun's cheque had not been honoured nor could it have been an onerous task for the solicitors to have said so if properly instructed.

18. It was at this point in time that the Defendants departed from the Formal Agreement. Starting from 1 December 1999, receipts from the Pub were not paid into the joint accounts of Fok and the 2nd Defendant. Thus, not only that the Defendants retracted from their intention to sell the balance of their shares to the Plaintiff, they also repudiated the Formal Agreement. Fok then wrote to the Defendants on 10 December 1999 protesting against the Defendants' breach of the Formal Agreement. To that protest, Messrs Josip Ma & Co replied on 16 December 1999 as follows:

"Our client informs us that on or about the 30th day of August 1999, by a written agreement (in Chinese) entered into between Messrs Chan Siu Ming and Fok Kam Wah, the representatives of your company as the intended Purchaser and one Mr Ling Kai Fung and Miss Ling Kar Wai, the representatives of our client, as the intended Vendor, your company has agreed to purchase 50% of the share-holding of our client for the consideration of HK$750,000.00 subject to and upon certain terms contained therein.

Our client further informs us that in breach of the terms of the said Chinese agreement, your company has failed to pay to our client the balance of the purchase price of HK$450,000.00 by the stipulated time, i.e. the 30th August 1999. Thus, your company has wrongfully repudiated the said Chinese agreement and such repudiation was accepted by our client. Our client reserves all rights against your company under the said Chinese agreement."

The complaint here is that of the balance of the purchase price of $550,000, $450,000 has not been paid. Impliedly, Messrs Josip Ma & Co was alleging that Wong's cheque of $450,000 had not been met and impliedly admitting that Chun's cheque had been met or settled in the way as alleged by Chun and Lai. Now the 1st Defendant says, it was the other way round.

19. The Defendants have never been consistent with their stance. On 3 December 1999, the Defendants were complaining through their solicitors that the whole of the purchase price or an unspecified amount of it has not been paid within the time stipulated. The letter of 16 December 1999 put it beyond doubt that the amount unpaid was $450,000 and not the $100,000 arising out of Chun's cheque. These letters were written by the Defendants' solicitors, apparently with full instructions in view of the detailed background set out therein. The Defendants now change their stance and admit, as they are bound to, in view of the documentary evidence, that this amount of $450,000 had been paid but not the amount of $100,000 under Chun's cheque. The Defendants' repeated change of their stance suggests an absence of good faith in their defence. The inferences to be drawn from these letters are, firstly that the Defendants were not acting bona fide in disputing the payment before litigation started, secondly that they are not raising a bona fide defence and thirdly that Chun's cheque has either been met or been redeemed.

20. The 1st Defendant also impressed me deeply with his blatant dishonesty. When cross-examined on his reasons for not depositing the receipts from the Pub into the joint accounts, he said because Fok did not turn up at the Pub and without his signature they could not draw money out from the joint accounts to pay the expenses of the Pub and hence they had to deposit the receipts into the former accounts of Chiefluxe. This is inconsistent with his solicitors' letter of 16 December 1999 referred to above in reply to the Plaintiff's protest on 10 December 1999. In that letter, Messrs Josip Ma & Co alleged that the Plaintiff had not acquired any share-holding in Chiefluxe because of its failure to pay the balance price of $450,000, accused the Plaintiff of interfering with the daily management of the business of the Pub and threatened to take out legal proceedings for injunction order against the Plaintiff unless it refrained from doing so. From this letter it is obvious that the Plaintiff had maintained a presence in the Pub which the Defendants' then solicitors threatened to restrain and that the misappropriation of the receipts of the Pub was part of the Defendants' deliberate design in evicting the Plaintiff and not because Fok did not turn up at the Pub.

21. Despite the Defendants knew that Chun's cheque was dishonoured on 1 September 1999, they allowed the Plaintiff to take part in the management of the Pub, deposited money received from the Pub into the joint accounts and paid Fok the management fee. These acts are consistent with the Plaintiff's case that the parties have agreed to a deferred payment.

22. In view of the above, I consider the 1st Defendant a dishonest witness. His evidence is inherently improbable and inconsistent with contemporaneous documents, in particular those from his then solicitors. I reject his evidence. I accept the evidence of the Plaintiff's witnesses. In particular, I have no difficulties in accepting Chun's and Lai's evidence that Lai had paid the 1st Defendant the sum of $100,000 in cash on 13 September 1999. Having accepted Chun's and Lai's evidence that they paid the 1st Defendant $100,000 on 13 September 1999, I have no difficulties to accept also that the 1st Defendant had, on behalf of himself and the 2nd Defendant, agreed with Chun and Lai prior to 30 August 1999 that the payment of Lai's contribution to the price of $100,000 could be deferred by a month on condition that Chun provided his cheque as security.

The Plaintiff's claim and the Defendants' counterclaim

23. Mr Lee submits that even if there was such an agreement for delayed payment of the $100,000, it did not form part of the Formal Agreement or that it was merely a personal agreement between the 1st Defendant, Chun and Lai and was totally unrelated with the Plaintiff and the Defendants as Chun and Lai were not members or directors of the Plaintiff. Such argument is only to be dismissed. Even if there were no agreement between the Plaintiff and the 1st Defendant for delayed payment, there was plenty of evidence in support of the affirmation of the contract by the Defendants. With full knowledge of the non-payment of the sum of $100,000 under Chun's cheque, the Defendants allowed the Plaintiff to participate in the management of the Pub, opened the joint accounts, deposited receipts from the Pub into those joint accounts in accordance with the Formal Agreement, and paid the Plaintiff management fees pursuant to the Formal Agreement. The Defendants then accepted the payment of $100,000 from Lai on 13 September 1999 and continued to conduct their affairs as if the Formal Agreement was valid and subsisting. The only reasonable inference that could be drawn from these facts is that the Defendants affirmed the Formal Agreement. Thus, even in the absence of any agreement for delayed payment, the Defendants must be taken to have affirmed the Formal Agreement and have not accepted the repudiation by the Plaintiff. Having now accepted the full price, it cannot be open to the Defendants to argue that the Plaintiff has repudiated the contract and that the Defendants were entitled to forfeit the $650,000 paid under the Formal Agreement. The Defendants' counterclaims must be dismissed.

24. One of the breaches relied on by the Plaintiff is that the Defendants failed to duly and formally increase the paid-up capital of Chiefluxe to $1,500,000. There was no express terms under the Formal Agreement which required the Defendants to increase the paid-up capital of Chiefluxe to $1,500,000, nor can such term be fairly implied into the agreement. However, there is no dispute that the Defendant failed to transfer 50% of the shares in Chiefluxe to the Plaintiff and register the Plaintiff's shares with the Companies Registry. These are clear breaches of the Formal Agreement. Not only that, the Defendants evicted the Plaintiff from the management of the Pub, and appropriated the income of the Pub by depositing them into the former account of Chiefluxe operated solely by the Defendants, instead of depositing them into the joint account. All these acts evinced an intention on the part of the Defendants no longer to be bound by the Formal Agreement. The Plaintiff is entitled to accept that as repudiation of the contract on the part of the Defendants which it did by its letter of 5 January 2000 and is entitled to recover all sums paid under the Formal Agreement and damages.

Conclusion

25. Having come to the above conclusion, I find that the Plaintiff is entitled to recover the whole of the purchase price paid plus 50% profits derived from the business of the Pub since 1 September 1999 until 5 January 2000 when it communicated its acceptance of the Defendants' repudiation to the Defendants. In view of the small amount of profits from the Pub, I do not consider it appropriate to order for an account. It would probably be to the parties benefit in saving costs if I should assess the profits on the basis of the figures available for September and October 1999 which are not in dispute. The Pub made a profit of $10,585.34 for September and a loss of $4,143.87 for October 1999, i.e. an average daily profit of $105.60. Accordingly, I assess the Plaintiff's damages as $768,318.50 which is calculated as follows:

Purchase price:	$ 750,000.00
Loss of profits from 1/9/1999 to 5/1/2000: $105.60 x 127 ? 2	$ 6705.60
Loss of management fees from 1/12/1999 to 5/1/2000: $10,000 X 1 5/31	$ 11,612.90
Total:	$ 768,318.50 =========

26. I therefore award the Plaintiff damages in the amount of $768,318.50 plus interest at judgment rate from 6 January 2000 and costs, to be taxed if not agreed. I leave it to the parties to resolve between themselves the balance in the joint accounts.