SAMLANE DEVELOPMENT LTD v. FUNG CHI FAI

HCA 318/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 318 OF 2006

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(By original writ and order to carry on)

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J U D G M E N T

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Introduction

1. This is an action commenced in February 2006 by Samlane Development Ltd (“Samlane”) against the defendant (“Defendant”) to recover a debt owed to Samlane.  Samlane had since been wound up on 4 September 2006.  Simon Blade and Bruno Arboit were appointed liquidators (“Liquidators”).

2. On 13 March 2009, the Liquidators were granted leave, pursuant to section 199(3) of the Companies Ordinance to enter into an option and investigation agreement (“Option Agreement”) with Remedy Asia Limited (“Remedy Asia”) on certain terms set out in a document (“2009 Order”).  Pursuant to that order, the Liquidators, Samlane and Remedy Asia entered into the Option Agreement on 5 May 2009.  Under clause 4.2 of the Option Agreement, upon the exercise of the option by Remedy Asia within the option term, the Liquidator must execute a deed of assignment of the action to Remedy Asia (the “Deed”). 

3. On 13 May 2010, Messrs Gall, solicitors acting for the Liquidators, sent a final version of the Deed to the Liquidators and Remedy Asia.  On 11 June 2010, Remedy Asia confirmed by email that it would take an assignment of Samlane’s cause of action.  The Deed was then executed on or about 24 June 2010.

4. On 17 September 2010, the Liquidators made an ex parte application for Remedy Asia to substitute Samlane as the plaintiff in these proceedings.

5. On 28 January 2011, Master Chow made an order making Remedy Asia a party to this action and an order that the action be carried on as if Remedy Asia had substituted Samlane as plaintiff.  The order was served on the Defendant’s solicitors on 7 March 2011.

6. On 21 March 2011, Messrs Gall, now as solicitors for Remedy Asia, served a copy of the Option Agreement and the Deed on Messrs B Mak & Co, who was acting for the Defendant in an earlier action commenced by Samlane.

7. Before dealing with the substantive issues in this action, I first deal with two preliminary issues, the option issue and assignment issue, raised by Mr Lin, counsel for the Defendant. 

The option issue

8. As a matter of law, an option is not a contract but an irrevocable offer that matures into a bilateral contract upon due exercise of the option during the option term: see Mountford v Scott[1] and Di Luca v Juraise (Springs) Ltd[2].   To be valid, the exercise of an option to acquire an interest in property must be performed strictly in accordance with its prescribed terms: see Hare v Nicoll[3] and Dibbins v Dibbins[4].

9. Based on the above legal principles, Mr Lin, counsel for the Defendant, argues that as Remedy Asia failed to exercise the option within the option term under clause 4.1 of the Option Agreement, the option expired and the Deed entered pursuant to clause 4.2 is invalid.  Mr Nip, counsel for Remedy Asia, argues that on the true construction of clause 4.1, the Deed was entered into within the option term.

10. Clause 4 of the Option Agreement provides as follows:

“4.1  The Option will expire six months after the date of this agreement or such other date as may be agreed in writing between the parties to this agreement or on the date on which the Funder ceases funding the Investigation pursuant to clause 6 below (the “Option Term”).

4.2  In respect of the Proceedings, the Option maybe exercised by the Funder giving notice in writing to the Liquidators at any time during the Option Term.

4.3  Upon the Liquidators receiving the notice referred to in clause 4.2 above at any time during the Option Term including on the last day of the Option Term, they must execute a Deed of Assignment to the Funder.”

11. It is common ground that reference to clause 6 in clause 4.1 was a typographical error and should have been correctly stated as clause 5.  Clause 5 provides as follows:

“5.   In the event that the Funder determines that the prospects of the Investigation identifying assets of the Defendant with reasonable prospects of realisation are no longer economically justifiable after taking into account the costs, risks and potential rewards, the Funder may cease funding the Investigation by giving notice in writing to the Liquidators (“Termination”).”

12. There are three limbs under clause 4.  The option term was (1) a period of six months from the date of the Option Agreement; or (2) such other period as the parties may agree in writing; or (3) until such period upon the funder ceases funding the investigation pursuant to clause 5. There is no dispute that a period of six months lapsed on 5 November 2009 under the first limb and that the parties have not agreed to a longer term in writing under the second limb. 

13. Relying on his construction of the third limb under clause 4.1, Mr Nip argues that the option term did not expire until 24 June 2010 because Remedy Asia never ceased funding the investigation or gave written notice to cease funding to the Liquidators pursuant to clause 5.  Mr Lin argues that clause 5 is only an escape clause to allow early termination of the Option Agreement before the six months period.

14. I agree with Mr Lin.  The first limb provides a term of six months by default.  This term may be reduced or increased by mutual agreement in writing under the second limb.  Mr Nip’s construction effectively means that the term may be unilaterally increased by Remedy Asia’s inaction in not negotiating and agreeing for an extended term in writing under clause 4.1 or by not giving notice of its intention to cease funding under clause 5.  Whether Remedy Asia continued to fund the investigation was not a requirement under either clause 4.1 or 5.  There is no evidence that Remedy Asia had continued to fund the investigation up to May or June 2010.  On Mr Nip’s construction, it means by doing nothing Remedy Asia may unilaterally and indefinitely extend the option term.  That could not have been the intention of the parties.  On a fair reading of clause 4.1, the first limb provided a default term.  If no agreement was reached under the second limb or if Remedy Asia did not exercise its right to termination under clause 5, which must necessarily mean early termination, and did not give written notice to the Liquidator of its intention to cease funding under clause 5, then the default option term applied.  This construction is simple, logical and makes sense.

15. Relying on his construction of the second limb under clause 4.1, Mr Nip argues that the Deed made on 24 June 2010 represented the agreement in writing between Remedy Asia, Samlane and the Liquidators that the term would only expire on that day.  The fallacy of this argument is that the Deed is a product of the exercise of the option during the option term.  It cannot be treated as an agreement to extend the term, notice of exercise of the option and the final product of such exercise.

16. Alternatively, Mr Nip relies on the email dated 13 May 2010 from Messrs Gall enclosing a final version of the Deed to the Liquidators and Remedy Asia as reflecting the parties’ agreement for the option term to expire upon the full execution of the Deed. That email was just a correspondence from Remedy Asia’s solicitors. At the highest, it reflected the intention of Remedy Asia and the Liquidator to enter into the Deed and their intention to extend the option term.  Without a formal acceptance, the parties were not ad idem yet.  That email was short of an agreement to extend the option term.  It certainly was not a notice in writing of Remedy Asia’s exercise of the option made during the option term. Not only that the option term had not been extended, it had actually long expired by default under the first limb of clause 4.1 before the email was sent.  That email could not constitute a valid exercise of the option. 

17. For the same reason, Remedy Asia’s email of 11 June 2010 in response to Messrs Gall’s email of 13 May 2010 confirming it would take the assignment was not an agreement to extend the option term or a valid written notice of exercise of the option, the option having long expired.

18. Mr Nip’s argument that the option term expired on the day when Remedy Asia executed the counterparts of the Deed in or around mid June 2010 also fails for the same reasons. 

19. Next, Mr Nip argues that even if the parties to the Option Agreement had not strictly complied with clause 4, the parties had clearly waived such strict compliance by conduct.  Such conduct includes: (1) Remedy Asia’s conducting investigations, engaging an investigator to investigate the assets of the Defendant and his ability to satisfy any judgment obtained against him in these proceedings together with engaging the Liquidators regarding the outcome of the investigations between 5 May 2009 and 24 June 2010; (2) the parties negotiating and agreeing on the terms of the Deed in 2010; and (3) the parties executing the Deed on 24 June 2010, without any complaint on the part of any party to the Deed of non-compliance with the provisions of clause 4 of the Option Agreement.  He quotes the case of Friary Holroyd and Healey’s Breweries, Limited v Singleton[5] in support of his argument.

20. Friary Holroyd and Healey’s Breweries, Limited v Singleton was a case of sale and purchase of property in which the purchaser failed to give notice to exercise the option to purchase under the lease.  That case is distinguishable from the present one in that at the time of purchase the option was still available to the purchaser. Had the purchaser exercised the option, it would be entitled to buy and the vendor obliged to sell.  The parties proceeded on that assumption and the English Court of Appeal held there was a waiver.  But in the present case the option had long expired.  The Liquidators were not obliged to assign the chose in action.  They may not be compelled to sign the Deed.  But they did sign. What does that leave Remedy Asia with?

21. Mr Lin argues that the exercise of the power of sale by the Liquidators is subject to the control of the court as embodied and set out in the 2009 Order.  In order to effect an assignment of the chose in action, both the Liquidators and Remedy Asia must comply with the terms and conditions of the Option Agreement as sanctioned and imposed by the 2009 Order. As Remedy Asia failed to exercise the option, the Deed was not validly or effectively entered into and the interest in the action has not been effectively assigned to Remedy Asia.  Therefore Remedy Asia has no right to sue the Defendant.

22. In reply, Mr Nip argues that the Liquidator has statutory power under section 199(2)(a) to sell the chose in action of Samlane independently of the Option Agreement.  That section gives a liquidator power to sell the property of a company in liquidation.  Section 199(2)(a) provides as follows:

“Subject to section 193(3), the liquidator in a winding up by the court shall have power –

(a)  to sell the real and personal property and things in action of the company by public auction or private contract, with power to transfer the whole thereof to any person or company, or to sell the same in parcels;”

I agree with Mr Nip’s submission.  Unlike other provisions of the Companies Ordinance which gives a liquidator power to do certain things only with the sanction of the court, such as section 199(1) in respect of the power to bring or defend an action on behalf of the company, section 193(3) gives a liquidator statutory power to sell the company’s chose in action without the sanction of the court or the committee of inspection. 

23. The effect of Remedy Asia failing to exercise the option under the Option Agreement is that it may not compel the Liquidators to enter into the Deed.  But that could in no way prevent the Liquidators from exercising their power of sale under section 199(2)(a) to sell the chose in action to Remedy Asia on similar or different terms as those contained in the Deed.  For this reason, I find that the Deed was validly entered into and effective in assigning this action to Remedy Asia.

The assignment issue

24. Remedy Asia relied on service of the Option Agreement and the Deed by Messrs Gall (formerly Messrs Gall & Lane) on Messrs B Mak & Co on 21 March 2011 as sufficient service of notice of assignment of the chose in action under section 9 of the Law Amendment and Reform Consolidation Ordinance (“LARCO”).  Mr Lin attacks this notice as defective on two grounds. 

25. First, Mr Lin relies on Compania Colombiana de Seguros v Pacific Steam Navigation Co[6] to argue that the notice was defective as it was served after Remedy Asia had become a party to this action on 28 January 2011.  This rule in Compania Colombiana has been doubted in recent days.  The learned authors in Chitty on Contracts[7] wrote:

“It is arguable that this should no longer be the rule; and that instead a court could prevent any unfairness to defendants by exercising its discretion to disallow an application to amend the particulars of claim so as to add the assigned claim.  Say, for example, a claimant is met by the defence that part (but not all) of what he is claiming is his company’s, rather than his personal, claim.  If he then takes a legal assignment from the company and gives written notice to the defendant, should he be able to apply for an amendment without bringing a fresh action?  Or is the “rule” in the Compania Colombiana case a rigid one that would automatically mean that such an application would fail?”

That precisely reflects the current views of what is left of the “rule”.  In this area of the law, there has been a developing trend of moving away from technicality to fairness.  The development of the principles in equitable assignment and Weddell & Anr v JA Pearce & Major & Anr[8] are clear examples of this developing trend.

26. In the present case, there is just no way that the notice could have been served before commencement of the action as the action had been commenced by Samlane against the Defendant in February 2006 prior to its winding up.  This action was then assigned by the Liquidators to Remedy Asia on 24 June 2010, more than four years later.  Then seven months later, the master made an order that Remedy Asia be made a party to this action and that the action be carried on as if Remedy Asia had substituted Samlane.  Service of the notice of assignment before commencement of the action is an impossibility.  The late service of the notice created no unfairness to the Defendant.  The action has already been commenced against him by Samlane; and Remedy Asia has, by order of the court, substituted Samlane.  To comply with the “rule” would require Samlane or Remedy Asia in its place to discontinue this action, serve the notice and recommence another action.  That would serve no purpose.  The facts of the present case demonstrate there is no useful purpose to be served by the “rule” except where unfairness would result due to want of service of the notice.  I would limit the application of the “rule” to circumstances where lack of notice would create procedural unfairness to the defendant.  The “rule” does not apply to the facts of this case.

27. Second, Mr Lin complains that the notice was served on the Defendant’s solicitors without obtaining prior confirmation that they were authorised to receive such notice.  Section 9 of LARCO requires express notice of assignment of the debt be given to the “debtor, trustee or other person from whom the assignor would have been entitled to receive or claim such debt or chose in action”.  I am unable to read the section as requiring personal service of the notice on the debtor, trustee or other person.  The test for service is whether the service was effective to bring the notice to the attention of the debtor.  The Defendant’s solicitors were instructed to represent the Defendant albeit in another action commenced by Samlane to which the debt was not related.  They must have authority to accept service of any process in a connected proceeding by the very opponent against whom they were litigating.  There was no need for Samlane to first ascertain from the Defendant’s solicitors whether they had authority to accept the notice before serving it on them. 

28. Even if the service was ineffective, the assignment nevertheless remains valid in equity: see Brandt’s Sons & Co v Dunlop Rubber Co[9]. The lack of notice will not prevent the assignee from proceeding with his action on the footing that he is an equitable assignee: see Weddell v Pearce & Major[10].  The assignee is entitled to sue in his own name, though it remains the practice that the assignee is normally required to join the assignor: see Brandt’s Sons & Co v Dunlop Rubber Co.  Joining the assignor would serve a useful purpose, if the assignor has not disposed of the whole of his interest in the chose in action assigned.  But where the assignor retains no interest in the chose in action and the assignment only fails to be statutory because it was not in writing or because no notice has been given, joining the assignor would serve no useful purpose.  In the United Kingdom, there has been a move to dispense with joining the assignor under those circumstances: see Chitty on Contracts[11]; The Aiolos[12]; Weddell v JA Pearce & Major[13]; and Raiffeisen Zentralbank Osterreich AG v Five Star General Trading LLC[14].  As Samlane or the Liquidators had retained no interest in the debt, I consider joining them in this action wholly unnecessary and a waste of costs.  The Defendant’s objection to the service of the notice is frivolous.

Background

29. Samlane was a private company incorporated on 4 January 1994.  It carried on business of, inter alia, providing transportation and logistics services.  It was subsequently wound up on 4 September 2006. 

30. Prior to the incorporation of Samlane, the Defendant was employed as a vehicle attendant by Weiss Engineering Company Limited (“Weiss Engineering”) owned by Ng Hok Sin.  After ten years of service, he was promoted to be the manager of the delivery department.  Then, Ng Hok Sin’s son, Robert Ng, returned to Hong Kong upon his graduation in the United States and took over Weiss Engineering from his father. 

31. In about 1994, Robert Ng and the Defendant agreed to incorporate Samlane to carry on the business of transportation and logistics services.  There were three shareholders: the Defendant, Robert Ng and John Mackie, each holding 45%, 45% and 10% of the issued shares of Samlane respectively.  They were all appointed directors of Samlane.  Robert Ng was responsible for finance and management while the Defendant was responsible for operation.  John Mackie’s role in Samlane was nominal.

32. Initially, Samlane provided transportation and logistics services to three major supermarkets, PARKnSHOP, Wellcome and CR Vanguard. It mainly transported food cargos, including frozen meat, fruit and vegetables.  In 1995, Samlane started to develop fruits merchandizing, processing and packaging business solely for PARKnSHOP.  It set up a factory in Buji in China for food processing and packaging.  In 1997, the factory employed 5 management staff and over 120 workers.  Samlane had a fleet of 50 refrigerated trucks and employed more than 250 employees.  Its annual revenue was in excess of $60 million.  It required cash flow of $2 million during peak seasons and $1 million during low seasons.

33. The Defendant was stationed in China most of the time.  He came back to Hong Kong about four times a week when he would attend Samlane’s office in Tsimshatsui for about two hours.  On those occasions, he would submit invoices for reimbursement to Robert Ng’s assistant, Swendy Chung who was in charge of the accounting department of Samlane.  Swendy Chung would check the invoices and issue him a cheque in payment.  He would also sign cheques for Samlane.  Samlane had a bank account with Hong Kong Bank.  Robert Ng, Swendy Chung and the Defendant were authorised signatories.  The cheques issued by Samlane had to be co-signed by any two of them.

34. In 2002, the Defendant’s son, Sam Fung, joined Samlane as the head of the delivery department in Fanling, which was set up in 2001.  His duty was to oversee the work of that department and to handle and coordinate the logistics process between China and Hong Kong.

35. The Defendant and Robert Ng had a common friend, Tse Yiu Lam who operated Shenzhen Dragon Foods Co Ltd (“Dragon Foods”), which was a client of Samlane.  In March 2003, the Defendant and Robert Ng agreed for Samlane to inject $5 million into Dragon Foods to acquire 51% interest in that company.  Sam Fung was relocated to work in Dragon Foods.  As more efforts were devoted to Dragon Foods and as the fruit and vegetable supplies business to PARKnSHOP was incurring loss, that business was suspended and Samlane’s factory in Buji was closed down.

36. After about a year, dispute arose among the Defendant, Robert Ng and Tse Yiu Lam over the operation of Dragon Foods. Employees and suppliers were not paid.  Dragon Foods was closed down by the Jiangmen court towards the end of 2004.  Sam Fung returned to the delivery department of Samlane in Fanling.

37. Towards Chinese New Year in early 2005, Samlane was also in financial difficulties and had no funds to pay debts and salaries to its employees.  Robert Ng and the Defendant agreed to make directors’ loans to Samlane.  On 7 February 2005, the Defendant transferred $500,000 from his personal account to the company to pay year-end salaries to Samlane’s employees.  On the following day, Robert Ng gave notice to terminate Sam Fung’s employment with effect from 28 February 2005. 

38. On or about 1 March 2005, the Defendant received a letter from Samlane’s company secretary, enclosing a copy of minutes of a board meetings held on 1 January 2005.  The minutes recorded that a resolution was passed by Robert Ng and John Mackie to change the Defendant’s position as executive director to non-executive director; to suspend payment of remunerations to all directors; and to employ Robert Ng as the chief executive officer at a remuneration to be agreed.  The Defendant had no notice or knowledge of this meeting. 

39. Subsequently, the password to the door of the office of Samlane was changed without the Defendant’s knowledge.  The Defendant was denied access to the office and excluded from management of Samlane.  He also lost contact with Robert Ng. 

40. On 2 March 2005, Robert Ng and John Mackie passed another resolution to remove the Defendant from his office as executive director and legal representative of Samlane’s subsidiary in Shenzhen.  On 25 March 2005, Samlane’s lawyers in Guangdong informed the Defendant of the resolution.

41. On 25 April 2005, Sam Fung established Jumbo Faith Logistics Limited (“Jumbo Faith”).

42. On 1 May 2005, Jumbo Faith reached an agreement with the vegetable suppliers of PARKnSHOP to provide them with plastic basket rental logistics services.

43. On 25 October 2005, Samlane issued a writ of summons with a statement of claim in HCA 2102 of 2005 against the Defendant and Jumbo Faith suing the Defendant for obtaining business for Jumbo Faith in breach of his duty as director of Samlane.  It also sought an interlocutory injunction against the Defendant and Jumbo Faith restraining them from soliciting, entering into, performing or continuing to perform any contract with PARKnSHOP or any vegetable suppliers supplying Chinese vegetables to PARKnSHOP.  The Defendant and Sam Fung instructed Messrs B Mak & Co to represent the Defendant and Jumbo Faith.  Samlane’s application for injunction was dismissed by Deputy High Court Judge Saunders (as he then was) on 23 January 2006 and the action was terminated.  Then Samlane commenced this action on 15 February 2006.  Seven months later, Samlane was ordered to be wound up.

Samlane’s case

44. Samlane claimed a total debt in the amount of $6,241,196.18.  Its claim is built on (1) an opening balance stated in an audit confirmation signed by the Defendant acknowledging his indebtedness to Samlane as at 31 March 1999; (2) outstanding balance of advance payments made to the Defendant; (3) outstanding balance of miscellaneous items; and (4) improper withdrawals.  From the aggregate sum above, Samlane gives credit to a total sum of $1.5 million advanced by the Defendant to Samlane in the form of director’s loan. 

Credibility of witnesses

45. The outcome of this trial depends very much on my finding of fact.  At the heart of this case is the credibility of the parties’ witnesses.  Remedy Asia called two witnesses, Arboit and Robert Ng.  The Defendant gave evidence but called no other witnesses.  This case stands or falls on my finding of their credibility.  Remedy Asia, as plaintiff, bears the burden of proof.  Ultimately, whether its case is proved depends very much on the evidence of Robert Ng.

46. Arboit, as one of the Liquidators, has no personal knowledge how the debt arose.  He gave evidence on his interpretation of the accounting documents.  His interpretation is consistent with Samlane’s case. 

47. Robert Ng is a highly educated person.  After completing his studies in the United States, he returned to Hong Kong and took over his father’s business.  Based on his conviction and imprisonment for accepting an advantage for sponsoring bogus membership in the Hong Kong Jockey Club, Mr Lin submits that Robert Ng is dishonest and incredible.  I would not allow myself to be influenced by the conviction but would look critically at the evidence.  Robert Ng impressed me as a sophisticated and arrogant person. He dealt with the Defendant and his son in a very high-handed manner.  He dismissed the Defendant’s son, not to mention that was one day after the Defendant procured a loan of $1 million from a friend for Samlane and $500,000 from his own source to finance the payment of year-end salaries to Samlane’s staff.  Then he teamed up with John Mackie to exclude the Defendant from the company (see §§ 50-54 below).  I have serious concerns if he was acting in good faith in his dealing with the Defendant in relation to the affairs of Samlane and in his commencing this litigation.  He is a really sophisticated and high-handed person, whose evidence I have to treat with extreme care.  For reasons as I shall explain in my analysis of the evidence, I do not find him a credible witness.

48. The Defendant came from a humble background.  He was educated up to primary level.  He started his carrier as a vehicle attendant.  Presumably, for his hard work, he rose to the position of manager and was made a partner in Samlane.  He has no knowledge of accounting and little knowledge of English.  By contrast, he is unsophisticated and simple.  He was subjected to a very searching cross-examination by Mr Nip.  He was confused about some of the dates.  He showed some inconsistencies in his answers to questions about accounting matters.  Given his background and the fact that he was not responsible for accounting matters, I consider his position understandable.  He departed from his pleaded defence in admitting his signature on the 1999 audit confirmation.  For reasons as I shall explain, I do not hold that against him for that reason.  However, there are aspects of his defence in which he was shown to be an insincere witness.  He is an opportunist.  I do not find him a credible witness either.

49. Both Robert Ng and the Defendant are not wholly credible witnesses.  I have to test their evidence against incontrovertible facts and contemporaneous documents.  I have to pick and choose their evidence and allow myself to be guided by contemporaneous documents and inherent probability.  On balance, I consider the Defendant a more credible witness. 

Exclusion of the Defendant from Samlane

50. Whether the Defendant was excluded from Samlane is not a relevant issue in this action.  However, his exclusion sets the scene in which the present action arose and provides the evidence of Robert Ng’s motive against the Defendant.

51. The following facts are not in dispute. Towards the end of 2004 and the beginning of 2005 Samlane was not in good financial condition. Robert Ng and the Defendant agreed to make directors’ loans to Samlane. Robert Ng advanced $2 million and the Defendant advanced $1 million.  On 7 February 2005, the Defendant further advanced another sum of $0.5 million to Samlane to pay year-end salaries for its staff.  Then on the following day, Robert Ng dismissed the Defendant’s son with effect from 28 February 2005.  On or about 1 March 2005, the password of the door to the office was changed.  This was not disputed by Robert Ng.  The Defendant said he was not informed of the change, was excluded from the office of Samlane and lost contact with Robert Ng. Given the tenor of the undisputed evidence, I have no doubt that was true.

52. It is not disputed that on or about 1 March 2005, the Defendant received a letter from Samlane’s company secretary, enclosing a copy of minutes of a board meetings held on 1 January 2005 in which a resolution was passed to change the Defendant’s position as executive director to non-executive director; to suspend payment of remunerations to all directors; and to employ Robert Ng as the chief executive officer at a remuneration to be agreed. 

53. The Defendant alleged that he had never been given notice of the meeting.  Robert Ng did not deny.  He only explained why the resolution was passed.  He said that in December 2004 there were arguments between him and the Defendant about payment of remuneration to directors.  He said that as they had agreed to make loans to the company it served no purpose for them to be paid directors’ remuneration, but the Defendant insisted to be paid or he would not carry out his duties anymore.  Thus, he passed the resolution with John Mackie to change the Defendant’s position as executive director to non-executive director and to suspend payment of remuneration to all directors.  While that explained why he procured the resolution to suspend payment of directors’ remuneration, he could not explain why he procure the resolution to appoint himself as chief executive officer and to be paid a remuneration to be agreed.  He also did not deny that he gave no notice of the meeting to the Defendant.  If there was any good faith in what he was doing, he would have given notice of the meeting and the resolution proposed to be passed to the Defendant, or at least would have promptly informed him of the resolutions passed.  But it was only until two months later that he announced the Defendant’s removal through the company secretary.  I think it is manifestly obvious that Robert Ng teamed up with John Mackie to exclude the Defendant from management of Samlane and suspend his director’s remuneration while providing remuneration to himself as chief executive officer. 

54. I have no doubt that Robert Ng dismissed the Defendant’s son and excluded the Defendant from Samlane in a very high handed-manner and out of bad motive.  I do not think he commenced this action in good faith.  I find his claims were exaggerated and he was not a credible witness.  

Claim (1): Opening balance of $2,293,578.92 as at 31 March 1999

55. Every year, in response to the request of Samlane’s auditor, the Defendant signed an annual audit confirmation acknowledging the amount of his indebtedness to Samlane.  The 1999 audit confirmation for the balance in the amount of $2,293,578.92 as at 31 March 1999 was relied on by Samlane as the opening balance of debt owed by the Defendant. 

56. The Defendant’s defence as pleaded in §5.8 of his Amended Defence is:

“If, which is denied, there was any confirmation signed by the Defendant for the purported indebtedness of $2,293,578.92, it was done solely for the aforesaid purpose and has not been a true acknowledgment of indebtedness by the Defendant to the Plaintiff.”

Under cross-examination, the Defendant admitted his signature on the 1999 audit confirmation.  Thus, his sole defence is that the audit confirmation was signed for audit purpose and does not reflect the underlying truth, of which he gave an explanation.  Mr Nip submits that the Defendant’s about-turn when giving evidence reflects how ready he was in twisting the truth in order to avail himself of another perceived line of defence.  The Defendant had given his explanation why he signed the audit confirmations in his supplemental witness statement.  His admission of his signature in the witness box is not a change of evidence.  It may perhaps reflect the undue caution of his solicitors in drafting the defence.  If the signature was his, what was wrong in admitting it?  I draw no adverse inference against him on his admission of his signature.

57. The Defendant’s explanation is that in 1995 Samlane expanded its business to supply of fruit, which led to a loss of over $3 million.  This would adversely affect Samlane’s bank credit.  At the suggestion of Robert Ng, who was in charge of finance and management of Samlane, the Defendant agreed to treat the loss as his personal indebtedness so as to paint a healthy financial picture for Samlane.  It was also agreed that this indebtedness would be gradually reduced and eliminated altogether in due course.  As the books show, the indebtedness was reduced from $3,322,022 in 1997 to $2,293,578.92 in 1999 and further reduced to $1,438,714 in 2001, although it was increased to $1,959,506 in 2004.  The Defendant did not know how these figures were arrived at as it was Robert Ng who was in control of finance and management.

58. Mr Nip criticises the Defendant’s evidence about the accounting arrangement as neither recorded in writing nor supported by contemporaneous documentations.  Be that as it may, one cannot lose sight of the fact that Samlane was a three member company, of which only Robert Ng and the Defendant were active members.  Robert Ng was in charge of finance and management. He is the son of the Defendant’s former employer.  Given how the Robert Ng’s father raised the Defendant up to be a member of Samlane, there was every reason for the Defendant to trust Robert Ng.  Samlane was only a small company which was essentially a partnership, one may not expect there would be full documentation of everything as suggested by counsel, particularly in respect of spurious arrangements of this sort.

59. Mr Nip queries the credibility of the Defendant’s explanation that the loss was put under his name instead of Robert Ng’s in order not to affect Robert Ng’s credit worthiness when applying for banking facilities for Samlane.  Mr Nip suggested in cross-examination that whichever one of them to bear the debt would be as damaging because both he and Robert Ng were directors of Samlane.  The Defendant replied that perhaps Robert Ng was thinking about protecting his credit worthiness for his other companies.  I think the Defendant’s answer just hit the nail on its head.

60. On the other hand, after hostility had commenced and when Samlane’s accountant demanded repayment, the Defendant replied:

“本人重申當時職務只負責日常營運及管理工作,一切財務安排及管理均由吳家麒先生及會計部全權負責,而上述款項是由於每年財務申報時候作財務撥備之用途,經他們安排指示下將此金額掛在本人名下而要本人簽署,本人從未動用上述款項,一切安排乃公司行為,而貴公司已管理森源公司每年年報賬目多年,貴司亦了解森源公司內部職權分配,深信應很清楚當時森源會計部為何作此撥備安排,才提交每年財務報告,在這本人重申並無責任歸還上述款項。”

In essence, he explained that the debt was just a “financial provision” for the purpose of annual financial report.  It was put under his name as a debt at the instruction and arrangement of Robert Ng and the accounting department.  He was asked to sign to acknowledge the debt, but he never had the use of the fund represented by the debt. 

61. Mr Nip argues that it is significant that at the time of writing this letter, the Defendant was not on the best of terms with Samlane and that litigation was imminent.  He would expect the Defendant to put forward his explanation of accounting arrangement, if there was such an arrangement, instead of saying that the debt was a “financial provision”.  He argues that “financial provision” is different from the accounting treatment of converting a company’s loss into a director’s debt and there was no mention in the letter of the accounting arrangement now pleaded.  I respectfully disagree.  One must view this letter as a reply by a simple lay man who is neither well educated nor sophisticated.  It was written without the benefit of legal advice.  I do not think one could attach too much significance to the words “financial provision”, but rather one should look at what in substance the Defendant was saying.  In my view, the Defendant was indeed talking about the accounting arrangement he had agreed with Robert Ng and that it was not his debt owed to Samlane.  I consider the Defendant’s reply then consistent with his defence today.  Though not strictly a contemporaneous document, I consider this letter a spontaneous reply which is likely to be true.

62. Mr Nip attempts to make a forensic analysis of the accounting arrangement suggested by the Defendant.  He says that though the debt was reduced from $3,322,022 in 1997 to $1,438,714 in 2001, it was increased to $1,639,240 in 2002 and to $1,994,915 in 2003 which is contrary to the alleged assurance by Robert Ng that it would gradually be reduced and eliminated altogether.  Under cross-examination, the Defendant replied that he would tolerate reasonable increases.  I do not think the increases rebut the existence of the arrangement.  The arrangement could not be interpreted as a rigid one.  If the financial position of Samlane was such as to make it impossible to reduce the debt, even on paper, then the Defendant would accept an increase.  The Defendant and Robert Ng were in good terms in 2003.  They were injecting $5 million into Dragon Foods.  It was likely that the accounting position then could not permit a reduction but require a modest increase.  I draw no adverse inference against the Defendant from the increases.

63. Mr Nip asked many rhetoric questions based on the financial statements to attack the credibility of the Defendant’s explanation. For example, he said if the Defendant and Robert Ng were so concerned to cover up a loss of about $3 million in 1995 and 1996, why would the audited statement show a loss for the year ended 31 March 2001 of some $8 million?  Questions like this are capable of many innocuous answers.  A forensic examination of this sort without forensic accounting expert opinion is unhelpful.  I do not find it necessary to consider those questions. 

64. So much is the criticism of the Defendant’s explanation.  What about Remedy Asia’s case?  All that it has are the audit confirmations.  If in fact there were borrowings, advances or overpayments of some sort which created the indebtedness acknowledged by the Defendant in the audit confirmation, one would expect the indebtedness to be supported by invoices, journal entries, journal vouchers, or payment vouchers.  But there was none.  In the financial statements for the first two years from 1 January 1994 to 31 December 1995, there was no debt due from the Defendant to Samlane at all.  Then, all out of the blues in the next financial statement for the 15 months period from 1 January 1996 to 31 March 1997, the Defendant became indebted in the sum of $3,322,022.  That indebtedness is not supported by any accounting document.  It ties in with the Defendant’s explanation that Samlane suffered loss of over $3 million which was converted into his indebtedness acknowledged by him in the audit confirmations.  The lack of supporting documentation and the surrounding circumstances support the Defendant’s explanation.

65. Besides, Robert Ng could offer no explanation as to how the indebtedness arose.  The debt was not an insignificant amount.  Robert Ng was admittedly the person in charge of finance and management.  If he cannot explain, who can?  This casts serious doubts on Samlane’s case.

66. This brings me to Swendy Chung who was Robert Ng’s assistant responsible for looking after the accounts of Samlane and those of his various other companies.  She was assisted by Samlane’s assistant accountant, Zackie Tam.  Swendy Chung and Zackie Tam were responsible for keeping the books of Samlane at the material time.  If there was such a debt, they must be able to tell how it arose and where the supporting documents were.  They are precisely the type of witness whom the court reasonably expects would be called by a plaintiff seeking to prove a debt.  Neither of them was called by Remedy Asia.  No explanation was given as to why they were not available to give evidence, other than that Swendy Chung ceased working for Robert Ng last year.  That does not explain why she could not be made available to give evidence for Remedy Asia. I am entitled to draw adverse inference against Remedy Asia from its failure to call Swendy Chung or Zackie Tam to testify about the debt. 

67. In conclusion, the failure of Robert Ng to explain how the debt arose and Remedy Asia’s inability to produce supporting documents, to call Swendy Chung or Zackie Tam to testify or to give an explanation for not calling them cast a serious doubt on the existence of the debt.  All these failures lend support to the Defendant’s case that there was no underlying indebtedness acknowledged by him in the audit confirmations.  I accept the Defendant’s evidence.  I find that he signed the audit confirmations pursuant to his agreement with Robert Ng for the purpose of improving Samlane’s or Robert Ng’s credit worthiness in their applications for banking facilities and there was no underlying indebtedness in the 1999 audit confirmation acknowledged by the Defendant.  Remedy Asia has utterly failed in proving this claim based on the audit confirmations.

The Running Account

68. Remedy Asia’s other claims are based on a document entitled “Statement of Account for Fung Chi Fai due to Samlane Development Ltd” (the “Running Account”) presumably prepared by Samlane for the purpose of this litigation before it was wound up.  It was handed over by Samlane’s former solicitors, Messrs John Ho & Tsui, to the Liquidators in the course of the Liquidators’ investigations.  The Running Account is a running account of all payments by Samlane to or on behalf of the Defendant, payments by the Defendant on behalf of Samlane and receipts from the Defendant.  These payments and receipts were placed under four categories: “payment in advance”, “entertainment without supporting”, “others” and “received on account”.  It is not known who was the maker of this Running Account.  Except for the opening balance, which is the indebtedness acknowledged by the Defendant in the 1999 audit confirmation and a credit entry of $17,940.20 in favour of the Defendant which Remedy Asia does not dispute, all the payments and receipts are properly evidenced by supporting documents, such as journal vouchers, payment vouchers and bank pay-in slips.  Some of those supporting documents were signed by the Defendant.  There is no suggestion by the Defendant that the Running Account is inaccurate or incomplete.  I find it to be an accurate running account in respect of all Samlane’s payments to or on behalf of the Defendant, payments made by the Defendant on behalf of Samlane and receipts from the Defendant.  

Claim (2): The outstanding balance of advance payments of $437,135.90

69. This claim is based on the balance under the category of “payment in advance” in the Running Account in the amount of $437,135.90.  It is common ground that Samlane would advance a sum of money to the Defendant for him to pay the salaries of Samlane’s employees and expenses in China and the Defendant would report the actual amount spent to the accounts department of Samlane at the end of the month.  The balance due from or owing to the Defendant would be settled in full or in part and carried over to the following month or months.  The accounting documents support the existence of this arrangement.  This claim represents the outstanding balance due to Samlane from the Defendant under this arrangement.

70. The Defendant’s defence is one of denial.  Then about eight years since the commencement of the action and less than one month before this trial, the Defendant gave some voluntary particulars of his defence, alleging that by reason of the account statements dated 3 August 2000 and 27 July 2002, all the advance payments made by Samlane to the Defendant as at 30 June 2002 had been fully settled with Samlane owing him $33,544.60.

71. The individual payments and receipts referred to in the two account statements were also reflected in the Running Account.  As the Running Account covers a period from 9 April 1999 to 15 April 2005 and is fully supported by incontrovertible accounting documents, the fact that at two particular points in time during this period the account had been squared off does not necessarily mean that the balance at the end of the period is not owing.

72. Under cross-examination, the Defendant said he disagreed with some of the entries in the Running Account, but was unable to identify which of the entries he was disagreeing and the basis of his disagreement.  He then tried to exonerate himself by saying that he would need to rely on his legal team.  I think that was just a mere excuse.  If he seriously had objections to any of the entries when he prepared his defence, it is incredible that he would not have so pleaded eight years ago when his memory was fresh but to raise it less than a month before trial eight years later.  He does not impress me as a credible witness in respect of this issue.  It seems to me that the defence as disclosed by the voluntary particulars was just his solicitors’ point based on some account statements which have no bearing to the whole financial picture.  I reject his defence.  I am satisfied that this debt of $437,135.90 is proven against the Defendant. 

Claim (3): Improper withdrawals totaling $4,127,062.74

73. This claim is for the aggregate amount of withdrawals made by the Defendant from Samlane from 13 April 1999 to 24 January 2005, purportedly as entertainment expenses in respect of which the Defendant failed to produce supporting receipts for the proper incurrence of such expenses.  The individual entries making up this total sum of $4,127,062.74 are listed in the Running Account under the category of “entertainment without supporting”.  Every entry is supported by documentation, some of which were signed by the Defendant.  These payments by Samlane and withdrawals by the Defendant are incontrovertible.  The question is whether these withdrawals were improper. 

74. Samlane’s pleaded case is that the Defendant may claim reimbursement for entertainment expenses incurred or to be incurred by him for or in connection with Samlane’s business, subject to the condition that the Defendant must produce proper receipts in support of the expenses and be approved by Robert Ng.  In his supplemental witness statement made less than a month before trial, Robert Ng departed from his pleaded case and said that the Defendant may advance a monthly sum based on a percentage figure.  If the entertainment expense claimed for that month was within that percentage figure, subject to production of receipts, the expense would be counted as legitimate expense without the need for his approval.  If the amount of claim fell outside that percentage figure, it had to be personally approved by him.  His evidence was quite a significant departure from the pleaded case in that he mentioned that there was a ceiling for the monthly expenses; below which his approval was not required, but above which his approval was required.

75. The Defendant’s pleaded case is that he reached an agreement with Samlane through Robert Ng that he shall be paid a non-accountable entertainment allowance calculated at the rate of $50 out of $850 for each transportation order from PARKnSHOP and there was no need for production of supporting receipts.  In his witness statement made in February 2012, two years before trial, he said starting from 1997 (not 1996 as pleaded), the business of Samlane grew rapidly and generated different amounts of entertainment expenses which confused the accounting department and caused arguments between him and Robert Ng.  Then he and Robert Ng reached agreement that a non-accountable entertainment allowance of $50 was to be paid to him for every transportation transaction generating revenue of $850, ie 5.88% (the “5.88% formula”).  The figure of $850 was the charge for delivery of one container load of goods at the time of the agreement.  The payment was of the nature of an allowance which was non-accountable so that there was no need to prove actual expenditure by production of receipts.  He was entitled to keep the surplus of what he had not spent but had to bear the deficit if the allowance was not enough (This is based on the original Chinese version of his supplemental witness statement, but not its English translation which was ambiguous).  For accounting and tax purposes, if he had receipts, they would be presented to Swendy Chung and used to set off against the allowance.  If there were no receipts, Swendy Chung would accept a voucher signed by him stating that the amount received was entertainment fee. 

76. In evidence, the Defendant also departed from his pleading and witness statements.  He said that the 5.88% formula was only applicable to transportation services provided to PARKnSHOP; and he would also be reimbursed actual expenses used in entertaining other clients on production of actual receipts.  Thus, there were two types of payments.  One was a non-accountable allowance based on the 5.88% formula and revenue from PARKnSHOP.  The other was a reimbursement of actual entertainment expenses spent on clients other than PARKnSHOP.  His allegation about this second type of entertainment expenses is a significant departure from his pleaded case.

77. Both Robert Ng and the Defendant departed from their pleadings.  However, it is common ground that there was some agreement relating to a percentage figure.  Having regard to the nature of the departure and the incontrovertible evidence and, most importantly, the disputed withdrawals were those under the 5.88% formula, I think the Defendant’s evidence as to the second type of reimbursement is relevant and should be admitted.

78. Looking at the pleading, it seems there is more conviction in the Defendant’s defence than in Samlane’s statement of claim.  Samlane commenced the action eight years ago when the evidence was still fresh.  Yet, Samlane simply pleaded two conditions of reimbursement: production of receipts and Robert Ng’s approval.  That was obviously incorrect on the basis of Robert Ng’s evidence.  It did not even mention the percentage figure, which is a common feature between the Defendant’s and Robert Ng’s evidence.  Even upon seeing the defence, Samlane did not respond to the 5.88% formula in its reply. Then, six years later in September 2012, the Defendant gave his supplemental witness statement giving more particulars about the 5.88% formula.  Robert Ng’s conduct of this litigation is dubious.

79. If the withdrawals had been irregular, it is just beyond reason why Robert Ng would have tolerated them for six years.  He was in charge of finance and accounting in Samlane.  The withdrawals clearly reflect that the parties were conducting themselves on the basis of the 5.88% formula. The total lack of objection from Robert Ng for those six years suggests Robert Ng’s evidence is just an afterthought to concoct a claim against the Defendant. 

80. Mr Nip points out some inconsistencies as to the timing of the application of the 5.88% formula in the pleaded defence, the Defendant’s first witness statement and supplemental witness statement.  The Defendant gave three different dates: between 1994 and 1995, since 1996 and starting from 1997.  Be that as it may, there is no dispute that there was a percentage agreement which is consistent with the 5.88% formula.  The alleged improper withdrawals claimed started from 1999.  The inconsistencies have no significance as they do not go to the heart of the dispute.

81. Mr Nip queries how the reimbursements could have caused confusion to the accounts department and created arguments between the Defendant and Robert Ng which led to the making of the 5.88% formula.  This argument does nothing to discredit the Defendant’s case or improve Samlane’s case because according to Robert Ng an agreement was made.  The issue is what is the content of that agreement and not whether the agreement was made as a result of the confusion or because Robert Ng considered the reimbursement excessive.

82. Mr Nip argues that the 5.88% formula is not credible, commercially unreasonable and not sensible, while the agreement to cap the entertainment expenses at 5.88% and special approval when the cap was exceeded as Robert Ng alleged is more logical and inherently probable.  With the evidence available it is difficult to tell which agreement is more commercially reasonable or inherently probable.  For the following reasons, I can say with confidence that the 5.88% formula is credible. 

83. The supporting documents are supportive of the Defendant’s case.  There were payments for reimbursement of entertainment expenses incurred on non PARKnSHOP clients which were all approved by Robert Ng and there were payments based on the 5.88% formula, some of which were approved by Robert Ng.  Robert Ng’s signatures appear on most of the cheques used to pay the allowance or the reimbursement.  All these are more consistent with the Defendant’s case than with Samlane’s case.

84. More importantly, for six years since April 1999, the Defendant had been allowed to make these withdrawals regularly on the basis of the 5.88% formula without complaint.  If there were no such agreement, it is difficult to understand why the payments could have been effected.  Many of the payments were effected by cheques signed by Robert Ng.  When he signed, he must have seen the supporting vouchers which were consistent with the 5.88% formula or that there were no supporting receipts as he allegedly required.  Robert Ng could and should have easily refused to sign the cheques or set off the reimbursements against the improper withdrawals.  His evidence is of doubtful veracity.

85. Furthermore, as I have already observed, Samlane’s case under this head and Robert Ng’s witness statement in respect of this claim have no conviction at all.  I do not believe in Robert Ng’s evidence.  I accept the Defendant’s evidence. 

86. Accordingly, I find that in about 1997, precisely when did not matter, the Defendant and Robert Ng reached agreement about the payment of entertainment expenses incurred by the Defendant on behalf of Samlane.  The agreement was that in respect of entertainment expenses incurred on the staff of PARKnSHOP, the Defendant was entitled to a non-accountable allowance, not a reimbursement of actual expenses, equivalent to 5.88% of the transportation revenue received from PARKnSHOP; and in respect of entertainment expenses on clients other than PARKnSHOP, the Defendant was entitled to reimbursement of actual expenses incurred and proved by receipts. 

87. Mr Nip quotes the case of Robert Yip v Wing Fai Construction Co Ltd[15] in which Bokhary PJ held that a director who received company money to expend or to reimburse him for what he had expended out of his own pocket on company purposes is liable to refund what he had not spent on company purposes to the company.  As the payment was of the nature of a non-accountable allowance, whether the Defendant has in fact spent is irrelevant.  The principle in Robert Yip v Wing Fai Construction Co Ltd does not apply.

88. In conclusion, I am satisfied that the Defendant has proved the 5.88% formula and that the withdrawals were not improper.  I dismiss Remedy Asia’s claim under this head.

Claim (4): Miscellaneous items in the sum of $883,418.62 - introduction

89. Under this head, Samlane claimed $883,418.62 as the aggregate amount paid by Samalane to the Defendant or others to settle the Defendant’s personal liabilities and which the Defendant failed to repay Samlane.  The individual entries making up this total sum have been placed under the category of “Others” in the Running Account.  For the purpose of this analysis, I have put these payments and receipts under seven sub-categories.  Each entry is supported by payment vouchers and copies of the cheques used to effect the payments.  These payments by Samlane and their receipts by the Defendant are incontrovertible.  The Defendant’s defence is one of denial.

Claim (4)(a): Temporary loans

90. The Running Account shows ten temporary loans paid to the Defendant and three repayments resulting in an outstanding balance of $80,000 due to Samlane.  I am satisfied that this amount is proved.

Claim (4)(b): Payment on behalf of the Defendant

91. A payment voucher dated 19 February 2000 shows that a sum of $50,000 was paid by Samlane on behalf of the Defendant to Tang Shun Chiu.  The Defendant accepted under cross-examination that he signed the payment voucher at places next to “Payment Approved By” and “Above Amount Received By”, showing that he approved and received the payment.  The Defendant asserted that Tang Shun Chiu was associated with Samlane, but could not remember what role he played in Samlane.  He accepted he was aware at the time that the payment voucher recorded the sum as being paid by Samlane on his behalf and that there was a reason for approving the payment.  He could not offer any explanation why he should not be liable to Samlane for this amount. I am satisfied this claim is proved. 

Claim (4)(c): Unpaid share contribution

92. Samlane claimed that the Defendant owed $450,000 unpaid contribution in respect of Samlane’s capital increase from $1 million to $2 million in 2002.  Samlane’s case is that by an ordinary resolution allegedly passed at an extraordinary general meeting held on 5 August 2002, the authorised share capital of Samlane was increased from $1 million to $2 million by creation of an additional one million ordinary shares of $1 each.  The resolution was recorded in Samlane’s audited financial statements for the year ended 31 March 2003.  In accordance with the existing shareholding proportion, the Defendant and Robert Ng were each allotted 450,000 shares and John Mackie was allotted 100,000 shares.  It is therefore Samlane’s case that the Defendant was liable to pay Samlane $450,000 as his contribution for the share allotment.

93. No document was produced to support the resolution to increase the share capital or the share allotment to the Defendant.  Under cross-examination, the Defendant said that he did not agree to the capital increase, but admitted signing Samlane’s audited financial statements for the year ending 31 March 2003 which showed an increase in share capital from $1 million to $2 million.  He tried to deny liability by arguing that as his English was not good he did not understand what he signed.  It is well established law that one cannot escape liability in signing a document by saying that he did not understand it: see for example, Wing Hang Bank Ltd v Crystal Jet International Ltd & Ors[16]. The defence of non-est factum is a very narrow defence.  In any event, that defence has not been pleaded.  Besides, Samlane’s annual return dated 4 January 2005 also showed that its issued share capital was $2 million.  That annual return is a public document. Thus, despite the absence of documentary proof that a resolution to increase the share capital had been passed, the Defendant cannot deny that Samlane’s share capital had been validly increased to $2 million.

94. Mr Lin argues that there is no evidence of allotment of the 450,000 new shares to the Defendant or the Defendant’s agreement to take up the shares.  However, the Defendant was not a passive shareholder or investor.  Samlane was a partnership company of effectively two shareholders.  John Mackie was just a sleeping partner.  The Defendant was one of its two major shareholders and active directors.  He participated actively in the operation of the company and to some extent its management.  Given the size of such a company, he could not have absolutely no knowledge of its shareholding structure.  He acknowledged the capital increase in 2002 by signing the financial statement of Samlane.  There was contemporaneous journal entry of his outstanding contribution to the allotted shares.  In the annual return dated 4 January 2005, which is a public document filed by its company secretary, it is stated that the Defendant held 900,000 of the two million issued shares representing his 45% interest in the company.  For three years since the allotment, the Defendant made no protest that he was registered as holder of the allotted shares.  That corroborates Robert Ng’s evidence of the resolution to increase share capital, pro-rata allotment and the Defendant’s agreement to take up the allotted shares.  Despite the absence of a written document evidencing his agreement to take up the allotted shares, he cannot dispute he had by conduct agreed to take up and had in fact taken up the allotted shares.  He is liable to the outstanding contribution to the share capital in the sum of $450,000.  

Claim (4)(d): Loan interest of $10,000

95. Robert Ng’s evidence is that in around December 2004, he and the Defendant agreed that each of them had to inject a sum of $2 million into Samlane as director’s loan.  He injected his loan of $2 million, while the Defendant only injected $1.5 million.  That loan was paid by two tranches.  A sum of $1 million was paid on 18 December 2004 by a cheque issued by BEL Services Co (“BEL”), a company owned by the Defendant’s friend Lee Ho Yin.  Another sum of $0.5 million was transferred by the Defendant to Samlane on 7 February 2005.  However, on 29 January 2005, the Defendant caused Samlane to issue a cheque of $10,000 to BEL as payment for interest.  The Defendant approved the payment voucher and acknowledged receipt of the payment.  Samlane’s case is that the director’s loan is interest free.  If the Defendant had to borrow from BEL to lend to Samlane, he was responsible for the interest charged by BEL.

96. The Defendant’s case is that Robert Ng had a dispute with Tse Yiu Lam in relation to the financial affairs of Dragon Foods in October 2004 and Robert Ng was in breach of his promise to prepare financial report for Dragon Foods.  Eventually, Dragon Foods was closed down by the Jiangmen court.  When the Defendant queried Robert Ng why he breached his promise, Robert Ng did not respond.  Instead, Robert Ng told him that the operation with Dragon Foods had affected the normal liquidity and operation of Samlane and asked him to obtain loan from outside for Samlane.  Then the Defendant obtained a loan of $1 million from BEL on behalf of Samlane to be repaid by ten monthly instalments with interest calculated on bank overdraft rate.  However, Samlane was unable to pay its first instalment by 19 January 2005.  He negotiated with Lee Ho Yin for deferred repayment.  On 29 January 2005, Samlane paid BEL $10,000 as interest.  As result of Samlane’s default, he repaid the loan to BEL by instalment.  His defence to this claim is that the loan of $1 million was made by BEL to Samlane and Samlane was responsible to pay interest.

97. The payment by BEL to Samlane was acknowledged in Samlane’s contemporaneous receipt voucher as a loan from the Defendant.  BEL had no business connection with Samlane.  It was not a finance company or moneylender.  There was no reason why it would lend $1 million to Samlane.  There was all the more no reason why, if it was a loan to Samlane, which was a total stranger to BEL, the loan was not supported by any loan document.  On the other hand, the Defendant was familiar with the proprietor of BEL.  It is therefore more likely that the loan was a loan from Lee Ho Yin, through BEL, to the Defendant who then lent it to Samlane as director’s loan.  Lee Ho Yin was not called to testify.  Adverse inference may be drawn against the Defendant that Lee Ho Yin would give evidence unfavourable to his defence.  I find that the sum of $1 million paid by BEL to Samlane was a loan to the Defendant who then lent it to Samlane as director’s loan.  If interest was payable to BEL, it was a liability of the Defendant and not Samlane.  The payment of interest was authorised by the Defendant.  It was an improper payment for which the Defendant is liable to repay Samlane.

98. The above finding is in fact favourable to the Defendant.  If the loan to Samlane were found to be BEL’s, the Defendant would not be entitled to have a set off against the claim by Remedy Asia.  

Claim (4)(e): Transfer of $180,000 to Sinogrand International Ltd

99. On 23 September 2002, Robert Ng and the Defendant each caused Samlane to transfer $180,000 to Sinogrand International Ltd (“Sinogrand”), which was another of their company.  There is no dispute that Sinogrand was an associated company of Samlane owned by Robert Ng and the Defendant as reflected in Samlane’s financial statement for the year ending 31 March 2005.  The Defendant signed the payment voucher authorising the payment of $360,000 for himself and Robert Ng.  He also signed receipt on the voucher. His share of $180,000 was then listed as an account receivable for the year ending 31 March 2004 in an account schedule of Samlane.  Subsequently, it was recorded as an account receivable from the Defendant in the journal voucher dated 31 March 2005.  There can be no dispute that Samlane transferred the said sum of $180,000 to Sinogrand at the direction and for the purpose of the Defendant.

100. The Defendant’s defence raised by him in the course of his cross-examination is that it was questionable why the said sum would only appear in the journal voucher in March 2005 when the transfer was made in September 2002.  Not only that this defence has not been pleaded, the fact that the sum was only booked as an account receivable in March 2005 does not detract from the fact that the Defendant had directed Samlane to transfer the said sum to a company which he was interested and for his own benefit and which remains unpaid.  The payment is incontrovertible.  I am satisfied that this claim is proved.

Claim (4)(f): Telephone fees

101. In the Running Account is an item of payment of telephone fees for the Defendant in respect of his mobile phone number 91733973 in the amount of $997.89.  No submission has been made by either party.  I assume this liability is not disputed by the Defendant.  I find the Defendant liable in respect of this amount.

Claim (4)(g): Vehicle expenses paid on behalf of the Defendant

102. Samlane claimed a total sum of $114,380.12 under this head representing payments made by Samlane on behalf the Defendant for his personal expenses in respect of vehicle registration number FZ360 used by him for the period from 14 April 2004 to 15 April 2005 and in respect of vehicle registration number GE683 for a brief period after his removal as executive director in March 2005.  These expenses include hire-purchase instalments, fuel, tunnel fees, licence fee, insurance premium.

103. It is common ground that the vehicle FZ360 was purchased by the Defendant on hire purchase terms for the use of his wife; that it was registered under the name of Samlane to take advantage of the discount for fuel; that it was agreed that Samlane would pay all the expenses and instalments; and that the Defendant would settle those payments every month.  Indeed, the Running Account supports such an arrangement of payment by Samlane and settlement by the Defendant. 

104. The Defendant’s case is that he had paid ten instalments from August 2003 to May 2004 and expenses promptly.  However, after the present dispute, Robert Ng caused the vehicle to be taken away and sold without his consent.  The Defendant therefore argues that not only is he not liable for any outstanding expenses and instalments, he is entitled to the net proceeds of sale of the vehicle.  According to Robert Ng, the vehicle was repossessed by the finance company as the Defendant defaulted in paying instalments.  It was then sold for $130,000 and the proceeds of sale less outstanding instalments in the amount of $97,768 were $32,232.  But, no credit was given to the net proceeds in the Running Account.  

105. The Running Account shows that during the period from 14 April 2004 to 15 April 2005, Samlane made 31 payments in the total sum of $165,012.52 in respect of the expenses and instalments of vehicle FZ360 and expenses of vehicle GE683; two sums of $39,214.40 and $11,418 were received from the Defendant and recorded under voucher number RV05007 and voucher number RV07015 respectively as repayment of expenses and instalments.

106. These two repayments were evidenced by contemporaneous vouchers and copies of cheques signed by the Defendant.  Voucher number RV05007 dated 19 May 2004 recorded repayment of four instalments for January to April 2004 and a repayment of the Defendant’s loan of $80,000.  Voucher number RV07015 dated 23 July 2004 recorded repayment of one instalment for May 2004 and expenses.  Thus, according to these two vouchers, the Defendant only repaid five instalments and not ten.  The vouchers and copy cheques were documents from Samlane and not from the Defendant.  But the Defendant was unable to produce his own documents, such as copy cheques or bank statements, in support of his assertion of payment of ten instalments.  I can only act of Samlane’s documents and reject the Defendant’s evidence.  I find that the Defendant only repaid five instalments and expenses in the total amount of $50,632.40 as stated in those two vouchers, leaving a balance of $114,380.12 outstanding as claimed by Remedy Asia.

107. That balance included four sums in respect of tunnel fees for vehicle GE683 evidenced by four vouchers in the total sum of $1,826. Samlane’s reason for claiming these expenses is that they were incurred by the Defendant when he was no longer appointed as executive director.  Though the vouchers were dated after the Defendant ceased to be an executive director, the description on the vouchers showed that they were for expenses incurred before he ceased to be an executive director.  There is no justification for these claims. 

108. Included in the balance claimed are two vouchers in respect of fuel expenses of vehicle FZ360, GE683 and FT175 for the month of January 2005 and February 2005 in the sum of $5,193.55 and $1,985.45 respectively.  A careful check of the invoices shows that the sum of $1,985.45 was for expense of vehicle registration number FT175 and FZ360.  While the Defendant is liable for repaying the expenses incurred in respect of vehicle FZ360, no reason was given as to why he is also liable for the expenses incurred in respect of vehicle GE683 or FT175.  The Running Account does not differentiate between the expenses incurred in respect of these three vehicles.  There are fourteen lever arch files containing a few thousand pages of documents.  If Remedy Asia was too lazy to find out which expenses were for which vehicle, it cannot expect the court to go through those documents to make an apportionment for it or to make a wild guess apportionment.  I just treat the amounts claimed in those two vouchers as not proved.

109. There is no reason why Samlane should keep the net proceeds of sale of vehicle FZ360.  The instalments Samlane paid for the vehicle were all included under the head of vehicle expenses in the Running Account which it claimed against the Defendant.  The outstanding instalments had been deducted from the proceeds of sale.  The net proceeds represent the equity the Defendant has acquired through the instalments he paid and those which he is required to pay under this head of claim.  Samlane is therefore required to give credit to the net proceeds of $32,232.

110. Thus, in the end, Remedy Asia is able to prove a claim of $73,143.12 (ie $114,380.12 - $1,826 - $5,193.55 - $1,985.45 - $32,232) under this head of claim.

Claim (4) Miscellaneous items - Conclusion

111. I am satisfied that the total amount of $844,141.01 is due from the Defendant to Samlane under this head:

(1) Temporary loan of $80,000;

(2) Payment on behalf of the Defendant of $50,000;

(3) Unpaid share contribution of $450,000;

(4) Loan interest of $10,000;

(5) Transfer to Sinogrand of $180,000;

(6) Telephone fees of $997.89; and

(7) Vehicle expenses of $73,143.12.

Conclusion

112. In conclusion, Remedy Asia has successfully proved a claim of $1,281,276.91 being the total of outstanding balance of advance payment in the sum of $437,135.90 and outstanding payments for miscellaneous items in the sum of $844,141.01.  On the other hand, Samlane owed the Defendant a director’s loan in the amount of $1.5 million as recorded under the “received on account” category in the Running Account.  That sum is more than sufficient to set off the amount claimed.  Remedy Asia’s claim must therefore be dismissed.  There is no counterclaim by the Defendant. Understandably, such counterclaim would be meaningless as Samlane was wound up.

113. For the above reasons, I dismiss Remedy Asia’s action with a costs order nisi that it shall pay the Defendant’s costs of this action.