NICE & WELL LTD v. FU MEE YUK SHIRLEY

CACV 20/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 20 OF 2011

(ON APPEAL FROM HCA NO 2726 of 2008)

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R E A S O N S   F O R   J U D G M E N T

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Hon Poon J (giving the Reasons for Judgment of the Court) :

INTRODUCTION

1.  The plaintiff is a company incorporated in Hong Kong.  At all material times, Mr Leung Kar Fai (“Mr Leung”) and the defendant were its two equal shareholders and directors.  In 2008, Mr Leung obtained leave under section 168BC of the Companies Ordinance, Cap 32 to commence the present statutory derivative action against the defendant for, among other things, breach of fiduciary duty as director arising from :

(1) her failure to disclose to Mr Leung that she had charged loan interest at 12% p.a. on loans by her to the plaintiff which was never approved and which had caused the plaintiff to incur excessive shareholders’ loans in the amount of HK$1 million; and

(2) unauthorized withdrawals of the plaintiff’s money in favour of herself in the total sum of HK$563,000.00.

2.  By a judgment dated 31 December 2010, Suffiad J dismissed the plaintiff’s claims (“the Main Judgment”).  By a further ruling dated 7 March 2011, the learned Judge ordered Mr Leung to pay the defendant costs and the plaintiff’s own costs personally (“the Costs Order”).  The plaintiff appealed against both the Main Judgment and the Costs Order.

3.  On 5 September 2014, after hearing the parties, we dismissed the plaintiff’s appeal in its entirety.  We now hand down the reasons for our judgment.

BACKGROUND FACTS

4.  The plaintiff, incorporated in June 2000, was acquired by the defendant and one Chan Koon Hung in July 2000.  On 21 August 2000, Mr Chan transferred his share in the plaintiff to Mr Leung.  Thereafter, Mr Leung and the defendant each held 50% of the plaintiff.  They were also the only two directors.

5.  The plaintiff opened and maintained a bank account with Wing Hang Bank.  The mandate given to Wing Hang Bank was that for cheques issued equivalent to or under HK$10,000.00 the signature of one director alone would suffice.  For amounts over HK$10,000.00 the signatures of both directors, that is, the defendant and Mr Leung, were required.

6.  On 28 July 2000, the plaintiff entered into a sale and purchase agreement to purchase Flats A and B, 1/F, Teemko Court, Nos 57 and 59 Java Road, North Point (“the Property”) at the price of HK$1,767,000.00. On 26 August 2000, a mortgage was obtained by the plaintiff from Wing Hang Bank for HK$1,236,000.00 to finance the purchase of the Property.  The balance of the purchase price of HK$531,000.00 was put up half each by the defendant and Mr Leung as shareholders.

7.  The plaintiff took possession of the Property on 8 September 2000 and carried out renovation works in the following month. Thereafter the plaintiff carried a business of tuition classes, run by Mr Leung, at the Property.  The tuition business turned out to be unprofitable. From December 2001, only Flat A of the Property continued to be used for the tuition business.  Flat B was leased out by the plaintiff at a monthly rent of HK$8,200.00.  In December 2002 the tuition business ceased completely.  As from March 2003, Flat A of the Property was also leased out by the plaintiff.

8.  On or about 20 December 2001, Wing Hang Bank granted overdraft facilities of up to HK$100,000.00 to the plaintiff.

9.  In May 2007, the plaintiff entered into an agreement to sell the Property at HK$4,230,000.00.  The plaintiff received a deposit of HK$200,000.00 on 14 May 2007 and a further deposit of HK$223,000.00 on 23 May 2007.  The sale was completed on 29 June 2007 whereupon the plaintiff received the balance of the purchase price of HK$3,807,000.00.

10.  It is not disputed that on 3 July 2007 the defendant received from the plaintiff a sum of HK$1,000,000.00 as a purported repayment of a shareholder loan with interest at 12% per annum.

11.  It is also not in dispute that the defendant had singly signed 57 cheques issued on the plaintiff’s bank account with Wing Hang Bank which were all made payable to her, totaling HK$563,000.00 (“the 57 Cheques” collectively), as follows :

(1) 22 cheques between 3 December 2001 and 14 November 2005, totaling HK$213,000.00, 20 of which were drawn for HK$10,000.00 and 2 were for HK$9,000.00 and HK$4,000.00 respectively (“the 22 Cheques”); and

(2) 35 cheques between 15 and 27 May 2007 each for HK$10,000.00, totaling HK$350,000.00 (“the 35 Cheques”).

THE PARTIES’ CASE

The plaintiff’s case

12.  The plaintiff’s case is that it had neither approved repayment of the loan in the sum of HK$1,000,000.00 to the defendant nor had it approved loan interest at the rate of 12% p.a. or indeed any payment of interest.  Further, the defendant had no authority to make out the 57 Cheques to herself.  There was no resolution of the plaintiff or the shareholders authorizing the same.  The way in which the defendant signed the cheques alone without involving Mr Leung was to hide away from him the fact that she made those payments to herself without the proper authorization and approval of the plaintiff.

The defendant’s case

13.  The defendant’s defence is based on an oral agreement reached between her and Mr Leung at the outset as to how the plaintiff would be operated (“the Oral Agreement”) :

(a) there was no need to draft complicated joint venture agreements between them for the purpose of their investment in the plaintiff;

(b) it was not necessary for them (in the running and operation of the plaintiff) to draw up detailed minutes or pass resolutions unless it was required to comply with statutory obligations or for banking requirements;

(c) all gain or loss in respect of the Property and the investment in the plaintiff will be on an equal share basis;

(d) any loan made by either shareholder to the plaintiff will carry interest at the rate of 1% per month;

(e) any surplus in the plaintiff’s account should be used to lower/ reduce the amount of outstanding loans to the shareholder who had loaned more to the plaintiff until the loans from both shareholders are equal;

(f) once the level of the loans from both shareholders are equal, repayment should be made on an equal basis;

(g) each of the defendant and Mr. Leung could alone sign cheques drawn on the plaintiff’s bank account for $10,000.00 or less but both would be required to counter-sign for cheques for an amount over $10,000.00.

14.  By December 2001, the defendant had made loans to the plaintiff which had exceeded HK$400,000.00 and which had far exceeded the loans advanced by Mr Leung to the plaintiff.  In line with the Oral Agreement, the defendant caused the plaintiff to make repayment to her by issuing the 22 Cheques in order to offset her increasing shareholder’s loan to the plaintiff.

15.  On or about 14 May 2007, Mr Leung agreed over a telephone conversation with the defendant that upon receipt by the plaintiff of the preliminary deposit and down payment for the sale of the Property, part of the defendant’s shareholder’s loan would be repaid to the defendant first.  As a result of such agreement, the defendant made out the first 34 of the 35 Cheques (other than the last one drawn on 27 May 2007) to herself as partial repayment of her shareholder’s loan to the plaintiff.  As to the cheque drawn on 27 May 2007, it was not received by her but was paid to a contractor for services rendered to the plaintiff for repairs to the Property.

16.  Lastly, on or about 29 June 2007, that is, the completion date of the sale of the Property, when the plaintiff received the balance of the purchase price, the defendant and Mr Leung met at the Canteen in International Finance Centre II (“the Meeting”) to discuss the sharing of the profits and repayment of the shareholder’s loan.  Based on estimation, the defendant and Mr Leung agreed to a distribution of profits at HK$1,000,000.00 each.  The defendant further brought along with her a shareholder’s loan account (“the Defendant’s Account”) and gave a copy to Mr Leung.  Based on the Defendant’s Account, Mr Leung agreed to the repayment of loan to the defendant in the sum of HK$1,000,000.00 inclusive of interest at the rate of 12% p.a.  Subsequently, Mr Leung received the payment of HK$1,000,000.00 by way of a cheque no 00161.  The defendant received payment of HK$2,000,000.00 by way of another cheque no 00157 dated 3 July 2007.  Both cheques were signed by her and Mr Leung.

17.  At the time of the Meeting, Mr Leung had not brought along his shareholder loan account.  He later produced one in July 2007 which also adopted the same rate of interest at 12% p.a.  The defendant disagreed with Mr Leung’s account as it included some items which ought not to have been included.

THE JUDGE’S FINDINGS IN THE MAIN JUDGMENT

18.  In a careful and detailed judgment, the Judge first identified five main factual issues :

(a) whether the plaintiff had approved the repayment of loans, being the subject matter complained of, to the defendant;

(b) whether the plaintiff had approved the loan interest at the rate of 12% p.a. applied by the defendant to such loan repayment;

(c) whether the defendant had authority to withdraw the sum of $563,000.00 from the plaintiff’s bank account to repay her loans;

(d) whether those acts of the defendant complained of amounted to a breach of trust/breach of fiduciary duty/negligence and/or fraudulent design;

(e) whether the defendant had misappropriated funds from the plaintiff which caused the plaintiff to suffer loss and damage.

19.  The Judge then analyzed the conflicting evidence given by Mr Leung and the defendant.  Having done so, he rejected Mr Leung’s evidence and accepted the defendant’s.  He then made the following findings of facts in favour of the defendant.

20.  First, on the operation of the plaintiff.  The plaintiff was carried on as a quasi-partnership by Mr Leung and the defendant.  Mr Leung and the defendant treated any decision reached between the two of them which involved or affected the running and operation of the plaintiff as one made by or on behalf of the plaintiff without any formal board meeting or resolution to that effect.  There was also an oral agreement between the defendant and Mr Leung at the outset that it would not be necessary for them in running the plaintiff to draw up detailed minutes or make written resolutions of the plaintiff unless it was required by legislation for statutory purposes or for banking purposes.

21.  Second, on interest rate for shareholder’s loans.  There was agreement between the defendant and Mr Leung that loans from them as shareholders to the plaintiff would carry interest at 1% per month. Even if there was no such agreement on interest, the conduct of Mr Leung in adopting the interest rate of 12% p.a. in preparing Mr Leung’s Account showed inferentially that he had thereby ratified the same interest rate charged by the defendant.

22.  Third, on settling of shareholder’s loans.  There was an agreement between the defendant and Mr Leung at the outset that any surplus in the plaintiff’s accounts would be used to reduce or lower the loans of the shareholder who had contributed more to the plaintiff first.

23.  Fourth, on the payments by way of the 57 Cheques. Mr Leung knew and consented to the repayments made by the plaintiff to the defendant of her shareholder’s loan by way of the 22 Cheques between 3 December 2001 and 14 November 2005 and by way of 34 of the 35 Cheques between 15 and 25 May 2007, totaling HK$553,000.00.  As to the remaining cheque dated 27 May 2007, it was used to repay a contractor for repairs to the Property and not to the defendant herself.

24.  Fifth, on the repayment of HK$1,000,000.00.  Mr Leung had consented to and agreed to such repayment as well as to the rate of interest charged on such loan.

25.  Finally, to round up his findings, the Judge accepted the defendant’s evidence that the issuing of each of the 57 Cheques within the signing limit for one signatory was done with the knowledge and agreement of Mr Leung and was done out of convenience rather than with a view to misappropriating funds from the plaintiff or with any intention to deceive the plaintiff or Mr Leung.  He emphatically rejected the plaintiff’s case in this respect and further found that there was no misappropriation of funds, no negligence and no breach of fiduciary duty by the defendant since what was done by her was done with the knowledge consent and agreement of Mr Leung, being the only other shareholder and director of the plaintiff.

26.  Based on the above findings, the Judge dismissed the plaintiff’s claims against the defendant.

REASONS FOR ORDERING COSTS AGAINST MR LEUNG PERSONALLY

27.  In ordering Mr Leung to bear the defendant’s costs and the plaintiff’s own costs personally, the Judge took the view that Mr Leung had made serious and unwarranted allegations of dishonesty, fraud and misappropriation of funds against the defendant, which he had all rejected after trial.  In making such allegations, Mr Leung was not acting for the legitimate interest or welfare of the plaintiff but did so for his own personal gain and interests.  He was therefore not acting in good faith and had no reasonable grounds for bringing the action.

APPEAL AGAINST THE MAIN JUDGMENT

28.  We first discuss the appeal against the Main Judgment.

29.  All the grounds of appeal are directed against the factual findings made by the Judge.  This Court will not disturb a factual finding made by a trial judge unless the party making the challenge can satisfy us with cogent reasons that the finding is plainly wrong.  For present purposes, we need not discuss every ground of appeal in detail.  For in his oral submissions, Mr Chu, who appeared for the plaintiff before us but not before the Judge below, had helpfully reduced the plaintiff’s attacks against the Judge’s findings into several main points, all of which can be disposed of shortly.

30.  Mr Chu first took two points which had not been pleaded.

31.  Mr Chu queried the necessity of borrowing money from the defendant.  He relied specifically on the fact that the overdraft facilities granted by Wing Hang Bank had not been fully utilized.  This point is a non-starter because it was never the plaintiff’s pleaded case that the defendant had wrongly caused the plaintiff to borrow from her.  It is not disputed that the defendant did lend money to the plaintiff.  So did Mr Leung.

32.  Mr Chu then argued that the plaintiff could have been able to obtain finance from the market, say Wing Hang Bank, at a cheaper interest rate than 12%.  It is therefore not safe to find that the defendant was entitled to charge such interest rate.  As a point which had not been pleaded, it is not open to the plaintiff on appeal now.

33.  Mr Chu next referred us to various parts of the evidence forensically, seeking to argue that defendant had not lent money to the plaintiff from the outset; that Mr Leung had not formally ratified the 12% interest rate; and that the Defendant’s Account is not reliable.

34.  What Mr Chu had attempted to do is asking us effectively to evaluate and assess the evidence afresh as if we were conducting the trial.  This is simply impermissible.

35.  In sum, the plaintiff has failed to satisfy us that any of the Judge’s findings is plainly wrong.  In fact, we are satisfied that the Judges’ findings are all correct.  We can see no basis whatsoever to disturb any of them.

36.  The appeal against the Main Judgment must fail. We dismissed it accordingly.

APPEAL AGAINST THE COSTS ORDER

37.  We next consider the appeal against the Costs Order.

38.  Section 168BI(3) of the Companies Ordinance provides that a court may only make an order of costs in favour of the member who has obtained leave to start a derivative action if it is satisfied that the member was acting in good faith in and had reasonable grounds for bringing the proceedings.  Section 168BI(1)(c) provides that the court may make any order it considers appropriate about the costs incurred by “any other parties to the … proceedings”.  In other words, no costs may be awarded in favour of the member if Section 168BI(1) is not satisfied.  Furthermore, if appropriate, the court may order costs against him in favour of the other party to the proceedings, which was what happened here.

39.  Based on his findings at trial, the Judge was correct in concluding that Mr Leung was not acting in good faith and had no reasonable grounds for bringing the present action.  On the facts and circumstances of the present case, the Judge was fully justified in exercising his discretion to make the Costs Order against Mr Leung personally.  We can see no basis to interfere.

40.  We therefore also dismissed the appeal against the Costs Order.