CHAN CHI WAH v. CHAN ALBERT KOON KEUNG AND OTHERS

HCA 128/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 128 OF 2011

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AND

HCA 766/2012

ACTION NO 766 OF 2012

(Transferred from DCCJ No 2138 of 2011)

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J U D G M E N T

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1. Although these are two actions, effectively they revolve around the same set of circumstances even though they have not been consolidated.  Throughout this judgment, Mr Chan Chi Wah, the plaintiff in the initial action, will be referred to as the plaintiff, or by his actual name.  His action was commenced in the High Court by Writ of Summons dated 24 January 2011.

2. By this action the plaintiff claimed payment of the balance of a debt being HK$1,950,000 due from all three defendants under a promissory note dated 15 June 2000, credit being given for the sum of HK$850,000 paid by the defendants by means of a single cheque for that sum dated 17 August 2007 drawn on the account of a company called Wah Fung Sauce Company Limited of which the defendants are the three directors.

3. On 8 June 2011 that company commenced proceedings in the District Court against the plaintiff, claiming repayment of the sum of HK$850,000 and interest.  This then was over four months after the plaintiff commenced his High Court action.  The defendants, the three directors of Wah Fung, had in fact served and filed their Defence to his action on 11 May 2011.  This Defence, in paragraph 19, set out their contentions in relation to this cheque.  It is not clear why it was thought necessary to commence District Court proceedings in respect of the issue of that cheque almost one month later.  It could have formed a Counterclaim and Set Off by the three defendants of Wah Fung.  Be that as it may, the District Court action was transferred to the High Court and the trial has proceeded as one action.  The dispute over the nature of the payment of the cheque is a vital feature of it.

The promissory note of 15 June 2000

4. This has all the hallmarks of having been prepared by a trained legal hand.  The plaintiff said that it was prepared or certainly was signed by him and the 1^st defendant, at the offices of a solicitor acting for all of them.  There is some difference about the details surrounding the circumstances of its execution and the 1^st defendant in particular was somewhat vague in his recollection but none of these matters is of any importance.  All are agreed that the document accurately reflected the agreement reached between all of them even though it is not entirely clear when the other two defendants signed it.

5. The background to it was the purchase by the defendants or their company, Wah Fung Sauce Company Limited, of certain properties owned by the plaintiff.  The defendants and/or their company, did not have sufficient money to complete the purchase, so they had to borrow HK$2,800,000 from the plaintiff in order to do so.

6. The note set out the timetable for repayment of this capital sum and interest.  To begin with instalments of interest were to be paid commencing on the date of the signing of the promissory note (ie 15 June 2000) and thereafter on the 15^th day of every month until 15 June 2002.  These monthly instalments were only HK$5,000 each.  The provision therefore was for 25 instalments making a total of HK$125,000.

7. On 15 July 2002 the defendants were to start repaying the capital sum of the loan, also by monthly instalments on the 15^th day of each month, providing for 92 instalments of HK$30,000 each and a final instalment of HK$40,000.  That meant that the defendants were not obliged to finalise repayment until 15 March 2010, almost 10 years after the debt was incurred.  The rate of interest was about 2% and only for the initial two year period.  There was no requirement to pay interest once the payment of instalments of the loan (which were a simple division of the capital sum of the loan, there was no additional element of interest) had begun.

8. There was a default clause entitling the plaintiff to call for the whole of the loan to be repaid with an additional interest element, if the defendants failed to pay any one instalment of the principal debt.

9. On any view this was an extremely generous arrangement favouring the defendants, so generous in fact that it could hardly be described as a normal commercial arrangement.  For some explanation of this, which is also the key to some of the future history of this debt, is the fact that the 1^st defendant was the plaintiff’s brother‑in‑law—the 1^st defendant was married to the sister of the plaintiff’s wife.  The plaintiff himself indicated that his own wife effectively ran the financial and accounting aspects of his businesses and ventures.

10. I have no doubt having heard the evidence of both brothers‑in‑law that the 1^st defendant over a long period of time took advantage of the relatively easy‑going and generous nature of the plaintiff, relying heavily on the relationship between their respective wives.

11. That impression is confirmed by the 1^st defendant’s attitude to his liability under the promissory note.  He said he would have had no difficulty in making payments of interest between 2000 and 2002 but it did not really impinge upon his mind as anything of importance.  He maintained that the plaintiff only mentioned it a few times and that such was their relationship he did not really regard any approaches as being serious requests.  I do not accept the 1^st defendant’s evidence.  He had no quarrel with the promissory note or any of its contents and simply ignored his liabilities under it and “fobbed off” the plaintiff, his brother‑in‑law, with excuses or simply by ignoring the reminders.  I am far from satisfied that he was in a financial position to make the modest payments of interest, but if he was, he certainly put any such liability well down his list of priorities.  His reliance on “word of trust” or “family relationship” as indicating that there was never any need for his obligations to be formalised, was glib and unrealistic.  Even his grudging acknowledgement that his brother‑in‑law had loaned him US$30,000 when he was to return from America to Hong Kong was accompanied by some petty response about the year in which he received the money.

The oral variation of terms in July 2002

12. This is one of the fundamental areas of dispute.  The plaintiff contends that this was brought about by the 1^st defendant’s indication that he was in financial difficulties in relation to repayment.  The effect of the variation was to allow the defendants to start payments of interest in July 2002 continuing at the same rate as hitherto until 15 December 2006, a period of almost four and a half years, with repayment of capital of the loan starting in January 2007 and concluding in September 2014. This extended the time for the defendant by that same four and a half year period.  It was entirely favourable to the defendant.  It was yet another example of the plaintiff’s extreme generosity, not to say tolerance.

13. I accept his explanation that it was done entirely to accommodate the defendants and what the 1^st defendant had put forward as financial stringency.  I also believe the plaintiff when he said that he frequently raised the matter of repayment and the 1^st defendant in particular acknowledged that the debt existed and that repayment had to be made.  In effect he behaved as it repayment would be on his terms as and when he deemed it appropriate or convenient.  It is not without significance that this oral variation was made at or about the time when the defendants failed to pay the first instalment of the capital loan.

14. Their denial of the oral variation is, I am satisfied, a contrivance on their part, a dishonest one, to try and lay the basis for an argument as to the period of limitation for proceedings.

The transfer of 3,000 shares in New Trend

15. New Trend was a company owned and/or controlled by the 1^st defendant only.  The 3,000 shares were transferred by the 1^st defendant in or about May 2005 to the plaintiff and his family in the following way—2,000 shares to the plaintiff himself, 970 to his son and 30 to his wife. 

16. According to the plaintiff the 1^st defendant was in financial difficulties with his business and that he and his co‑shareholder, a Mr Ho Pao Ming, had difficulties in repaying mortgages on properties and other current liabilities.  Incidentally by that time the 1^st defendant had still not paid any interest on the loan which was the subject of the promissory note.  In the event the plaintiff and his businesses and family took over the liabilities of New Trend.  Its accounts continued to be prepared and handled by the 1^st defendant’s wife, the plaintiff’s sister‑in‑law.

17. For some time prior to the actual transfer of the shares the plaintiff had made other loans to the 1^st defendant to help him with his business and New Trend in particular.  All the indications would thus be that the shares were some sort of security or replacement for what the plaintiff had thus already provided for the 1^st defendant, i.e. the loans just referred to.  The plaintiff’s son had also loaned the 1^st defendant sums totalling in excess of HK$330,000, hence the transfer to him of 970 shares.  The 1^st defendant at no time denied this loan and failed to answer the detailed contentions of the plaintiff in the latter’s Supplemental Statement of 6 December 2012.

18. The 1^st defendant’s evidence in support of his contention that the share transfers were in total satisfaction of the original debt is entirely lacking in credibility.  He said that he and the plaintiff agreed that the shares were valued at HK$2.8 million, the amount of the original debt.  But this ignores the interest which for the two years 2000 to 2002 amounted to a further HK$125,000.  This sum does not take into account the period July 2002 to May 2005, almost three more years.  No repayment instalment had been paid from July 2002, so ignoring the matter of the disputed oral variation, there would have to be interest on the capital sum which would have amounted to at least another HK$160,000, putting the sum owing at over HK$3 million.

19. The 1^st defendant accepted that the company was heavily saddled with mortgage debt but alleged that payments continued to be made by him or his wife.  I reject this.  It was clear that New Trend was burdened with debt and this was the motivation behind his approach to the plaintiff.  Furthermore he says that he had bought the 1,000 shares held by his co‑shareholder Mr Ho for HK$100,000.  On the basis of this valuation all the shares transferred to the plaintiff and his family were worth only HK$300,000, only 1/10 of the accumulated original indebtedness to the plaintiff.  When this was put to him he claimed that he had bought the shares cheaply from Mr Ho.  On being asked how cheaply, he replied by stating that he paid only 50% of the value. That would still make the 3,000 shares worth only HK$600,000, only one‑fifth of the debt due to the plaintiff.  This of course ignores the effect of any incumbrances and the loans made by the plaintiff to him.  The 1^st defendant was entirely unconvincing and somewhat vague.  He was also unable to explain why there was not one document evidencing this transaction as the settlement of not only his indebtedness, but that of his co‑defendants.  One again he took refuge in a bland assertion that amongst businessman and friends, word of mouth was sufficient and there was mutual trust.  If that be the case the mutual trust had not led him to make any payment under the promissory note.

20. The dispute as to who paid instalments of the mortgages after the transfer of the shares does not matter and it is not necessary to go into a detailed examination of the mortgage accounts and from whose or which account payment was made.  The fact remained that New Trend was saddled with debt, other loans had been made to the 1^st defendant and the shares were significantly below any value which would bear comparison with a debt of HK$2.8 million and more.  Throughout I prefer the evidence of the plaintiff to that of the defendants, the first of whom has demonstrated dishonesty in several respects, the most obvious being in respect of the cheque for HK$850,000 with which I shall deal shortly.  I reject Mr Albert Chan’s evidence in its entirety.

The Wah Fung cheque for HK$850,000—17 August 2007

21. Since this was the subject of the defendants’ action in the name of their company in the District Court I propose to deal with their case in relation to it first.

22. In August 2007 they said that the plaintiff approached their company through his brother‑in‑law, the 1^st defendant, for a loan to enable him to purchase some properties.  This of course, even on the defendants’ own evidence, would have constituted a significant change in the commercial traffic involving them.  For the first time, if their contentions are true, the plaintiff would have been seeking a loan from his brother‑in‑law’s business.

23. It is significant how this sum was dealt with in the records of the company Wah Fung Sauce.  There exists a document purporting to be a minute of a directors’ meeting on 8 August 2007, seemingly approving a loan of HK$850,000 to the plaintiff.  There is not one word specifying when the loan was to be repayable or what interest was to be charged upon it.  If indeed it was a loan, and thus an asset held by the company, it had to feature as such in the company’s accounts.  Since the company, on the face of it, had recorded it in a directors’ minute there had to be consistency between that record (if it be truly such) and entries relating to it in the books and accounts of the company.

24. There is a document relating to the cheque drawn in the plaintiff’s favour, described as an “invoice”.  There is nothing on it to suggest that it was in respect of a loan.  In the Day Book or Ledger the entry noting the cheque and payee makes no mention of it being a loan.

25. In the individual ledger accounts, whilst certain sums of money paid by the company to other individuals are noted as loans, that sum paid to the plaintiff contains no such note.

26. I now turn to the evidence of Mr Yeung, the auditor of Wah Fung Sauce Company.  He was faced with entries for this sum of money which gave no explanation for the basis of the payment.  He discussed it with the 1^st defendant, the upshot being that he was to include it in the accounts as loans to directors.  Thus it came to be included in the item in the balance sheet described as “Amount from Directors” in the total sum of HK$1,711,994.  Note 9 to that item reads: “the amount is unsecured, interest free and has no fixed term of repayments.”  If it was truly a loan to the plaintiff, it should have been identified as such, and included in the list of current assets with a note in the accounts to explain it.

27. The 1^st defendant seemed to dispute Mr Yeung’s evidence or at the very least, be equivocal about it but I have no doubt that Mr Yeung was telling the truth and seeking to resolve efficiently the query he had on the documents and that he acted in accordance with what he was told.  In due course the 1^st defendant (and the 2^nd defendant) signed on the accounts.

28. The 1^st defendant is in something of a dilemma.  In contrast to the arrangement in respect of the original loan—a promissory note with a timetable for payments and signed by all—he had no document from the plaintiff to the like effect in respect of the HK$850,000.  This was a similar situation to his assertion in respect of the transfer of the New Trend Shares—no document to recite the valuation of those shares or the acceptance by the plaintiff that he received them in satisfaction of a loan of HK$2.8 million.

29. The inconsistency between the board meeting minute and the company financial and accounting documents is explicable in only one way.  The payment of HK$850,000 was to be reflected as a loan to the directors; the inference is clear.  The directors had made a payment which they were liable to re‑imburse, no doubt at their leisure, to the company.  They had in fact borrowed from their company a sum of money to pay to the plaintiff.  The liability for its repayment was not on the plaintiff, but on the directors themselves.  Hence the way Mr Yeung was instructed to treat it.

30. The plaintiff claimed that the HK$850,000 cheque was a part‑payment of the original debt under the promissory note.  He had been consistently pressing for some repayment and the 1^st defendant promised this on the sale of certain properties by Wah Fung.  That sale materialized but only HK$850,000 of the proceeds was handled over.  I have no doubt that the plaintiff was telling the truth.  By contrast the defendants were not and I suspect that the creation of the “board meeting minute” categorizing the payment as a loan to the plaintiff was a contrivance in order to lend some support to their case.

31. In her written submissions, Ms Athena Wong, for the defendants, seeks to elevate the board minute to an objective, unequivocal, decisive document. I have already dealt with its position in relation to the company’s accounting records, signed by two defendants, which are conclusive particularly in the light of Mr Yeung’s evidence, which she apparently misunderstands, and which override a self‑serving board minute.

32. Ms Wong relies on Order 27, rule 4 as constituting a “deemed admission” by the plaintiff of the authenticity and dating on the minute.  It does not and cannot provide that the other party is deemed to accept its contents as being true.  It is not permissible to allege fraud without clear evidence in respect of a particular document but it may emerge in the course of evidence that a document (the original) is not what it purports to be.  In this case the document is authentic in the sense that it was signed by the defendants.  That does not render its contents truthful nor its dating necessarily accurate.

33. It is not a “strong contemporaneous document reflecting the parties’ true intention”.  It is highly dubious as to its provenance, timing and purpose.  It was not signed by the plaintiff and so cannot be said to reflect his intentions nor was he asked to sign the “invoice”.  I have set out my findings quite clearly on this.  Her other submissions do not have any realistic basis and I have already dealt with these issues between the parties.

The letter before action dated 26 July 2010

34. This has sometimes been erroneously referred to as 29 July 2010, and sometimes 2011.

35. Subsequent to the payment of HK$850,000 the plaintiff says that he continued to ask for payment of the balance of the debt due to him.  I accept his evidence.  Eventually he found it necessary to instruct solicitors, now a decade after the original promissory note.

36. The letter before action claims the original amount of the debt, HK$2.8 million, plus the interest due.  But it made no mention of the payment of the HK$850,000 cheque.  The plaintiff had no clear explanation for this omission.  He seemed somewhat surprised at the fact.

37. The defendants did not reply to this letter but in their evidence put forward some story to the effect that the 1^st defendant contacted the plaintiff, a meeting was arranged as a result of which the plaintiff was to go off and come back to them once he had investigated the matter.  In none of the written statements of the defendants is there any mention of such a meeting or arrangement.  This explanation is highly unlikely from the outset.  His position had already been made clear by the letter despite the omission to deal with the HK$850,000 cheque.  I am satisfied that the omission was the fault of his solicitors or perhaps some misunderstanding.  However the Statement of Claim served on 24 February 2011 made the position clear and his stance has been consistent ever since.

38. The 1^st defendant stated (in a statement of 15 November 2010) that subsequent letters from the plaintiff’s solicitors did in fact mention the HK$850,000 cheque and identify it as a part payment of the debt.  But still the 1^st defendant made no written response and his statement is silent thereafter.

39. I reject the defendants’ evidence on this issue as I have on others.  Ms Wong’s contention that it is “unethical for the lay client or solicitors to demand anything more than the recoverable in letters before action” is not apposite.  My findings make the position clear. In any event the position was made clear in later letters and the pleadings. The defendants made no written answer to these letters.  Once again I consider they thought the problem, such as it appeared to be to them, would go away by virtue of the 1^st defendant’s family connexion with the plaintiff and his previous extended patience. However by this time he had enough of the prevarication, empty promises and evasive conduct.

The Limitation Point

40. There is no validity whatsoever in this argument in view of the findings in respect of the principal issues and Mr Lau’s written submissions on this are clearcut.

41. I am satisfied that the plaintiff made demands—I use that term in its technical sense—for repayment, frequently between 2000 and 2002, of the 1^st defendant—the plaintiff had negligible contact with the other two.  In effect the first defendant affirmed the debt, acknowledged his liability but succeeded in putting the plaintiff off each time with half‑hearted promises.

42. In 2002 when the oral variation was agreed—and the only beneficiaries of this were the defendants—the debt was both acknowledged and remained a liability for the defendants.  Thereafter requests for payment were made by the plaintiff, and the 1^st defendant in particular continued to acknowledge the debt.

43. When Wah Fung sold properties in or about August 2007, the defendants made the HK$850,000 payment on account.  Once again the liability was acknowledged and the one and only payment to reduce it, was made.  The writ was issued on 24 February 2011 approximately 3½ years later, and was within the period under the Limitation Ordinance.  I do not need to consider in detail Ms Wong’s contentions on this. The findings on the material issues render it unnecessary.  At no stage was the plaintiff’s remedy, time‑barred. There were requests by the plaintiff for payment of and acknowledgements by the 1^st defendant of liability for payment of the debt and interest, throughout the period 2002 to 2010.

The extraneous matters

44. At the start of this case the defendants’ counsel took some time in preliminary skirmishes which seemed to ignore the realities of litigation, despite the enthusiasm and persistence with which certain points were pursued.

45. The ability to issue and serve a subpoena “duces tecum” can be a very effective weapon in the armoury of a party in litigation.  Sometimes it is effective in bringing before the court an independent witness to produce documents and explain a particular point (or more than one) on them.  In this case such a subpoena was directed to the auditor of the accounts of Wah Fung. His evidence was very important and could not be obtained from any other source.  His conversation with the 1^st defendant ‘scuppered’ the defendants’ case on the nature of the HK$850,000 payment, even if I had been uncertain about the plaintiff’s evidence on this, which I was not.

46. It would have been a tactical error for the plaintiff’s solicitors to have notified the defendants’ solicitors of their action.  Impliedly, the former could not trust that there would be no interference by the defendants with the auditor and it was important that, unwilling as he was to made a statement, that he should be before the court.

47. The second point taken was in relation to the service of the plaintiff’s 2^nd and 3^rd List of Documents.  These cannot have taken the defendants by surprise.  In any event they had them more than three weeks before trial but had not asked for copies or inspection.  Ms Wong explained that the plaintiff did not have leave to file such lists.  That is perfectly correct but these documents were readily available to the defendants in any event and it is quite pointless to sit back do nothing and take a technical point at trial which has no merit whatsoever.  That is not the correct way to conduct litigation.

48. Furthermore the plaintiff’s solicitors took this course because although the defendants had originally, as long ago as October 2012, taken out a summons to adduce a valuation report on the properties held by New Trend at or about the time of the transfer of shares to the plaintiff and his family, they had not pursued the matter.  The valuation of these properties was a material point in relation to this transaction.  Eventually a joint valuation report was obtained, behind which the defendants could not go.

49. This valuation report had specifically not taken into account the incumbrances in the form of the mortgages and even then the properties were worth only HK$1.821 million, well below the debt of HK$2.8 million (ignoring the additional liability for interest) before one took into account the other loans and advances made by the plaintiff.  I have also not taken into account other liabilities falling on the 1^st defendant in respect of which he sought financial help from the plaintiff.

50. In June 2013 the plaintiff sought to administer interrogatories to the 1^st defendant. The use of interrogatories can also be a very powerful weapon in the hands of a litigant in order to resolve or identify issues.  The first three of these interrogatories were intended to obtain from the 1^st defendant information within his possession, power or control concerning the mortgages, the remaining mortgage debt, and repayment instalments which encumbered the properties owned by New Trend.  His refusal to answer these was quite simply obstructive.  The inference must be that he was badly advised.  As a result the defendants cannot complain that the plaintiff’s solicitors took the necessary steps to obtain documents in order to reveal the full position which went to the value of the New Trend shares.

Conclusion

51. The plaintiff succeeds in his action HCA 128/2011.  There will be judgment in his favour as prayed for in the Statement of Claim with interest at the rate claimed, up to the date of judgment, and at the judgment rate thereafter.  The plaintiff will also have an order for his costs, on a party‑and‑party basis, to be taxed if not agreed.

52. The defendants’ action (as plaintiffs in the name of their company in HCA 766/2012) will be dismissed with costs, also on a party‑and‑party basis, to the plaintiff (the defendant in HCA 766/2012), to be taxed if not agreed.

53. The costs of the matters advanced by Ms Wong will fall to be dealt with within the ambit of my costs order in respect of HCA 128/2011.