LIU BO SUN & ANOTHER v. LUI KUEN KEE

CACV 283/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 283 OF 2003

(ON APPEAL FROM HCA NO 1346 oF 2002)

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J U D G M E N T

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Hon Woo Ag CJHC :

Introduction

1. This is an appeal by the plaintiffs against the judgment of the Jackson J handed down on 21 July 2003, whereby both the plaintiffs’ claim and the defendant’s counterclaim were dismissed.

Background

2. The background facts, as the judge set out in his judgment, are not in dispute between the parties before us.

3. The claim arose out of the loss suffered by a company known as a South China Tent Fty Ltd which was incorporated on 31 August 1995 (“the Company”) in its acquisition of a residential property known as Unit 1505, 15^th Floor, Block B, Kornhill, Quarry Bay, Hong Kong (“the Property”) in March 1997.  The purchase money with $7,630,000.  In August 1997, the Company created a legal charge over the Property in favour of Union Bank of Hong Kong Ltd (now the Industrial and Commercial Bank of China (Asia) Ltd) (“the Bank”) to secure a loan of $5,247,000 from the Bank to the Company. 

4. The plaintiffs are husband and wife.  At all material times, they were the only registered shareholders of the Company.  The defendant worked for the Company and was remunerated by way of commission on the business that he did rather than by salary.

5. By a deed of Declaration of Trust dated 8 May 1997, the plaintiffs declared that they held their shares in the Company on trust as to 40% for the 1^st plaintiff, 40% for the defendant and 20% for one Yuen Tak Sing (“Yuen”) who also worked for the Company.

6. The 1^st plaintiff was a director of the Company at all material times.  The 2^nd plaintiff was a director of the Company from its incorporation until 30 August 1999 when she resigned and was replaced as a director by the defendant. 

7. In June 2001, the Company defaulted in its required monthly payment to the Bank, and the Bank issued a demand letter requiring immediate payment of all the outstanding balance of the loan including interest, totalling $5,026,546.72.

8. On 23 July 2001, the Bank issued proceedings against the Company as a borrower and against the plaintiffs as guarantors (based on the guarantee that they signed in favour of the Bank for the loan).  On or about October 2001, the Property was sold by receivers for $2,770,000, which sum was used by the Bank to reduce the outstanding balance of the loan with interest and to pay for other costs connected with the default and the sale.

9. The plaintiffs reached a repayment arrangement with the Bank for the then outstanding principal, interest and other costs which amounted to $2,543,617.83.  The plaintiffs having paid the sum of $1,070,896.86 to the Bank on 2 January 2002, the remaining outstanding balance was $1,472,720.97 which was to carry interest at the rate of 5.875% per annum to be repaid monthly until August 2017. 

10. The plaintiffs’ claim against the defendant is for 50% of the said sum of $2,543,617.83 plus interest on the basis that the 1^st plaintiff and the defendant had agreed that the acquisition of the Property in the name of the Company was a 50/50 property investment joint venture between them, whereby the 1^st plaintiff and the defendant would provide 50% of the fund needed for the investment and would share profit or loss of the investment equally.

11. The defendant denied that there was such a joint venture agreement.  His case was that the decision to purchase the property was that of the plaintiffs alone.  

12. He also raised a counterclaim in respect of the money which he paid to the Company as an alleged personal loan to the plaintiffs totalling $1,723,947.30, which was evidenced by a confirmation for audit purposes issued by the Company’s auditors to him.

The judgment

13. In his judgment, the judge dealt with a number of significant documents relating to the parties’ respective cases.  He said:

“	The documents
	19.	It is, I think, necessary to refer specifically to a few of the documents in evidence before me at trial as follows :
		(a)	The conveyancing documents.
			None of these were signed by the defendant who, at the relevant time, was neither a director nor a shareholder of any kind of the Company.  He did however sign some cheques of the Company relative to the purchase of the Property and in so doing perhaps held himself out as having, at least, an interest in the Company.
		(b)	The Declaration of Trust.
			The precise reason why the plaintiffs had this document prepared and why they signed it remains somewhat unclear to me although the 1st plaintiff told me in evidence that it was at the request of Yuen who wished to have his interests protected.  That reason however does not sit happily with other evidence before me to the effect that Yuen was aggrieved by this document.  And, I might add, it sits a little uncomfortably with me that the 1st plaintiff unilaterally signed a declaration the effect of which (on one view of it) ensnared the defendant in a liability to which he might not have been subject in its absence.  Be that as it may.  For the purposes of this action the reason for the document its perhaps not as important as the interpretation put upon it by the 1st plaintiff and the defendant.  This document impacts upon the evidence in this action in two ways : firstly in relation to the alleged 50:50 joint venture between the 1st plaintiff and the defendant and secondly in relation to the so-called shareholders meetings.
		(c)	Minutes of Shareholders Special Meeting 9 May 1998.
			These minutes suggest that Yuen was the chairman of the meeting albeit that the defendant denies that he was even present.  In the event Yuen refused to sign them, presumably because he did not accept them as being correct or because he wished to disassociate himself from what had been agreed.  There is no specific reference in the minutes as to how the loss on the Property was to be met albeit that there is provision to meet any deficit that might arise from the Company’s purchase orders.  That of course is an entirely different matter.  The minutes were signed by the 1st plaintiff, the defendant and Chan Hung.
		(d)	Letter to Yuen from Chan Hung 10 March 1999.
			This letter, in effect, suggests that Yuen is liable for 20% of the losses arising from the purchase of the Property.
		(e)	Fax to Chan Hung from Yuen 23 March 1999.
			Yuen expresses outrage at the suggestion made in Chan Hung’s letter of 10 March.  He makes it plain that in his view he has no liability whatsoever in respect of the Property.  [The importance of this is that the plaintiffs now accept that that is so and that instead of seeking a 20% contribution towards the loss from Yuen they now seek a 50% contribution from the defendant.]
		(f)	Minutes of Shareholders Meeting 15 July 1999.
			These minutes recite that the 1st plaintiff and the defendant (who were both present at the meeting) each held 40% of the Company’s shares and that Yuen (who was not present) held 20%.  Inter alia the minutes recite that it was agreed that :
			“	…each and every shareholder shall share the outstanding balance and expenses in selling the [Property] in proportion to their respective shareholdings.”
			These minutes were signed by the 1st plaintiff, the defendant and Chan Hung.
		(g)	Minutes of Shareholders Meeting 12 March 2001.
			These minutes recite that only the 1st plaintiff, the defendant and Chan Hung were present and that it was agreed that the Property was to be sold and that :
			“	…the outstanding balance due to the Bank and the expenses shall be the responsibility of the shareholders.”
			The minutes were signed by the 1st plaintiff, the defendant and Chan Hung.
		(h)	Draft Deed of Indemnity 5 February 2001.
			This document was prepared on the instructions of the 1st plaintiff and the defendant refused to sign it.  The effect of the document (if signed by the defendant) would have been that he had agreed to indemnify the plaintiffs as to 40% of the losses resulting from the sale of the Property.
		(i)	Confirmation for audit purposes 8 January 2002.
			This document purports to show that the Company was indebted to the defendant in the sum of $1,723,947.50.
			and
		(j)	Directors Loan Account.
			This document purports to show how the greater part of the $1,723,947.50 referred to in (i) above was paid over to the Bank in repayment of the mortgage loan.  Such payments were, to all intents and purposes, matched by identical payments to the Bank by the 1st plaintiff until April and May 2001 when no payments were made by the defendant and the 1st plaintiff made good the shortfall for those two months.” (Emphasis added)

14. The judge also made various findings.  He said :

“	17.	Let me say straightaway that I reject the evidence of the defendant to the effect that the purchase of the Property was nothing to do with him and that whilst I am in no doubt whatsoever that both the 1st plaintiff and the defendant did agree that the Property should be purchased (and in the name of the Company) in the hope and in anticipation of a subsequent sale at a profit it never occurred to either of them that such a sale might result in a loss; that such a loss was never contemplated (let alone provided for) and, when a loss resulted, the 1st plaintiff found himself in a position of having to try to protect his interests by doing retrospectively what he should have done at the very outset of the venture, i.e. put into writing the precise terms of his agreement with the defendant and, in so doing, anticipate a possible loss and provide for settlement of it.
	18.	My view that there was such an agreement (regardless of its precise terms which, given the fact that it was not evidenced in writing and the fact of some distinct uncertainties in the 1st plaintiff’s recollection of events, I can only guess at) is reinforced by the fact that the 1st plaintiff and the defendant both agree that they had previously purchased (in the name of the same or another company or both) at least one other property at Kornhill and had resold it almost immediately at a sizeable profit.” (Emphasis added)

15. The conclusion reached by the judge was as follows :

“	Conclusion
	20.	The 1st plaintiff in his evidence before me, maintained that (by reason of his misapprehension of the legal position) he assumed as a consequence of the Declaration of Trust that any property owned by the Company (and any losses resulting therefrom) should be shared according to the declared beneficial shareholding ratio, i.e. 40:40:20, and that explains the decisions reached at the shareholders meetings as minuted.
	21.	Whilst it may possibly be right that he was labouring under a misapprehension it does little to strengthen his case against the defendant who continues to maintain that he never had an agreement with the 1st plaintiff; that he was not (at the material time) either a shareholder or director of the Company and that whilst he had no objection to the Company purchasing the Property he cannot be held responsible for the loss resulting from that purchase.
	22.	I have little doubt, on the evidence before me, that the defendant has sought to take advantage of the 1st plaintiff’s negligence in not ‘tying him down’ to the consequences of a possible loss resulting from the purchase of the Property, but equally by reason in part of that negligence, and in part by the 1st plaintiff’s acknowledged misunderstanding of the true position regarding the shareholding in the Company and his evidence generally before me I find myself unable to say that he has proved his case on the balance of probabilities.
	23.	All that I am sure about, on the evidence before me, is that the defendant’s counterclaim is unsustainable : it is based upon a complete fiction.  Most of the $1,723,947.50 which he paid to the Company was paid by him specifically in respect of the Property.  It was not, as he maintains and as the Auditors’ Notes might suggest, paid by him in the form of loans to the plaintiffs.
	24.	Accordingly I dismiss the claim of the plaintiffs and I dismiss the counterclaim of the defendant and I make an order nisi that each party must bear its own costs.” (Emphasis added)

Grounds of appeal

16. On behalf of the plaintiffs, three grounds of appeal are raised.  The first two grounds challenge the judge’s conclusion that the plaintiffs had failed to prove their case on the balance of probabilities, on the basis that this was in conflict with his finding that there was a joint venture agreement between the 1^st plaintiff and the defendant, as shown in paragraphs 17 and 18 of his judgment.  It is submitted by Mr Daniel Tang, for the plaintiffs, that in view of such clear finding of a joint venture agreement to purchase the property (in name of the Company) the judge erred in failing to rule that where there was a loss in the joint venture, the 1^st plaintiff and the defendant should be responsible equally for such loss.

17. The third ground of the appeal alleges that the judge erred in failing to find an implied term in the joint venture agreement that in case of loss, the 1^st plaintiff and the defendant should share the same in equal shares.  For this purpose, the plaintiffs have taken out a summons dated 19 January 2005 to apply to this court to amend the Statement of the Claim in order to plead two things, namely, to describe the joint venture as a partnership, and to plead in the alternative that the agreement to share profit or loss equally was also an implied term of the agreement.

18. In my judgment, it is obvious from the various passages of the judgment cited above that the judge had rejected point blank the denial of the defendant of the existence of the joint venture agreement.  He also rejected the defendant’s counterclaim that the money totalling $1,723,947.50 which he had paid to the Company were loans he made to the plaintiffs.  He found that the defendant paid most of his own money to the Company specifically in respect of the Property.  As he had accepted the plaintiffs’ case that was a joint venture agreement between the 1^st plaintiff and the defendant to purchase the Property in the name of the Company in the hope of making a profit, I find it, to say the least, startling that he was “unable to say that he [the 1^st plaintiff] has proved his case on the balance of probabilities.”

19. From the entirety of the judgment, it seems to me that while the judge had doubts about the precise terms of the joint venture, there were only two significant matters of which judge was not certain about in relation to the joint venture agreement, namely,

(a)	the loss from the joint venture “was never contemplated (let alone provided for)” (paragraph 17 of the judgment); and
(b)	the agreed ratio in the joint venture between the 1st plaintiff and the defendant, whether it was 50:50 as the plaintiff stated in his evidence, or whether it was 40% on the part of defendant to correspond to his beneficial shareholding in the Company, as evidenced by the Declaration of Trust (paragraph 19(b) of the judgment), and by the minutes of the shareholders’ meetings held respectively on 15 July 1999 and 12 March 2001, both of which were signed by the 1st plaintiff and the defendant (paragraph 19(f) and (g) of the judgement).

20. This appeal challenges the judge’s assessment of the evidence that have been adduced by the parties before him.  The power of this court to interfere with such assessment can only be exercised where the judge was plainly wrong or where he overlooked important documentary evidence or its effect.  See para 59/1/48 of Hong Kong Civil Procedure 2004, Vol 1.

21. For my part, I find the judge’s conclusion that the plaintiffs have failed to prove their claim on the balance of probabilities plainly wrong.  That which Mr Danny Ng has submitted on behalf of the defendants has not altered my view in any way.

22. I must say that when I was reading the judgment, I was very surprised at the judge’s conclusion that he found the plaintiffs had failed to prove their claim on the balance of probabilities, given that he had already found that he had “no doubt whatsoever the both 1^st plaintiff and the defendant did agree the Property should be purchased (in the name of the Company) in the hope and in anticipation of a subsequent sale at a profit”.  The only doubt that he had was as to the sharing ratio.  The documents, in particular, the Declaration of Trust and the minutes of shareholders’ meetings dated 15th July 1999 and 12th March 2001, show clearly that such ratio should be 40% on the part of the defendant, which contradicts the plaintiff’s case that the ratio was 50%.  The judge found the sums totalling $1,723,947.50 referred to in the directors’ loan account “were, to all intent and purposes matched by identical payments to the Bank by the 1^st plaintiff until April and May 2001.”  The loss sharing ratio apart, the judge’s unequivocal findings were that there was the joint venture agreement in respect of the Property and the defendant and the 1^st plaintiff had paid matching sums to the Bank for repaying the mortgage loan.  The only conclusion that is permissible is that the 1^st plaintiff had proved his case of such a joint venture, and that the judge’s conclusion to the contrary plainly is wrong, if not, in the circumstance of his specific finding, absurd.

23. Even if there was no discussion between the parties about the sharing of any possible loss and, as the judge put it, loss was not contemplated, the minutes of 15 July 1999 and 12 March 2001 signed by the 1^st plaintiff and the defendant made it abundantly clear that the parties agreed that the defendant’s share of the loss should be 40%.  This is, of course, at variance with the 1^st plaintiff’s case that it was to be 50%, and also inconsistent with the evidence of the matching payments made by the 1^st plaintiff and the defendant to the Bank.  Since this is an appeal against the judges’ finding by the plaintiffs, the variance and inconsistency should fairly be resolved in favour of defendant.  In the circumstances, I am of the view that there should be judgment in favour of the plaintiffs against the defendant as to 40% of $2,543,617.83, with interest at judgment rate as from the date of the writ.

Pleading point

24. That which Mr Ng attempts to put in the way is that the plaintiffs’ pleaded claim was on the basis of an agreement for the defendant to contribute 50% of the loss, and that there was no pleading about 40%.  This flies in the face of three important documents, namely, the Declaration of Trust, the minutes of 15 July 1999 and 12 March 2001, all of which were signed by the defendant, having all been pleaded in the Statement of Claim as the defendant’s undertaking to contribute to the loss, although the claim in the relief sought was for 50%.  In view of the judge’s clear findings about these documents, despite his doubts as to the precise terms of the joint venture agreement, he should have concluded that the documents supported an agreement as to 40%. 

New trial

25. Mr Ng has, in his written submissions, urged us to order a new trial if we were of the opinion that the judge was clearly wrong in his conclusion.  However, Mr Ng is not able to point to any possible important fresh evidence that the defendant can adduce at such a new trial so as to avoid the effect of the contemporaneous documents.  I do not think it proper to order a new trial in the circumstances of this case; the parties should be spared the expense and time which would have to be incurred for a new trial.  See Millar v Toulmin (1886) 17 QBD 603 and Wong Ming Chun t/a Tai Tak School v Chen Hsun Yu and Ors, CACV 19/1968 (25 Oct 1968, unreported).

The proposed amendments

26. I consider that it is unnecessary to amend the statement of claim by pleading “partnership”, as a joint venture agreement clearly is a partnership agreement.  I will also state that I reject Mr Ng’s suggestion that it is necessary for the joint venture to be proved to involve a business, because such an agreed joint venture in the circumstances of this case clearly involved an agreement to enter into an enterprise for the purpose of profit.  And in any event, one of the very significant badges of trade, to use taxation jargon, is to resort to financing in a commercial manner, which is well borne out by the mortgaged loan from the Bank. 

27. As to the implied term sought in the amendment, I do not accept Mr Tang’s argument that since the judge found that there was a joint venture agreement between the 1^st plaintiff and the defendant, it must necessarily be on the basis of 50:50 profit and loss sharing.  I consider this proposed plea of doubtful validity in view of the judges’ obvious doubt as to the profit and loss sharing ratio.  The Declaration of Trust, as well as the minutes of two shareholders’ meetings that were signed by the parties prior to the emergence of their dispute, constitute strong evidence against such an implied term.  This is perhaps more a matter of evidence than a matter of legal implication. 

Conclusion

28. For the above reasons, I would dismiss the summons for amendment with costs to the defendant.  I would allow the appeal and enter judgment for the plaintiffs in the sum of $1,017,447.13 with interest at judgment rate from the date of writ until payment, with costs of this appeal and below. 

Cheung JA :

29. I agree.

Stone J :

30. I agree.