LAM YIN KWAN AND OTHERS v. DANNY HOR YAT FUNG AND ANOTHER

CACV 115/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 115 OF 2011

(ON APPEAL FROM HCA NO 1633 OF 2007)

------------------------

BETWEEN

------------------------

________________________________

REASONS FOR JUDGMENT

________________________________

Hon Tang VP:

1.  I agree with the judgment of Kwan JA.

Hon Kwan JA:

2.  This is an appeal of the defendants from the judgment of Suffiad J on 3 June 2011 after a six-day trial. We have dismissed the appeal with costs on an indemnity basis at the conclusion of the hearing and these are the reasons.

3.  The plaintiffs’ claim was for damages for breach of an oral agreement made on or about 22 May 2007 (“the Agreement”) between the shareholders of Meda Jewellery Limited (“Meda”) to bring about the splitting up of their interests in Meda and its subsidiaries. The trial before the judge was on liability only. He gave judgment for the plaintiffs with damages to be assessed and in a ruling on costs on 21 September 2011, he varied his costs order nisi and awarded costs of the trial on liability to the plaintiffs to be taxed on a common fund basis instead of the standard basis.

4.  There were two broad issues before the judge. The first, which was purely a question of fact, was whether the Agreement was made as alleged by the plaintiffs. The second, a mixed question of law and fact, was whether the Agreement was legally binding and enforceable. The plaintiffs had a fallback position, they invoked the doctrine of estoppel by convention if the two issues aforesaid should be found against them. As the judge had held in their favour on both issues, he did not find it necessary to deal with estoppel by convention.

5.  In this appeal, the defendants challenged the judge’s findings on both issues and relied on virtually the same grounds in seeking to impugn the finding on each. They have a heavy burden to discharge in an appeal against findings of fact. They would need to show the judge was plainly wrong in the sense that there was no evidence to support his findings of fact, or that the findings were contrary to documentary or other incontrovertible evidence that the judge had overlooked, particularly where the findings are based on the credibility of witnesses or the preference of the evidence of one witness for that of another (Ting Kwok Keung v Tam Dick Yuen & Ors (2002) 5 HKCFAR 337 at paras 41 and 42; Tang Kwok Ming v Daxprofit Scaffolding Ltd [1999] 1 HKC 657 at 663F to I). As Godfrey JA had stated clearly and emphatically in Tang Kwok Ming at the passages cited above: an appeal to the Court of Appeal is a re-hearing on the papers, the appeal court will not usurp the function of the trial judge to find the facts, and it is not enough to show there is little evidence to support the judge’s finding, or that it was ‘contrary to the weight of the evidence’.

The background

6.  The judge set out the background in paragraphs 1 to 35 of the judgment. For present purpose, the relevant background matters may be stated as follows.

7.  Meda was incorporated in Hong Kong under its former name in 1997 and was wound up by the court on 5 September 2007. It was operated by different shareholders prior to April 2000. The 1^st plaintiff, the 2^nd plaintiff, the 1^st defendant and two other investors purchased Meda from the former shareholders in 2000. The two other investors later withdrew and sold their shares to the remaining three. The 2^nd plaintiff subsequently held his shares in Meda through his company, the 3^rd plaintiff, and the 1^st defendant held his shares through his company, the 2^nd defendant. At the time Meda was wound up, its shares were held by the 1^st plaintiff (30%), the 3^rd plaintiff (30%) and the 2^nd defendant (40%). The three shareholders were the only directors of Meda.

8.  At all material times, Meda held all the shares in Anju Jewellery Limited (“Anju”), and Anju in turn owned all the shares in Forex Creation and Distribution Limited (“Forex”). Anju and Forex were incorporated in Hong Kong. Meda owned and operated a jewellery production factory in Mainland China (“the Meda PRC Factory”), with the 2^nd plaintiff as its designated legal representative. Meda, Anju, Forex and the Meda PRC Factory are referred to collectively as “the Meda Group”.

9.  Disagreements between the shareholders in Meda arose in March 2007. On 4 May 2007, the 1^st plaintiff wrote to the 2^nd plaintiff and the 1^st defendant informing them of her intention to withdraw from the group and seeking compensation on the items listed in her letter. This was followed by several discussions among them in May.

10.  On the plaintiffs’ case, the discussions culminated in the Agreement reached by the parties at a meeting on 22 May 2007, the principal terms of which were that by 30 June 2007, the 1^st plaintiff would take over Meda, the 2^nd plaintiff would take over the Meda PRC Factory, and the 1^st defendant would take over Anju and Forex. The parties also agreed on the mechanism to carry the principal terms into effect, as set out in paragraph 11 of the judgment.

11.  On the defendants’ case, at the meeting on 22 May, the parties had only reached “certain rough understanding” as to the division of the Meda Group. There was no concluded agreement as there were various outstanding matters to be ascertained, verified or confirmed.

12.  It was not in dispute that the following matters had taken place after the meeting on 22 May 2007:

(1)     The 1^st defendant had sent emails to two overseas customers on 22 May 2007 and 27 May 2007 to inform them that a decision was made by all the directors to terminate their business co-operation by the end of June and that each shareholder would take over separate parts of the business of the group in the manner as mentioned above.

(2)     On 25 May 2007, Meda signed a provisional sale and purchase agreement to sell its office premises at Hunghom, Kowloon for $7.8 million. The formal sale and purchase agreement executed by Meda was dated 8 June 2007.

(3)     On 31 May 2007, Meda issued letters to four employees to inform them that their employment would be terminated with effect from 1 June 2007, “due to restructuring of the company”. They included the 1^st defendant’s secretary and his sister-in-law. Other staff members of Meda were informed of the termination of their employment by 30 June 2007.

(4)     The factory workers in the Meda PRC Factory were laid off in June 2007 and a chart was prepared setting out the amount of compensation to be paid to each worker upon the termination of their employment on 30 June 2007.

(5)     A document entitled “All Warehouse Listing” dated 15 June 2007 was prepared by the staff of the group setting out the quantity and value of the inventories and stock kept in the warehouses and stating that they were to be divided in the ratio of 40:30:30.

13.  On 16 June 2007, there was a shareholders’ meeting of Meda attended by all the shareholders. The minutes of the meeting were drawn up by a staff of Meda but were not signed by any of the shareholders. According to the minutes, the 1^st defendant requested to appoint an individual to represent the 2^nd defendant to witness the payment of redundancy payment to the factory workers and this was accepted by the 2^nd plaintiff. Other matters were discussed and agreed. Sales orders received before 30 June 2007, regardless of the delivery date, were to be included in the calculation of the current group companies’ profits. Meda should arrange full settlement of its gold loan with the HSBC on or before 30 June 2007 and that the required fund would be obtained from “HSN [a major customer of Meda] invoices factoring with HSBC”. The 2^nd plaintiff would make arrangements to cease production from 25 June 2007 in order to facilitate a stock taking in the factory around 27 June, and he would arrange the calculation of the work in progress. After the completion of the above procedures, the interested parties would invite the appointed auditor to do the stock checking.

14.  The 1^st defendant disputed the accuracy of the minutes of the meeting on 16 June 2007 for the first time when giving his oral testimony.

15.  Without forewarning and on 26 June 2007, the 1^st defendant caused the 2^nd defendant to present a petition to wind up Meda on the ground of breakdown of mutual trust and confidence between the shareholders. As a result of the petition, the bank accounts of Meda were effectively frozen, until the 1^st and 2^nd plaintiffs had obtained validation orders from the court to enable Meda to pay its staff and perform its outstanding sales orders. The defendants refused to withdraw the petition notwithstanding the letter of demand of the plaintiffs’ solicitors dated 25 July. The writ in this action was issued on 28 July and the plaintiffs later decided not to oppose the winding-up petition or seek specific performance of the Agreement in their writ action but instead claim damages against the defendants for breach of the Agreement.

The judge’s findings

16.  The judge found both the 1^st and 2^nd plaintiffs to be honest witnesses doing the best they can to tell the court all that had transpired between them and the 1^st defendant in this matter. He found the 1^st defendant not only an unreliable witness, but also a dishonest witness, so much so he rejected not only the explanation given by the 1^st defendant in an attempt to explain away why he sent those emails to the overseas customers mentioned earlier, but also rejected all his evidence where they conflict with the evidence given by the 1^st and 2^nd plaintiffs.

17.  After a careful analysis of the evidence, the judge rejected categorically the explanation of the 1^st defendant on the underlying reason for the various undisputed steps taken by the parties after 22 May 2007 to the effect that those steps were not taken to implement the concluded agreement to split up the Meda Group. He also rejected the 1^st defendant’s allegation that the minutes of the shareholders’ meeting on 16 June 2007 was not an accurate record.

18.  The judge accepted the evidence of the plaintiffs in its entirety and made a finding of fact that the parties had reached the Agreement on the terms as stated by the plaintiffs. He then considered a number of matters raised on the defendants’ behalf in support of their contention that owing to uncertainties relating to those matters, the Agreement was so vague and uncertain that it cannot be legally enforceable in law. These matters were addressed in paragraphs 103 to 161 of the judgment. In summary, he rejected the defendants’ contention either because the alleged uncertainty did not arise on the facts found by him, or it would have no impact on the binding nature of the Agreement, or that a workable formula was provided for in the Agreement without the need for every single detail to be worked out. He also rejected the defendants’ contention that the plaintiffs’ subsequent behaviour based on an allegation of wrongful solicitation of customers by the 1^st plaintiff and the omission to arrange for the transfer of shares in Meda, Anju and Forex, should cast doubt on the existence or binding effect of the Agreement. He therefore found in favour of the plaintiffs that the Agreement was binding and enforceable.

This appeal

19.  The approach taken by Mr Grossman, SC for the appellants was one that was decried by Godfrey JA in Tang Kwok Ming at 664A to D. Counsel trawled through the judgment and tried to pick holes in it treating these as grounds of appeal, contending that these matters taken in combination should cast doubt on the judge’s findings. He was seeking to re-argue matters relating to the credibility of the 1^st and 2^nd plaintiffs and to defend the credibility of the 1^st defendant. Each of the arguments he raised had been analysed and rejected by the judge. Repeating the defendants’ arguments advanced below does not demonstrate in what way the judgment went wrong. For this court to interfere, he would need to show the judge was plainly wrong in the sense as mentioned earlier. This is plainly not a case in which there was no evidence to support the judge’s findings, or that the findings were contrary to documentary or other incontrovertible evidence. Mr Grossman’s submissions went to the weight of the evidence, which was a matter for the trial judge. He has simply failed to show why the findings of the judge could be said to be wrong, let alone plainly wrong.

20.  I will deal concisely with the grounds raised by Mr Grossman in this appeal.

The pleading point

21.  Mr Grossman took a pleading point that there was an inconsistency between the facts found by the judge and the plaintiffs’ case as pleaded. In the amended statement of claim, it was pleaded that the Agreement, with the principal terms and the terms on the mechanism to implement the principal terms, was made at a meeting held on or about 22 May 2007. Mr Grossman referred to the oral evidence of the 1^st and 2^nd plaintiffs and submitted that the effect of their evidence was that some of the terms of the Agreement were agreed before 22 May, which was contradictory to their pleaded case. He further submitted that the judge had erroneously found in paragraphs 43 to 44 of the judgment that the Agreement was formed on dates between 4 and 21 May 2007, not on or about 22 May 2007 as pleaded, and this was impermissible as this constituted a radical departure from the pleaded case.

22.  I do not think that was a fair and proper way of reading the relevant parts of the judgment, which I set out below:

“42. Looking at both the witness statements of the 1^st and 2^nd defendants [this is clearly a clerical error and should read “plaintiffs”], while accepting that on one reading of their witness statements, it is possible to infer that all the terms of the Agreement were agreed between the three of them at the meeting on 22 May 2007, however, it remains a fact that there is no clear and express statement to that effect. On the other hand, both the witness statements of the 1^st and 2^nd plaintiffs did expressly state that ‘the parties began to negotiate and explore the possibilities of splitting their partnership in the operation and management of the Meda Group in or about mid May 2007.’

43.  In those circumstances, whatever agreement may have been made as to the sale of the Property and or the distribution as to the assets of the Meda Group in accordance with the ratio of shareholding, if that had been agreed prior to 21 May 2007, could only have been conditional upon final agreement as to how the companies within the Meda Group should be divided among the three of them.

44. Looked at in this way, until there was final agreement as to who would take which of the companies within the Meda Group, only then would the other terms of the Agreement fall into place even though they may have been discussed or conditionally agreed before the 22 May 2007.”

23.  In other words, what the judge was saying there was that whatever terms might have been discussed or even agreed by the parties before 22 May 2007, there was no complete or concluded agreement until they reached agreement on 22 May 2007 as to who was to take over which company in the Meda Group. There is no departure from the pleaded case that the Agreement, being the concluded agreement, was made on 22 May 2007.

24.  This argument was raised in the court below and rejected by the judge in paragraph 48 of the judgment for the reason that only facts and not evidence need be pleaded and there can be no objection to the way in which the plaintiffs had pleaded the Agreement. I respectfully agree.

Inconsistencies in the evidence of the 1^st and 2^nd plaintiffs

25.  It was argued that there were inconsistencies between the oral testimony of the 1^st and 2^nd plaintiffs as to the extent of the terms agreed prior to 22 May 2007 and inconsistencies between their oral testimony and their witness statements. These alleged inconsistencies were raised as stated in paragraphs 38, 39, 40 and 41 of the judgment and rejected by the judge in paragraphs 45, 46 and 47.  The judge was satisfied that such discrepancies can only be attributed to poor memory rather than untruthfulness on the part of the 1^st and 2^nd plaintiffs. There is no substance in this argument.

Uncertainties relating to the Agreement

26.  It was submitted here that in view of the uncertainties raised, the judge should have found that the Agreement had not been concluded, or that even if it were concluded, it was not contractually binding and legally enforceable. As mentioned earlier, each of these alleged uncertainties was raised in the court below and had been dealt with by the judge.

27.  Mr Grossman submitted there was a “core issue” not addressed in the Agreement and that was the compensation the 1^st plaintiff should pay for taking over Meda as being “the lion’s share of the split”. On the evidence of the plaintiffs accepted by the judge, the evidence of the 1^st defendant as rejected by the judge, and the findings made by the judge, this question of compensation was never raised or discussed at the time and it simply did not arise. The relevant parts of the judgment are paragraphs 103 to 108. There is no basis to challenge the judge’s analysis and findings, and the group income statement and group balance sheet that Mr Grossman referred us to simply do not assist him.

28.  The next complaint was the absence of arrangement as to the discharge of personal guarantees. This was thoroughly considered in paragraphs 127 to 137 of the judgment and dismissed as a red herring. I entirely agree.

29.  Next was the absence of arrangement as to the value and intellectual property rights of the moulds. On the judge’s findings, the terms of the Agreement have adequately dealt with the ownership of these properties, and from the documentary and oral evidence, it is clear that those moulds which were the properties of the customers would be returned to them. The judge’s reasoning is found in paragraphs 120 to 124. There is nothing in this point.

Inconsistent behaviour of the parties after the Agreement

30.  The judge rightly rejected the argument on the lack of arrangement to effect the transfer of shares for the reasons in paragraphs 157 to 161 of the judgment. He accepted the evidence of the 1^st plaintiff on this. Nothing more need be said.

31.  On the absence of notice to the banks to terminate the personal guarantees, there is no substance in this point as mentioned earlier.

32.  As for the alleged wrongful solicitation of business by the 1^st plaintiff, the judge had made a specific finding of fact that the 1^st plaintiff was genuinely mistaken about the status of Amkor Pacific and that she had genuinely thought she had the right to deal with this customer despite the promise given by her in the Agreement not to deal with the clients of Anju and Forex for a year. This is dealt with in paragraphs 144 to 148 of the judgment. I see no basis to impugn this finding.

33.  Mr Grossman referred to an email from the 1^st to the 2^nd plaintiff dated 14 June 2007 in which the 1^st plaintiff referred to “New Meda” and sought to cast doubt on her credibility in the explanation she gave about this, the gist of which was to the effect that the new company would take over the sales order just received. This would seem to be the only point not addressed in the judgment. I agree with Mr Wong, who appeared for the plaintiffs, there is no inconsistency in her evidence. The parties had agreed in the Agreement that sales orders with delivery dates after 30 June 2007 would go to the new company, hence, the 1^st plaintiff’s understanding in her email of 14 June 2007 was correct. It was only at the shareholders’ meeting on 16 June 2007, as evidenced by the minutes of that meeting, that it was agreed that sales orders received before 30 June, regardless of the delivery date, would be included in the pool of assets to be divided.

34.  Lastly, Mr Grossman pointed to the failure of the plaintiffs’ solicitors to mention the Agreement in their letter dated 29 June 2007 and that the 1^st plaintiff did not mention the terms of the Agreement fully in her 1^st and 6^th affirmations filed in the winding-up proceedings. These matters were dealt with adequately by the judge in paragraphs 49 to 52 of the judgment.

Inherent improbabilities

35.  Mr Grossman also complained that the judge had failed to approach his assessment of evidence on the basis of inherent improbabilities, in view of the fact that the Agreement with detailed complex terms was not reduced into writing, the inconsistencies in evidence and behaviour of the 1^st and 2^nd plaintiffs, and the uncertainties relating to the Agreement.

36.  It could not have escaped the judge’s attention that the Agreement sued upon was made orally. The fact that it was not reduced into writing must also be viewed against the findings that the parties had taken steps to implement a number of its important terms and there was further discussion and agreement on the implementation of its terms as recorded in the minutes of the meeting on 16 June 2007.

37.  Although the judge did not mention expressly he had assessed the evidence on the basis of inherent improbabilities, it is apparent from his judgment that he had borne this firmly in mind when he subjected the evidence adduced on both sides to a close analysis in paragraphs 42 to 98 of the judgment.

Conclusion and costs

38.  There is no merit in any of the grounds advanced for the defendants in this appeal and it should never have been brought. Costs of this appeal should follow the event.

39.  Suffiad J had awarded costs to the plaintiffs on a common fund basis, to mark the court’s disapproval of the defendants’ conduct in misusing the judicial process of a winding-up petition against Meda to wriggle out of a concluded bargain. This, coupled with the manner in which the defendants had defended the action brought by the plaintiffs against them on the oral agreement, warranted a costs order beyond the party and party basis. I see no reason to interfere with this exercise of discretion by the judge.

40.  As this appeal from the judgment is entirely without merit, this court should likewise mark its disapproval of the defendants’ conduct in pursuing this hopeless appeal. It is appropriate in the circumstances that the costs awarded to the plaintiffs in this appeal should be on indemnity basis with a certificate for two counsel, and we so order.

Hon Chu JA:

41.  I agree.