ROSSINGTON INVESTMENTS LTD. v. LAM PING KWONG

HCA9120/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.9120 OF 2000

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J U D G M E N T

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1. The plaintiff claims against the defendant for repayment of money lent amounting to $1,300,000.00. The defendant's defence is that the money was not lent, but was a payment on account of agreed commission for financial services, and counterclaims against the plaintiff for the balance of such commission amounting to $116,667.00. He also alleges breach of fiduciary duty and failure to account, and claims an account and damages. He also claims against the third party, who is the sole director of the plaintiff company for the sum of $116,667.00.

2. The third party, Mr Yip Wai Man and the defendant, Mr Lam Ping Kwong, are financial consultants. Mr Yip operates through the plaintiff, a BVI company of which he is the sole director. At the relevant time Mr Lam was consultant to Luen Cheong Tai International Holdings Ltd ("LCT") which is a construction company incorporated in the Cayman Islands and listed on the Stock Exchange of Hong Kong. He was known as the assistant to the chairman of LCT and later became its Chief Executive Officer. He also had his own company, Gama Ray Co. Ltd ("Gama").

3. LCT wanted to raise money. To that end, Messrs Lam and Yip had discussions about a possible purchase of shares in it by one Baker Mellon Stuart Construction Corporation ("BM"). On 10 August 1999 Mr Lam signed on behalf of Gama a letter of commitment agreeing to pay to Mr Yip half of fees received from LCT, namely 2% on the amount of funds raised through the joint efforts of Mr Yip and Gama, and 10% of the profit sharing before interest and tax on projects organised and secured by both of them.

4. In about October 1999 LCT announced a rights issue of one share for every four held. LCT had an underwriting agreement for this with an investment and stockbroking company, Rexcapital Ltd ("Rexcapital"). The deadline for the underwriting exercise was 14 January 2000.

5. There were discussions between Mr Yip and Mr Lam and the chairman of LCT, Mr Chan Man Chuen which resulted in the purchase by Mr Yip for his clients of 17,000,000 of LCT's shares, at a price of $1.25 per share. These shares were then held by Taiwan Star Securities Ltd ("TSS"), whose shareholders were Mr Yip, Mr Ko Jin Heng and Mr Ng Kin Fai. It was agreed that the actual price to Mr Yip was to be $1.00 per share and a refund of $4,250,000 was made and paid to the account of the plaintiff on 29 January 2000. On 31 January a payment of $1,300,000 was made from that account to Mr Lam's account and Mr Lam signed a receipt for it.

6. In brief it is the plaintiff's and Mr Yip's case that this payment was a loan against future commission which would be payable to Mr Lam on the completion of what Mr Yip called a "package deal"; an original agreement which involved, as well as the purchase of the 17 million shares, a further exchange of land for shares in LCT. The total figure involved would be about $60,000,000. But the land exchange part of the package deal was never completed.

7. It is Mr Lam's case, as pleaded, that he was approached by Mr Yip on behalf of a client of his company, one Beili Overseas Holdings Ltd, who wished to subscribe for the 17 million shares, and was informed by him that the commission thereon was to be 25c per share, to be divided between Mr Yip's company, Mr Lam and an undisclosed third party. Because Mr Yip's client could not put up the money in time for the deadline, Mr Lam was asked to arrange a bridging loan and he approached Rexcapital who agreed to provide such loan. Mr Yip's client, who was then identified as Hand Yu International (Holding) Ltd ("Hand Yu") subscribed for the shares.

8. It is the evidence of Mr Yip that he raised funds from his friends Ko Jin Hang and Ng Kin Fai to buy the shares. They formed TSS to hold the shares. In the beginning about $50 million was raised, and a package deal was agreed with LCT whereby the purchasers would put up cash and a piece of land in the New Territories in exchange for shares. However, because the response from the market to the share issue was very good, the purchasers were asked to reduce their proposed purchase from 40 million to 17 million shares and this they agreed.

9. Mr Yip says that his party asked for 17 million shares plus the rights issue of 4.25 million shares, but that was not completed; the rights were not exercised; they could not be because the shares were fully allotted and oversubscribed. Mr Chan Man Chuen, the chairman of LCT agreed to make the refund of $4,250,000. The proposed exchange of land for shares was left open meantime, but if it was successful, Mr Yip was to receive commission from which he agreed to pay $1,600,000 to Mr Lam. In January the latter said that he needed money to pay his tax bill. Mr Yip told him that he was not in a position to pay because the package deal had not been completed. Mr Lam asked Mr Yip to lend him the money, and since he was now the Chief Executive Officer of LCT, Mr Yip trusted him, and did so, using the plaintiff's account.

10. After that although Mr Yip tried to follow up on the land for shares exchange, he says that Mr Lam kept dodging him. Then Mr Lam resigned from LCT. Mr Yip demanded repayment of the $1,300,000 plus his own commission which was due to him under the letter of commitment. On 31 March 2000, Mr Lam sent him a letter to the effect that he was entitled to $170,000 commission less $100,000 short payment from his company, i.e. $70,000 but Mr Yip did not accept this because he thought that he was due over $600,000 commission for the "package deal" which included the land exchange. Subsequently solicitors were instructed and proceedings instituted.

11. From cross-examination it appears that Mr Yip's position on the refund of $4,250,000 is that although it was Mr Ko who put up the money the refund was to be shared between himself and Mr Ng. He had paid Mr Ng $1,200,000 from the refund, but this was the repayment of a loan; it was not intended as Mr Ng's share which was a matter yet to be settled between them. He did not accept that the payment to Mr Lam was part of the one-third share of the refund which was due to the latter for his part in arranging the sale of the 17 million shares.

12. Mr Yip said that he had not discussed the refund with Mr Ko, who had put up the funds for the purchase; since Mr Chan Man Chuen had guaranteed that he would not pay more than $1.00 there were two different transactions and no need to discuss the second one with anyone. I suggested that this appeared to be a secret profit or commission taken by him from the purchaser, TSS, but he replied that Mr Ko knew about it as did other shareholders. Later he said that there was a written agreement with Mr Ko. Application was made, and refused, for him to give discovery of this agreement, because in effect it would go to his credit on a matter collateral to the issues here, but I asked him if he wished to give voluntary discovery of it and he declined.

13. He also denied ever having seen, before the proceedings, a statement of account produced by Mr Lam as coming from him, which shows how the figure of $1,300,000 is arrived at.

14. In re-examination Mr Yip said that his sharing of the refund only with Mr Ng was agreed with Mr Ko because of the package deal which had been intended to allow Mr Ko to exchange his land for shares; therefore Mr Ko had been willing to pay Mr Yip 10% commission on the package deal; and that was why he himself had been willing to pay Mr Lam commission if and when the package deal was completed. He said that Mr Ko had later asked for payment from the refund, and that he himself was now involved in another court case involving Mr Chan Man Chuen and Mr Lam.

15. The plaintiff called one other witness, a Mr Victor Chan How Chung of Rexcapital. His evidence was that Rexcapital did not make a bridging loan to Hand Yu or at all for this transaction. All the cheques were to be in hand by the due date, and all were then presented; none was dishonoured. He had however been approached by Mr Lam, who had asked him about a loan for a possible investor who might be "momentarily tight" and had said that he would consider such a loan but would have to know who the borrower was and how repayment would be made. He had not been approached by Mr Lam to collect the refund cheque for $4,2500,000 or at any rate could not remember this.

16. Mr Lam's evidence is that Mr Yip had approached him on behalf of a potential investor who wanted to buy 46 million shares. Later this was reduced to 17 million. Mr Yip had asked him if he could arrange for the two major shareholders in LCT to give him the rights to these shares, which he did. Then Mr Yip brought up the matter of land in Tai Po which his client wanted to exchange for more shares. He had gone with Mr Chan Man Chuen to the office of Hand Yu where he had met Mr Ko and Mr Ng; it had been suggested that the subscription for 17 million shares would only go ahead if the land exchange was agreed to, but Mr Lam had resented this proposition and it had been refused. The meeting had not been friendly. Mr Yip had told him later that he would not bring up the land issue but still wanted the 17 million shares. He could persuade Mr Ko to put up $1.25 each for them, but as to the 25c difference he had asked Mr Lam to keep it confidential. He had promised to give Mr Lam one-third of the difference; and one third was to go to another person, not known to Mr Lam, who had been arranging all the subscriptions of the potential investors. Later, because the shares were oversubscribed Mr Chan Man Chuen had told him to make sure that the buyer had the money for the subscription; he had asked Mr Yip to send in cheques, and these were deposited but dishonoured. So at the request of Mr Yip he had approached Mr Victor Chan at Rexcapital and obtained his agreement in principle to provide a bridging loan though in the event this was not necessary because a fresh cheque was provided and this one was honoured.

17. After that Mr Yip told Mr Lam to collect the cheque for $4,250,000 from Mr Chan at Rexcapital, this he had done, and had handed it over to Mr Yip. Later he asked Mr Yip for his one-third. Mr Yip had given him a cheque for $1,300,000, on the basis that he could not afford the total amount, i.e. one-third of $4,250,000 or $1,416,667. The name on it was wrong and it could not be cashed so Mr Yip had deposited the $1,300,000 directly in Mr Lam's bank account. He had later received from Mr Yip, by post, an account which purported to deduct $212,500 as commission to related parties and $150,000 as working cost reimbursements, before the division, so as to give Mr Lam $1,295,833.33 and further to debit an advance of $10,000 made in 1999. He had disagreed the former deductions but accepted liability for the advance and contacted Mr Yip about this but to no avail. Later Mr Yip had asked about his own commission of $170,000 or 1% of the price of the shares, under the letter of commitment; and he had said that he would recognise that, as a matter of fairness although strictly the letter was intended to cover only dealings with BM. He had rounded down the short payment made to him to $100,000 and agreed to pay Mr Yip $70,000; and indeed he said in evidence that he was still prepared to give credit for this amount.

18. Under cross-examination Mr Lam insisted that the commission to Mr Yip of $170,000 was not really due but was only a matter of fairness. He said that he had thought all along that Mr Yip's client was Hand Yu because he had met Mr Ko and Mr Ng at the offices of that company and had been given name cards with that name on them. However he seemed to be confused as to whether the commission payable to him had been payable for his actions in obtaining a bridging loan (which was pleaded) or his actions in persuading the major shareholders of LCT to release the 17 million shares. It appears that he never did in fact arrange a bridging loan; at most, he obtained an agreement in principle to one. There were various other discrepancies between his evidence and his pleadings.

19. What strikes me most forcibly about this case is that there is no dispute that shares were bought at a price of $1.25 per share, with an agreement to reimburse $0.25 to the buyer's agent. The whole thing has the smell of dishonesty about it. Mr Lam knew he was being asked to keep it confidential. I asked him about this and he did not seem to think there was anything wrong with it, though I have to say I could not entirely follow his reasoning. Mr Yip says that it was agreed with Mr Ko, who put up the money, that he and Mr Ng should share the refund. I have to say that that sounds somewhat unlikely, though no doubt it is possible. However although Mr Yip says he has a written agreement to that effect in his office he has declined to produce it and I am left wondering why. Further he also says that Mr Ko has asked him for the money. I am not in a position to find that there has been a breach of trust on Mr Yip's part, or knowing receipt on Mr Lam's but I am left with a sense of suspicion against both of them. If there was a breach of trust it will no doubt be open to Mr Ko, if he can prove it, to seek recovery against whichever party succeeds in these proceedings.

20. There is no dispute that the money has been paid and I accept that it is for Mr Lam, who avers that it was paid to him as agreed commission, to prove that. Now while it is true that there are discrepancies between what Mr Lam says and what he has pleaded it is to be noted that if one reads the pleadings closely it is not averred that there was a loan to Hand Yu but only that he arranged one. In any event it is difficult to find much discredit in discrepancies between pleadings and evidence given that the pleadings are never in the witness's own words. It is also not difficult to see why he might have thought that Mr Yip's principal was Hand Yu, and told that to his lawyers.

21. Overall, given that Mr Lam was working for LCT and obviously did have a hand both in arranging the share subscription and at least an agreement in principle to a loan, it is easy enough to see that he might have been offered a commission for his part in it. Mr Yip says that that commission was only to become due if and when the "package deal" was negotiated but although he says that the commission, when due to Mr Lam would come to $1,600,000 or so it is not clear how that would be worked out. Further there is the account which Mr Lam says he received by post from Mr Yip; he saw a return address on the envelope which he did not keep. Mr Yip says that he did not send this account but it is difficult to see how Mr Lam could have made it up; if he did, why put in fictitious deductions which he would then have to dispute in his third party claim? Also Mr Yip says that the refund was to be shared entirely between himself and Mr Ng but in fact as appears from his evidence Mr Ng has not seen a penny of it, but only the repayment of a separate loan. Furthermore, if this was an advance of expected commission on the "package deal" or that part of it which had not come to fruition, one wonders why there is nothing in writing to that effect, especially since once it was agreed that the share subscription would go ahead on its own, there was in no longer any package deal but, if the land exchange agreement was still alive, two separate agreements.

22. Overall it seems to me more probable than not that this payment was not a loan to Mr Lam but was indeed a payment to him of a commission agreed between him and Mr Yip for his part in negotiating the share subscription. The plaintiff's claim against the defendant must accordingly fail. The defendant's claim against the third party for the balance of the commission must succeed.

23. The defendant's counterclaim against the plaintiff is, it seems, misconceived. There was no relationship between it and the defendant; Mr Yip simply used that account to put the money through. The company cannot be liable for the balance.

24. The plaintiff's claim against the defendant is dismissed and the defendant's counterclaim against the plaintiff is likewise dismissed. In the interests of saving further expense, rather than making concurrent orders for costs against each party I will make no order for costs as between the plaintiff and the defendant.

25. There will be judgment for the defendant against the third party in the sum of $116,667 with interest at the judgment rate from 30 October 2000 (the date of the Third Party Notice herein) until payment and costs to be taxed if not agreed; such costs in view of the amount sued for to be on the District Court scale.

26. The costs orders are nisi.