FUNG YEE WAN v. LUI FU SING

DCCJ 2042/2005

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2042 OF 2005

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J U D G M E N T

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1.  This is the Plaintiff’s application for summary judgment for the sum of $1,000,000.

2.  The Plaintiff’s case is very simple and is this.  There was an agreement between the Plaintiff and the Defendant (“the Plaintiff’s Agreement”) whereby the Plaintiff agreed to purchase and the Defendant agreed to sell 4 % of the shares in Weld-Tech Electrical Supplies Co Ltd (“Weld-Tech”) for the consideration of $1,000,000.  Pursuant to the Plaintiff’s Agreement, the Plaintiff paid $1,000,000 to the Defendant by way of the Plaintiff’s cheque dated 17^th September 2002 (“the Cheque”).  The Cheque was cashed by the Defendant but the Defendant has not transferred any Weld-Tech shares to the Plaintiff.  In any event, Weld-Tech has, since 21^st February 2005, been in liquidation.  Upon these facts, the Plaintiff says there is total failure of consideration of the Cheque and the Defendant should repay $1,000,000.

3.  The Defendant admits that the Cheque was cashed and that he has not transferred any Weld-Tech shares to the Plaintiff.  The defence put forward by the Defendant can be summarized as follows:

a.	Although there had been negotiation between the Defendant and the Plaintiff’s husband concerning the sale and purchase of 4 % of the shares in Weld-Tech, the negotiation did not materialize into the Plaintiff’s Agreement as alleged by the Plaintiff.
b.	Instead, the negotiation between the Defendant and the Plaintiff’s husband culminated in an investment agreement (“the Defendant’s Agreement”) made in September 2002 and between the Defendant and Mr. Chan Chung Yuen (“Mr. Chan”) on one part and the Plaintiff’s husband on the other part.  Both the Defendant and Mr. Chan were shareholders of WESCO Lightning Technologies Inc. (“WESCO”).  By the Defendant’s Agreement, the Plaintiff’s husband agreed to take up 4 % shareholding in WESCO at the consideration of $1,000,000.
c.	In pursuance of the Defendant’s Agreement, the Cheque was paid to the Defendant on 17th September 2002 and 20,008 WESCO shares representing 4 % of its shareholding were transferred to the Plaintiff’s husband on 20th September 2002.

Therefore, the Defendant says that the Cheque is supported by consideration, namely, the 20,008 shares in WESCO transfered to the Plaintiff’s husband.

The Defendant’s case in detail

4.  The factual basis of the Defendant’s case is set out in the Defendant’s affirmation filed in opposition to the Plaintiff’s present application.  Mr. Chan has also filed an affirmation to basically adopt the evidence of the Defendant.

5.  According to the Defendant, there had been negotiation between the Plaintiff’s husband and the Defendant before the Defendant’s Agreement was concluded.  Initially, it had been suggested that the Plaintiff’s husband would invest in Weld-Tech by purchasing 4 % of its shareholding at the price of $1,000,000.  The Plaintiff’s husband had then indicated that he would not invest in his own name but would instead nominate his wife (i.e. the Plaintiff) to take up those shares.  However, no conclusion was reached and the negotiation continued.

6.  As the negotiation ensured, the Plaintiff’s husband, the Defendant and Mr. Chan formulated a plan to reorganize WESCO and Weld-Tech with the ultimate aim of seeking a listing in the Hong Kong Stock Exchange.  The plan involved formation of a holding company which would acquire and hold 100 % of the shareholding of WESCO.  WESCO would in turn hold 100 % of the shareholding of Weld-Tech.  It was the goal of their plan that after such reorganization, an application would be made to list the holding company in the Hong Kong Stock Exchange.

7.  The first step of the reorganization was therefore for all existing shareholders of Weld-Tech to transfer their shares to WESCO.  On 15^th August 2002, Mr. Chan and the Defendant (being the then shareholders of Weld-Tech) transferred a total of 499,999 shares of Weld-Tech to WESCO in return for WESCO shares issued and allotted to them.  The Defendant further declared the remaining 1 share of Weld-Tech held by him was holding in trust for WESCO.

8.  According to the Defendant, the Plaintiff’s husband is fully aware of the above share transfer, as he was an active participant of the reorganization and listing plans.  As a result of the transfer of shareholding of Weld-Tech to WESCO, it was pointless to transfer the 4 % shareholding of Weld-Tech to the Plaintiff as nominated by the Plaintiff’s husband.  Hence, in September 2002, the Plaintiff’s husband, the Defendant and Mr. Chan entered into the Defendant’s Agreement.  It was also agreed that the Plaintiff’s husband would himself take up the shares of WESCO in his own name.

9.  Pursuant to the Defendant’s Agreement, $1,000,000 was paid on 17^th September 2002 by way of the Cheque and 4 % of the shareholding of WESCO (represented by 20,008 WESCO shares) was transferred to the Plaintiff’s husband on 20^th September 2002.

Discussion

10.  In my view, the Defendant’s defence can be viewed as comprising the following essential elements:

a.	The non-existence of the Plaintiff’s Agreement.
b.	The existence of the events culminating in the Defendant’s Agreement and the Plaintiff’s husband’s involvement therein.
c.	The Cheque was payment for the transfer of 20,008 WESCO shares to the Plaintiff’s husband and in pursuance of the Defendant’s Agreement.

11.  Let me now examine the Defendant’s case from the above perspectives.

(A)  The non-existence of the Plaintiff’s Agreement?

12.  According to the Plaintiff’s case, the Plaintiff’s Agreement is evidenced by a letter dated 23^rd July 2002 from the Defendant to the Plaintiff in the following terms:

“To:      [the Plaintiff]

From:   [the Defendant]

23^rd July 2002

Re Transfer of Shares

Further to our discussion, I am pleased to confirm the above transfer of old shares of [Weld-Tech] from [the Defendant] to [the Plaintiff].

The value of the 4 % old shares of the Company is agreed to be HKD1,000,000.00.

A legal party will be consulted and documents will be ready as soon as possible.

(Signed)

[the Defendant]”

13.  The Defendant admits that he has written the above letter.  However, he alleges that the sole purpose of writing the letter was to put on record the price for the purposed purchase of 4 % of shareholding of Weld-Tech as the basis for further negotiation with the Plaintiff’s husband for his proposed investment in Weld-Tech.  He emphasizes that no conclusive agreement was reached for the purchase of Weld-Tech shares by the Plaintiff’s husband.  In furtherance of his contention, the Defendant suggests that the last sentence in the said letter is evidence that the parties had still to consult legal advice and so the proposed transfer was subject to contract.

14.  The above contention is inconsistent with the terms of the letter, which is a contemporaneous document.  It is clear from the letter that the Defendant seeks to “confirm”the transfer 4 % of Weld-Tech shares from the Defendant to the Plaintiff at the “agreed” value of $1,000,000.  All the essential elements of an agreement such as, the parties, the quantity of shares to be sold and the price are present.  In my view, the letter is clear evidence of a concluded agreement.  The Plaintiff and the Defendant might have agreed to further “beef-up” the agreement with the benefit of legal advice but that should not derogate from their concluded agreement.

15.  I find the Defendant’s case concerning the letter dated 23^rd July 2002 incredible.

(B1)  The existence of the events culminating in the Defendant’s Agreement?

16.  The first line of attack leveled by Mr. Au, counsel for the Plaintiff, at the existence of the Defendant’s Agreement is that the Defendant has failed to provide particulars on the circumstances of the Defendant’s Agreement.  All that the Defendant put forward in terms of evidence is mere assertion albeit on affirmation.

17.  According to the Defendant, the “ultimate aim” of the Defendant’s Agreement is to facilitate the listing of the holding company to be formed.  However, the Defendant has only outlined very briefly the alleged plans without providing any particulars, such as timetable or road map for the incorporation and listing exercise.

18.  The Defendant has not just failed to condescend upon particulars but there is also a curious lack of documentation.  If, according to the Defendant’s case, the Defendant was meticulous enough to put in writing something which did not amount to an agreement (in terms of the letter dated 23^rd July 2002), would he have failed to prepare any documentation on the Defendant’s Agreement? 

19.  Bearing in mind that, according to the Defendant, the ultimate aim is to have a listed holding company wholly owning WESCO and for WESCO to wholly own Weld-Tech, one would expect some documentation from all 3 entities in furtherance of this objective.  However, there is none.

20.  From the point of view of the holding company, there is no document evidencing the incorporation of or the plan to incorporate a holding company.  I have already observed above that there is no road map or timetable for the listing exercise.  There is also no documentation evidencing the engagement or participation of legal and/or financial professional for the exercise.

21.  The absence of documentation is particularly striking when one takes into account the practice of WESCO and Weld-Tech as disclosed in the evidence in terms of documentation.  Let me elaborate further.

22.  From the point of view of WESCO, if WESCO’s directors were meticulous enough to record its share benefits scheme (which was set up to recognize the efforts and contribution its employees, consultants or advisers) in its minutes (see Exhibit WWLC-1 in the Affirmation of the Plaintiff’s husband), one would expect some record of discussion and/or resolution of the directors concerning something as important as the reorganization and the listing plan?  In particular, where is the documentation to confirm that WESCO would hold all Weld-Tech’s shares and the appointment of the Defendant as WESCO’s trustee?

23.  From the point of view of Weld-Tech,if Weld-Tech was conscientious enough to record the price for the proposed purchase of Weld-Tech shares by the Plaintiff’s husband when there was yet to be an agreement (i.e. the letter dated 23^rd July 2002), would there be a complete absence of documentation concerning the reorganization and listing exercise?

24.  Under the Defendant’s Agreement, $1,000,000 was meant to pay for 4 % of WESCO shares (or the 20,008 shares transferred to the Plaintiff’s husband).  However, the Defendant’s case is contradicted by the following contemporaneous documents which confirm that the value of the shares transferred was nil:

a.	WESCO’s register of members (see Exhibit LFS-3 in the Defendant’s Affirmation),
b.	WESCO’s board minutes dated 13th September 2002 and signed by the Defendant himself (see Exhibit WWLC-1 in the Affirmation of the Plaintiff’s husband),
c.	the letter dated 13th September 2002 signed by both the Defendant and Mr. Chan informing the Plaintiff’s husband of the offer of 20,008 shares to him with nil amount payable (see Exhibit WWLC-2 in the Affirmation of the Plaintiff’s husband),
d.	the bought/sold note (see Exhibit WWLC-4 in the Affirmation of the Plaintiff’s husband), and
e.	the instrument of transfer for the transfer (see Exhibit WWLC-4 in the Affirmation of the Plaintiff’s husband).

(B2)  The Plaintiff’s husband’s involvement in the events culminating in the Defendant’s Agreement?

25.  It is the Defendant’s case that the Plaintiff only issued the Cheque under the instruction and as a nominee for her husband and her husband has actively participated in the events leading to the Defendant’s Agreement.  In particular, it is alleged that the Plaintiff’s husband:

a.	formulated the reorganization of WESCO and Weld-Tech with the ultimate aim of seeking a listing;
b.	was aware of the first step of the reorganization, namely, the transfer of Weld-Tech shares from the Defendant and Mr. Chan to WESCO; and
c.	was a party to the Defendant’s Agreement.

26.  However, the Defendant has produced no evidence in support of the above contentions.  It is important to note that if, upon final analysis, the so-called reorganization and listing plans and the Defendant’s Agreement are found to be incredible, there will simply be nothing for the Plaintiff’s husband to know.

27.  Mr. Wong, counsel for the Defendant, submits that as the Plaintiff’s husband has acquired substantial shareholding of WESCO (see Exhibit LFS-3 in the Defendant’s Affirmation), he must be taken to have full knowledge of the fact that Weld-Tech is wholly owned by WESCO.  In my view, the fallacy of Mr. Wong’s argument is that:

a.	on the evidence, the Plaintiff only acquired substantial shareholding in July 2003 but the alleged circumstances culminating in the Defendant’s Agreement happened in or before September 2002; and
b.	there is no allegation let alone evidence of the Plaintiff’s participation in the management of WESCO.

28.  If the Defendant’s case concerning the Plaintiff’s husband’s knowledge goes, then the whole basis of the Defendant’s case concerning the Plaintiff drawing the Chequefor her husband in pursuance of the Defendant’s Agreement will collapse.

29.  By reason of the above, I find that the Defendant’s case concerning the existence of the events culminating in the Defendant’s Agreement and the Plaintiff’s husband’s involvement therein incredible.

(C1)  The Cheque was payment for the transfer of 20,008 WESCO shares to the Plaintiff’s husband?

30.  Perhaps, the most crucial piece in the Defendant’s puzzle is the fact that the Cheque was meant to pay for the 20,008 WESCO shares (or 4 % of WESCO shareholdings) transferred to the Plaintiff’s husband.  This can be looked at from 2 angles:

a.	4 % of WESCO shareholdings is 20,008 shares; and
b.	the value of 20,008 WESCO shares is $1,000,000.

31.  First, there is nothing in the evidence to confirm that 4 % of WESCO shares is equivalent to 20,008 shares.  The Defendant has failed to adduce evidence on the total number of WESCO shares issued. 

32.  Mr. Wong has tried unsuccessfully to demonstrate by means of the number of shares apparently issued and allotted to Mr. Chan and the Defendant on 15^th August 2002 (see Exhibit LFS-2 in the Defendant’s Affirmation) that 4 % of WESCO shares is equivalent to 20,008 shares.

33.  In fact, if one adopts Mr. Wong’s approach and merely takes those shares into account, 4 % of WESCO shares amount to:

(199,996 + 299,994) x 4 % = 19,999.60 shares (but not 20,008 shares)

34.  Secondly, I have already noted above that WESCO’s register of members, WESCO’s board minutes dated 13^th September 2002, the letter dated 13^th September 2002, the bought/sold note and the instrument of transfer for the 20,008 shares all show that the value of the 20,008 shares transferred to the Plaintiff’s husband has nil value (as opposed to $1,000,000).

(C2)  The Cheque was payment in pursuance of the Defendant’s Agreement?

35.  I agree with Mr. Au’s observation that on the evidence the Cheque and the transfer of the 20,008 shares appear to be quite independent from each other.  The Cheque was drawn from the Plaintiff to the Defendant but the transfer of the 20,008 shares was from Mr. Chan to the Plaintiff’s husband.

36.  Moreover, the 20,008 shares came from Mr. Chan but the Cheque was paid to the Defendant.  It is not the Defendant’s case and there is certainly no evidence to the effect that the Defendant has received the Cheque for Mr. Chan.

37.  In the premises, I find the Defendant’s case that the Cheque was payment for the transfer of 20,008 WESCO shares to the Plaintiff’s husband and in pursuance of the Defendant’s Agreement incredible.

Some other reasons for trial?

38.  One of the main criticismsmade by Mr. Wong on the Plaintiff’s case is on the timing and the apparent absence of demand from the Plaintiff or Plaintiff’s husband.  His point can be illustrated by the following chronology:

a.	The Plaintiff’s Agreement was made by 23rd September 2002.
b.	On 15th August 2002, the Defendant transferred away his 299,999 Weld-Tech shares to WESCO and declared that the remaining 1 share held by him is on trust for WESCO.
c.	The Plaintiff’s husband was informed of the offer of 20,008 WESCO shares to him by way of the letter dated 13th September 2002.
d.	The Plaintiff’s husband accepted the above offer on 16th September 2002.
e.	The Plaintiff’s Cheque was dated 17th September 2002.
f.	20,008 shares were transferred to the Plaintiff’s husband on 20th September 2002.
g.	The writ was issued on 4th May 2005.

Built on the above chronology, Mr. Wong submits that the timing and the lack of demand calls for explanation and the Plaintiff and her husband should be cross-examined at trial.

39.  The Plaintiff explains that the Plaintiff’s Agreement was first initiated by the Defendant, who was then envisaging cash flow problem.  She therefore did not chase up hard albeit she did ask the Defendant on various occasions when he would let the plaintiff have the bought/sold note and the instrument of transfer for signing.  And the Plaintiff only came to know that the Defendant has transferred his Weld-Tech shares to WESCO when the Plaintiff later perused the annual return of Weld-Tech.

40.  I must confess that I was initially attracted byMr. Wong’s criticism.  However, upon further reflection, I am satisfied that this is a complete red herring.  What Mr. Wong tries to suggest is that the Plaintiff and/or her husband must have known about the circumstances of the Defendant’s Agreement by reason of the timing of the above events and the absence of demand.  However, I have already disbelieved the Defendant on the Defendant’s Agreement.  In the circumstances, there is nothing left for Mr. Wong to build on to cast doubt on the Plaintiff’s case.

41.  Lastly, Mr. Wong has reminded me of the fact that there is an oral element in both the Plaintiff’s Agreement and the Defendant’s Agreement and that the factual disputemay only be resolved by testing the credibility of witnesses.  In particular, he submits there are at least 3 other persons who may know of the reorganization and listing plans, the Defendant’s Agreement and the circumstances of the Cheque.  These 3 persons are the other transferees under the share benefits scheme, namely, Mr. Lau Yuk Ching Alexander, Mr. Ma Hon Wing and Mr. Lui Pui Sing.

42.  In my view, the testimony of the above witnesses may or may not be helpful depending on what they know. There is nothing in the evidence concerning what they know.  As a matter of fact, one doesn’t even know if these witnesses would be willing to testify for the Defendant.

Conclusion

43.  For the above reasons, I find the defence put forward by the Defendant incredible.  I am not satisfied that there is an issue or question in dispute which ought to be tried or that there ought for some other reason to be a trial. 

44.  I enter judgment for the Plaintiff against the Defendant in the sum of $1,000,000 together with interest at judgment rate from the date of writ until payment.

45.  I further make a costs order nisi that the costs of the action including the costs of this application and all reserved costs be to the Plaintiff, to be taxed if not agreed with certificate of counsel.