CHAN MIU CHEUNG v. PRAGUE ENTERPRISES LTD. AND OTHERS

IN THE COURT OF APPEAL

1992, No. 172
(Civil)

- Headnote -

Practice and procedure - No averment of wrong-doing against 3rd defendant, majority shareholder in 1st defendant - judgment for damages against 3rd defendant for damages must be set aside.

Pleadings - where there are averments to sustain a claim for the recovery of damages a claim for interest in the prayer for relief is sufficient.

IN THE COURT OF APPEAL

1992, No. 172
(Civil)

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J U D G M E N T

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Litton, J.A., giving the judgment of the Court:

1. This case is concerned with the shares in a private company called Stirling Drainage Services Limited (SDSL). It was incorporated on 19 January 1982. The promoter was Mr. John Gilbert, the plaintiff in the court below. Mr. Gilbert died recently and his widow, the personal representative of his estate, has been substituted as the respondent in this appeal.

2. The judge, Barnett J., whose judgments given respectively on 13 March 1991 (on liability) and 9 October 1992 (on quantum) are under appeal, described the background to the company in this way:

"The Plaintiff is a Scotsman of little formal education but experienced in practical civil engineering. In particular, he is experienced in the laying, maintenance and clearance of drains.

He has or perhaps to be more accurate, at the material time had, no experience of setting up a company, running a business or book-keeping. He worked twice in Hong Kong. First on the construction of the cross harbour tunnel, later on the MTR. During his employment with the latter company, the Plaintiff discovered that there was opportunity for someone to introduce skill and modern methods in dealing with blocked and broken drains. With his good name and connections in the industry and his ability to handle men, he felt that he could successfully set up a company in this field. He decided, therefore, to leave the MTR when his contract expired in 1981 and go into the business of both general engineering and drainage work."

3. The 2nd Defendant, Mr. Anthony Fahy, a chartered accountant, acted at all material times as the Company Secretary and was responsible for keeping SDSL's books. His firm, A.P. Fahy & Company, also acted as auditors for the company. The 3rd Defendant, Yeung Suk-tao is Mr. Fahy's wife and she is the majority shareholder in Prague Enterprises Limited, the 1st Defendant.

4. In the background were other individuals who were at one time shareholders in the company, referred to for convenience by the judge as "The Leungs", and a Mr. McGeachan, to whom money was owed.

5. At all material times, the issued share capital consisted of 85,102 shares of $10 each and, as at the beginning of 1984, the shareholders were as follows:

6. Mr. Gilbert was Chairman and Managing Director of the company. But, as the judge found, "SDSL was in a mess", the affairs of SDSL were largely directed from Thingummy's, a bar owned by Mr. Fahy.

7. By April 1984, as the judge found, "things were desperate for the plaintiff and SDSL. The Leungs were pressing for money or an investigation; McGeachan was seeking a resolution; and workers were unpaid. To the rescue came Mr. Fahy".

8. It was this "rescue operation" launched by Mr. Fahy, as the judge found, which eventually gave rise to the litigation in this case.

9. Essentially what the judge found was this:

(i) In May 1984 Mr. Fahy, using the 1st Defendant as a vehicle, acquired the Leungs' shares for $700,000.

(ii) As between the plaintiff and Mr. Fahy, the intention was not that Mr. Fahy or the 1st Defendant should become the beneficial owners of the shares acquired from the Leungs; the intention was that the shares should constitute security for the plaintiff's indebtedness and when the cost of the purchase of the shares was repaid then the 26,999 shares would be "returned" to the plaintiff: meaning, presumably, that the shares would be transferred back to the plaintiff as the registered holder.

(iii) At about the same time what was described as the "Addendum to The Catholic Club Agreement" was concluded. By this, Mr. Gilbert acknowledged his indebtedness to Mr. Fahy for a total of $1,186,640.70, which included the sum of $700,000 paid to the Leungs for their shares. Mr. Gilbert then acknowledged his agreement to transfer his 43,403 shares to the 1st Defendant until 11 November 1984 when he would have repaid the full amount namely $1,186,640.70 whereupon the greater part of that parcel of shares namely 35,201 shares (which included the 26,999 shares acquired from the Leungs) would be transferred back to him, the 1st Defendant being entitled to retain the balance of the shares beneficially. In the meanwhile Mr. Gilbert resigned as chairman and managing director and Mr. Fahy and the 3rd Defendant was appointed as directors.

(iv) The funds for the discharge of the liability of $1,186,640.70 were to come from the earnings of SDSL.

10. The effect of the arrangement was that the transfer of the shares to the 1st Defendant was by way of charge, and 35,201 shares would be transferred back to Mr. Gilbert when the debt was discharged. In the meanwhile, Mr. Fahy and his wife obtained complete managerial control of the company.

11. It was this arrangement which Mr. Gilbert alleged in his Writ issued in April 1985 to have been vitiated by undue influence exercised over him by Mr. Fahy.

History of Proceedings

12. These proceedings have an unfortunate history. Although the writ was issued on 11 April 1985 it was not until 1 December 1987 that the Statement of Claim was served.

13. It is not easy to make sense of the reliefs sought in the Statement of Claim. Essentially, the principal relief was for a declaration that Mr. Gilbert was induced to effect the transfer of his shares by the undue influence of Mr. Fahy, and for an order setting aside the transfer; there was also a prayer for an account of the profits made by the company from 11 May 1984.

14. In August 1990 the Statement of Claim was amended to plead, in effect, a new cause of action. This became the new paragraphs 19, 20, 21 and 22 of the amended Statement of Claim which are in these terms:

"19 On the 5th October 1984 the Plaintiff wrote to the 2nd Defendant in his capacity as the Company Secretary and Auditor of Stirling requesting (i) audited accounts of the Company since the date of incorporation (ii) unaudited or draft accounts up-to-date (iii) particulars of the Company's present financial standing including the balance sheets and profit and loss accounts for the previous 6 months to be provided within 3 days.

20 On the 6th October 1984 the Plaintiff and 2nd Defendant met together and a handwritten agreement was drawn up by the 2nd Defendant and signed by both the parties. This agreement provided, inter alia, (i) the Plaintiff would be given a statement of accounts for the year 1984 through to 18th January, 1985 (ii) the Plaintiff would receive 50% of the shares of Stirling by 15th January, 1985 (iii) the Plaintiff would be appointed a director of Stirling by the 14th January, 1985 (iv) the Plaintiff would be a co-signatory of Stirling cheques with either the 2nd or 3rd Defendants.

21 In consideration for reaching such an agreement the Plaintiff agreed that his letter of the 6th October, 1984 could be ignored by the 2nd Defendant and that no reply was necessary.

22 In the event the 2nd Defendant and in breach of that agreement, none of the provisions of the agreement were implemented."

15. At the same time as the addition of the new cause of action, a prayer for damages and for "interest pursuant to Ordinance" was added.

The trial

16. The trial began before Barnett J on 31 December 1990 and ended on 19 February 1991.

17. The judge had a most difficult task before him. The three defendants were not legally represented and, in effect, Mr. Fahy assumed the role of counsel for the defendants, although the 3rd Defendant was permitted by the judge to conduct her case independently to some extent. The judge summarised the general tenor of the trial in this way:

"From the evidence, which spread over several weeks, there emerged a sorry tale of confusion and conflict. Allegations or imputations of offences such as arson, assault, false imprisonment, fraud, false accounting, misrepresentation and drunkenness were freely made, such is the bitterness between the plaintiff and Mr. Fahy. For it is the heart of the plaintiff's case that Mr. Fahy stole his company SDSL: while Mr. Fahy's complaint is that the kindness shown by the defendants in helping the plaintiff out of his business difficulty resulted in their acquisition of a company, the extent of whose debts and problems the plaintiff had failed to disclose to them."

18. The judge found that pursuant to the Addendum to The Catholic Club Agreement Mr. Fahy should have made full disclosure concerning the financial affairs of the company to Mr. Gilbert by not later than 11 November 1984, to enable Mr. Gilbert to see whether sufficient profits had been generated in the prior six months to pay off the liabilities of approximately of $1m. The judge found that Mr. Fahy had wrongfully failed to do this. Apparently, the judge was never invited by the counsel for the plaintiff to infer from this fact that there were indeed sufficient profits, which Mr. Fahy chose to hide, with the result that the debts were discharged, thus entitling Mr. Gilbert to a re-transfer free from encumbrances of 35,201 of the shares. Instead the judge was invited to find that the transfer by the plaintiff of his 43,303 shares, by way of charge, was vitiated by undue influence exercised by Mr. Fahy. This was what the judge eventually found established.

19. As regards the October 1985 agreement pleaded by amendment as paragraphs 19-22 of the amended Statement of Claim, the judge said:

"In the circumstances, I do not propose to consider the October Agreement in detail. In view of the opinion I formed as to Mr. Fahy, I would be disposed to accept the plaintiff's account. However, as the agreement was for the plaintiff to receive '50% shares in SDSL by the 15 January 1985' and as all but 20 of the shares were in the 1st Defendant's name, difficulties appeared to arise over enforceability. Careful consideration of Mr. Fahy's authority would be required. That issue was not canvassed".

20. In the result, therefore, nothing turned on the allegation of breach of contract arising from the October 1984 Agreement. It would seem to follow logically that any claim for damages by the plaintiff would have fallen by the way side.

21. As regards the main issue, what the judge said was this:

"I am satisfied that undue influence has been established and that the plaintiff should get relief. As to the precise nature of that relief, I will hear further argument as agreed."

Events after judgment

22. The record is silent as to what took place after Barnett J. had given judgment on liability on 13 March 1991. The minute of formal judgment was eventually entered on 18 September 1992 as follows:

"This action having been tried before the Hon. Mr. Justice Barnett without a jury between 31 December 1990 and 19 February 1991 and on 13 March 1991 and on 16 May 1991 and the said Mr. Justice Barnett having on 16 May 1991 ordered that judgment as hereinafter provided be entered for the plaintiff

23. IT IS THE DAY ADJUDGED that:-

(1) the Defendants do pay the Plaintiff damages to be assessed;

(2) the Defendants' counterclaim herein be dismissed;

(3) the liability for costs be adjourned until conclusion of the assessment of damages; and

(4) the Plaintiff's own costs to be taxed."

24. Assessment of damages then took place on 24 and 25 September 1992. Judgment was given on 9 October 1992.

25. As regards the assessment of damages, the judge said:

"On 16 May 1991, I ordered that the relief to be afforded to the Plaintiff should be damages to be assessed. That assessment has crystallized into a valuation of the shares of SDSL as at May 1984, the measure of damages being the price for which the plaintiff could reasonably have expected to sell his 51% shareholding in May 1984."

26. The judge assessed damages in the sum of $176,225 which works out to approximately $4 per share for the 43,403 shares of $10 each in SDSL. He also awarded interest on that sum at the rate of 10% per annum from 1 June 1990 to the date of his judgment, 1 June 1990 being the date when the application to amend the Statement of Claim to include a claim for interest was first made.

The appeals

27. The appeals now before us are as follows:

(1) An appeal by the 3rd Defendant to set aside all orders made against her.

(2) An appeal by the 1st and 2nd Defendants against the award of interest.

(3) A cross-appeal by Mr. Gilbert's widow:

(a) that the "judgment or order for damages be varied and assessed in such an amount as the Court thinks just and reasonable";

(b) that "the sum so varied and assessed as damages do attract interest at the rate of 10% per annum from the date of issue of the writ to 9 December 1992".

The 3rd Defendant

28. There is no averment of wrong-doing in the Statement of Claim made against the 3rd Defendant. She comes into the Statement of Claim in three places: (1) An averment that she is the majority shareholder of the 1st Defendant; (2) the fact that on 11 May 1984, pursuant to the transfer to the 1st Defendant of the Leungs' shares and those of the plaintiff, 10 of those shares were registered in the 3rd Defendant's name; (3) in the prayer for relief: that the 3rd Defendant held the ten shares "as trustee and/or by way of security for an advance of $1m made by the 2nd defendant to the plaintiff". Neither the 1st Defendant company nor the 3rd Defendant are alleged to have been a party to the exercise of undue influence on the plaintiff.

29. Since the earliest days of Equity, undue influence has been treated as a species of fraud. In the leading case of Earl of Chesterfield v. Janssen [1751]2 Bes Sen 125; 28 ER82, Lord Hardwicke LC identified this kind of fraud as:

"..... presumed from the circumstances and conditions of the parties contracting.... to prevent taking surreptitious advantage of the weakness and necessity of another: which knowingly to do is equally against the conscience as to take advantage of his ignorance: a person is equally unable to judge for himself in one as the other".

30. The judge made no adverse findings against the 3rd defendant. He held that when SDSL became desperate and funds for the rescue operation were provided by the 1st Defendant, of which the 3rd Defendant was majority shareholder, Mr. Fahy was "acting for and on behalf of them both". This, however, is far from a finding of equitable fraud on the part of the 3rd Defendant. Indeed, the judge could not have made such a finding against the 3rd defendant without extensive amendments of the pleadings, since there were no allegations of wrong-doing of any kind made against her.

31. Plainly, the judgment against the 3rd Defendant cannot stand and all orders made against her, whether for damages, interest or costs must be discharged.

Claim for interest

32. Mr. Coleman, counsel for the defendants, argues this: Where Order 18 rule 8(4) provides that "a party must plead specifically any claim for interest under s48 of the Ordinance or otherwise", this means that the claim for interest must appear in the body of the Statement of Claim; it is not sufficient for a claim for interest to be made in the prayer. He suggests that in so far as McDonald Hamburgers Ltd v. Burgerking (UK) Limited [1987] FSR 112 at 124 suggests otherwise, that was wrongly decided.

33. We have no hesitation in rejecting this submission. A Statement of Claim is an entire document which includes the prayer for relief. If, from the statement of facts in the body of the Statement of Claim, liability for the payment of interest could arise, the pleader needs to do no more than to include a claim for interest in the prayer for relief. Obviously, if the plaintiff is alleging that a liability for interest arises from contractual arrangements, then this must be pleaded in the body of the Statement of Claim. Where the action is "for the recovery of a debt or damages" and the averments in the Statement of Claim, if established, would give rise to such liability, then plainly all that is needed is a prayer for interest in the reliefs claimed. This flows from the provisions of s48(1) of the Supreme Court Ordinance.

34. We have not gone into the circumstances giving rise to liability for damages on the part of the 1st and 2nd Defendants, since there are no appeals by them against the judgment for damages. There is, on the record, a judgment on liability against them, from which a claim for interest could hang. We would therefore not disturb the award of interest against the 1st and 2nd Defendants.

35. Mr. Poll, counsel for the plaintiff, argues that once the Statement of Claim was amended in 1990 to claim interest, then the amendment takes effect from the inception of the claim. He relies on a note in the 1993 Annual Practice, note 20/5-8/2 on p.370, to this effect. It is common ground that the award of interest in the circumstances of a case such as this is discretionary. Having regard to the appalling delays which have occurred in the prosecution of the plaintiff's claim, it is not surprising that the judge did not order the award of interest to run from April 1985 when the writ was issued. There is nothing inherently wrong in the way the judge exercised his discretion, namely, to order interest from the date of the application to amend, when the claim for interest was first included in the Statement of Claim. We would uphold the judgment on this point.

The quantum of damages

36. What the judge had to find was "the price for which the plaintiff could reasonably have expected to sell his 51% shareholding in May 1984". Shares in SDSL were not readily marketable. Transfers of shares were governed by Article 4 of the Articles of Association (p.142, bundle) which gave to the directors an unfettered discretion to refuse to register any transfer without giving any reason. The judge awarded damages in the sum of $176,225, which works out to approximately $4.00 per share.

37. The judge had before him the audited accounts of the company for the three periods ending 31 March 1983, 31 March 1984 and 31 March 1985 which were submitted to the Inland Revenue Department for tax purposes. During this period, apart from small sums by way of interest earned on fixed deposits, the sole source of income of the company was "service income", earned from drainage services offered to various clients, the biggest by far being the Hong Kong Housing Authority. These were, essentially, services rendered by Mr. Gilbert and the workmen under his supervision, using various items of machinery owned by the company. The most prosperous year was that ending 31 March 1984 when the company earned $2.778m by way of service income and showed a net profit for the year of approximately $44,000, after charging depreciation on its fixed assets amounting to $456,772, at the rate of about 20%. The other two years showed losses for the company. The total net assets disclosed in the balance sheets for the three years were as follows: Year ending 31 March 1983 $411,584; year ending 31 March 1984 $455,675; year ending 31 March 1985 $365,410. There being a total of 85,102 shares issued, this works out to respectively $4.80, $5.35, and $4.29 per share. Given the fact that what the judge had to do was to value, not the company, but the 51% shareholding in a private company, there is nothing implicitly surprising in the figure he reached. It must be remembered that the shares were subject to the absolute control of the directors and were not marketable as such.

38. Mr. Poll, counsel for the plaintiff, has drawn attention to the financial statements for the period 1 October 1981 (prior to incorporation) to 30 September 1983 which in fact bear no signatures of any kind, and show the net profit for that period as $379,628. There, depreciation was charged at a much lower rate than for the year ending 31 March 1984. It was $236,665. This would have accounted for much of the increase in profits. Total net assets are shown in the balance sheet at $1,230,648; this would have worked out to $14.46 per share.

39. Mr. Poll submits that the judge wrongly failed to take into account this financial statement, which had apparently been prepared by Mr. Fahy. He submits that it presented a "totally different and profitable picture of SDSL" as compared with the three audited accounts for the years ending 31 March 1983, 1984 and 1985.

40. We do not agree with this submission. The provenance of those financial statements is dubious. It is simply referred to in the valuation report of Mr. Hughes as "possibly" enclosed with a letter from Messrs AP Fahy & Co to McConnell Dowell Constructors (Asia) Ltd. dated 30 September 1983, in an apparent attempt to persuade McConnell Dowell to purchase the company. The judge dismissed Mr. Fahy's letter as "worthless" and "nonsense". It is therefore difficult to see what reliance Mr. Poll can properly place upon these accounts.

41. In substance, Mr. Poll's complaint is this: SDSL had been successfully incorporated and set up to provide a service unique to Hong Kong; special and expensive equipment had been bought for this purpose; staff had been trained and a client-base, including several well-known Hong Kong institutions and companies, had been established. The potential for greatly improved earnings was therefore present; the judge failed to take these factors into account.

42. We reject these submissions. The judge had, almost in identical terms, taken those factors into account at p.5 of his judgment. The fact is that the company relied to a very large extent upon the personal efforts of Mr. Gilbert. Once there was a falling-out between him and Mr. Fahy, the fortunes of the company rapidly declined. This demonstrates the precariousness of the company's financial position. Its assets consisted largely of equipment and motor vehicles, which as at 31 March 1985 had a net book value of $750,351. It is difficult to see how, on any view of the facts, SDSL could be regarded as a valuable company.

43. Mr. Poll argues that in valuing the shares the judge should have paid regard to the fact that when the Leungs sold their 26,999 shares, they received $700,000. From this, he argues, the error in the judge's assessment can be demonstrated. The answer, simply, as it seems to us, is that the judge plainly had regard to that transaction, which he dismissed as not a true indication of the proper value of the shares. He also took into account the subsequent sale by Mr. McGeachan of his 14,700 shares for $300,000.

44. Valuation of shares in a private company is not an exact science. There is always room for reasonable minds to differ on the result. The fact is that, in this case, expert witnesses were called, one on each side, and they both reached the opinion that the proper value to place upon the shares in May 1984 was in the region of $4. It is difficult to see how a judge who arrived at the same conclusion on the evidence before him could be said to have erred in principle. The plaintiff's appeal on damages must therefore be dismissed.

Conclusion

45. We summarise our conclusion as follows:

(1) The 3rd Defendant's appeal must be allowed and all orders made against her be set aside.

(2) The 1st and 2nd Defendants' appeals against the award of interest fail.

(3) The plaintiff's appeal against the quantum of interest and the period for the award of interest fails.