XCHRX KONG SUN ENGINEERING & CONSTRUCTION CO. LTD. v. LAM PONG SIU CALVIN

HCA5272/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5272 OF 1998

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J U D G M E N T

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1. The Plaintiff company has issued a Writ against the Defendant, one of its former executive directors, for conversion or detinue of a car and also of a notebook computer allegedly owned by the Plaintiff. The Plaintiff furthermore sues for sums allegedly due from the Defendant on director's current account.

2. I am only concerned with the current account claim. Master Muttrie gave final judgment under Order 14 on 18 May 1999 in the sum of HK$980,000 plus interest and the Defendant now appeals against such judgment.

3. Although in the pleadings, the claim is cast in two alternative ways, first by reliance on an account stated and secondly, for a debt representing the balance due on director's current account, Mr Jason Pow, who appears for the Plaintiff, makes it plain that he is not relying on any account stated as a separate cause of action, that is, in the sense of what the cases call "a real account stated" giving rise to a fresh, binding promise to pay (see Siqueira v Noronha [1934] AC 332). The claim is on the alleged debt.

4. According to the Plaintiff, the debt was incurred when, on 30 May 1996, at the Defendant's request, the Plaintiff lent him $1,000,000 in order to help him purchase a flat. That sum is said to be repayable on demand and, an unsatisfied demand for repayment having been made on 27 January 1998, the Plaintiff sues on the debt.

5. The Plaintiff's case is that the claim is worthy of summary judgment, because it is supported by extremely strong evidence, including clear written admissions of liability on the Defendant's part and because the attempts made by the Defendant to deny liability are utterly incredible.

6. The Plaintiff relies first on an audit confirmation countersigned by the Defendant pursuant to a request issued by the Plaintiff's auditors dated 28 April 1997. On its face, in signing this document, the Defendant acknowledges that, as at 30 September 1996, he owed the Plaintiff $980,000 on current account.

7. Secondly, the Plaintiff relies on the fact that the Defendant, then a director of the Plaintiff, signed the directors' report dated 29 April 1997 annexing the Plaintiff's audited financial statements for 1996. Note 5 to those financial statements contains the following statement:-

"The amount due from directors is unsecured, interest-free and has no fixed term of repayment. The balances during the year are as follows: 30.9.96: Lam Bon Yuk $1,278,574 and Lam Pong Siu $980,000."

8. The Plaintiff's deponents affirm that since then, the debt position has not changed.

9. In the Amended Defence and Counterclaim, the Defendant admits (a) that he countersigned the audit confirmation dated 28 April 1997; (b) that he signed the Directors' Report dated 29 April 1997 and (c) that he was paid $1 million on 30 May 1996. He alleges, however, that such sum was paid to him by way of bonus for the 1995/1996 financial year and was not a sum lent to him. He says that the practice of the Plaintiff was to account for all such bonuses as "Director's Drawings" in the Plaintiff's records but that the Plaintiff never demanded repayment. In his affirmation opposing summary judgment, the Defendant admits that his bonus in the 1995 financial year had been HK$120,000.

10. Miss Karen Cheung, who appears for the Defendant and who has only recently come into the case, submits that there are two triable issues, namely: as to whether the payment was by way of bonus or by way of loan on current account; and secondly, as to whether the Defendant may be permitted to set off sums claimed or intended to be claimed in a counterclaim for wrongful dismissal. Additionally, she submits that a Petition which has been presented by the Defendant against the Plaintiff company under section 168A of the Companies Ordinance and for a winding-up order under the just and equitable ground constitutes a cogent "other reason" for requiring this claim to go to trial.

Bonus or loan?

11. The first point to note about the Defendant's allegation that the money was paid to him as a bonus and not a loan is that it is an assertion unsupported by any documents.

12. Secondly, as already mentioned, the audit confirmation signed by the Defendant is a clear admission by him to the contrary, that is, that the money was a sum due from him to the company. Similarly, he clearly signed the Directors' Report annexing financial statements which clearly indicate the existence of the debt.

13. These admissions have never been explained away. Indeed, the Defendant's attempts to get around them cast great doubt on his veracity.

14. Thus, as Mr Pow points out, in the original Defence filed on 13 May 1998, it was pleaded, presumably on the Defendant's instructions, that the Defendant had "never countersigned" the audit confirmation and that he had in fact "never seen the Directors' Report" and had not signed it either. These are clear assertions of fact which should not have been made if untrue.

15. When the Defence was amended, the Defendant's position changed. It was then pleaded that the booking of bonuses to directors as directors' drawings on current account was due merely to a somewhat peculiar accounting treatment of those sums, adopted in accordance with the Plaintiff's practice.

16. In his Affirmation opposing summary judgment, the Defendant yet again changed his position. He now says that he "paid no attention to how the sums were labelled in the audited accounts" since it was a small family company and that he signed the audit confirmation and the Directors' Report "without even looking carefully at the contents thereof."

17. Mr Pow attacks the Defendant's alleged lack of attention to the accounts by pointing to the Defendant's copy of the accounts in question, exhibited by him in the Petition proceedings, which bear handwritten annotations indicating careful scrutiny of the figures. It is the evidence of Arthur Lam Bon Yuk, on the Plaintiff's behalf, that such handwriting is the Defendant's. That evidence has not been challenged. This again shows, Mr Pow submits, that the Defendant's attempts to raise a triable issue are wholly incredible.

18. At the hearing, the Defendant's position, as explained by Miss Cheung, was now that the sum had been paid to him either by way of bonus or as dividend and that a trial should be ordered to investigate whether this was so. There is no suggestion that any board resolution for declaration of a dividend exists. Nothing is said as to the amount of the dividend declared. Nor is there any attempt to relate the amount of the payment to the number of shares held by the Defendant.

19. In an attempt to raise a triable issue, Miss Cheung sought to rely on a letter dated 13 May 1996 signed by Arthur Lam addressed to the Bank of America in support of a mortgage application made by the Defendant. That letter gives certain figures for the Defendant's basic salary, housing allowance and bonus which are significantly higher than the amounts shown in the financial statements. In the Amended Defence, these sums are relied on as accurate, with a view to showing that the reliability of the audited financial statements themselves is to be doubted. The Plaintiff has explained that these amounts were overstated in order to assist the Defendant's chances of getting a mortgage. While Mr Pow accepts that this is not at all an attractive explanation, he submits that his client puts it forward as genuine and argues that the purpose for which the Defendant seeks to rely on the letter, namely, to cast doubt on the reliability of the financial statements, cannot be supported.

20. Thus, the financial statements show that where bonuses have been paid (in sums admitted by the Defendant to be accurate), these have been faithfully reflected in the Plaintiff's audited accounts. Moreover, they have been reflected in the tax returns, including the Defendant's own tax returns, setting out the sums in question. Mr Pow points out that a challenge has been issued in the evidence for the Defendant to disclose his tax return if he did in fact treat the sum in question as his bonus and that there has been no response from the Defendant.

21. Finally, Mr Pow points to the Plaintiff's financial position in 1996, which involved profits of $512,129 for the year and retained profits from previous years totalling some $1.27 million. If the Defendant's version is true, this would mean that in these circumstances, the Plaintiff saw fit to pay the Defendant and Arthur Lam bonuses totalling about $2.2 million, a proposition which Mr Pow submits is wholly unbelievable. One notes that in the previous year, the bonus was in the sum of $120,000. There is certainly no evidence of any reason for this increasing to $1 million in 1996. Arthur Lam explains that he is not in doubt that the sum he was given was a loan and deposes to having repaid it in March 1998. As to this point, Miss Cheung points out that this cannot have much weight because the repayment was made only after Arthur Lam had effectively diluted away the Defendant's shareholding, making it no skin off his nose to pay the money back to what was very largely his own company.

22. On all the evidence, I have come to the conclusion that the allegation that the payment was a bonus is wholly incredible. There is not a shred of objective evidence to support it. There are clear written and signed admissions of the Defendant to the contrary. The Defendant's attempts to explain away those admissions have constantly shifted and are wholly unbelievable. Accordingly, insofar as the Defendant's case rests on these allegations, I have no hesitation in rejecting them as untenable, even in the Order 14 context.

The Counterclaim

23. When the Defence was amended, a Counterclaim was added, alleging wrongful dismissal. There followed an application to strike it out on the ground that the claim was within the exclusive jurisdiction of the Labour Tribunal. Just prior to the hearing, solicitors for the Defendant wrote saying that they did not propose to be present and that they consented to the counterclaim being struck out. This was apparently because it was decided to pursue the claim in the Tribunal where indeed, a claim was lodged and is pending for hearing next month. In such circumstances, it is therefore unsurprising that there has been no appeal against the order striking out the counterclaim and no application before me today to reinstate it.

24. In such circumstances, I do not have any counterclaim before me in this Court which is capable of being relied on by way of set-off. I accordingly reject the counterclaim as the basis for a triable defence. No injustice will be suffered by the Defendant since, if his counterclaim is good, he will obtain an appropriate award at the Tribunal.

The Petition

25. I am, with respect, wholly unable to see how the existence of the Petition in any way provides a reason for allowing the Defendant to go to trial in the present proceedings. The issues are quite different and any judgment recovered by the company in the present case will be taken into account in any section 168A relief or in a winding-up.

26. I am therefore of the view that the appeal must be dismissed with costs.