Sang Lee Investment Co Ltd v. Wing Kwai Investment Co Ltd and Another

CACV000023/1979

[Whether on the particular facts specific performance should be granted or refused.]

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

Coram: Cons, J.A., Yang and Bewley, JJ.

Date of Judgment: 18 July 1980

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

JUDGMENT

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

Cons, J.A.:

1. This appeal stems from an idea, in 1961, to redevelop a plot of land in Quarry Bay by the erection thereon of a high rise complex of three estates, each consisting of blocks of flats with shops on the ground floor and comprising in all 1,335 units. They were to be known as the Po Lee, Wai Lee and Tak Lee Estates.

2. The man behind the idea was a Mr. T.F. Mok. He had at one time been a clerk and interpreter in a solicitors' firm. His plan was simple. He would sell the intended units not only before they were completed but even before any form of construction had begun. The purchaser would put down a deposit and then pay instalments, which included a provision for interest, over a period of five years. In this way the whole scheme would be virtually self--financing. It could be got off the ground with little more than the intial deposit on the land, some $609,000. The eventual profit would be enormous.

3. Mr. Mok took the idea to his old friend, Mr. F.F. Kwan. They had collaborated before in at least one other land development, and both were, with one Mr. Ma To Sang, three permanent directors of a company by the name of Sang Lee Investment Co. Ltd. (the appellant in these proceedings and the third party in the proceedings below). Although it was not until a short while later that Mr. Kwan became Chairman of Sang Lee, he was at all material times its guiding spirit. He was also a man experienced in the field of property development. He agreed that Sang Lee would become one of two partners in a joint venture to carry Mr. Mok's plan into reality. His company would act as manager for the joint venture to supervise the construction and be responsible for the administration and sales. In return it would receive commission.

4. The other partner in the joint venture was to be a syndicate of wealthy businessmen, collected and headed by Mr. Mok himself and who would, in due course, be incorporated into a limited company. The syndicate took the name of Ball Land and became later Ball Land Investment Co. Ltd. (the second respondent in these proceedings and the defendant below). One of the members of the syndicate, later a shareholder and director of the company, was a Mr. Lai Kwai Tim.

5. These negotiations took place in 1961. The initial agreement to purchase the site was signed on the 25th October (G2). (There was a supplemental agreement in the December (G18)). The vendor was Davie Boag & Co. Ltd. The deposit was paid and $507,600 as commission to Mr. Mok. There were as well administrative and advertising expenses. All were comfortably covered by a contribution from each partner of approximately $564,000. On the same day that the agreement was signed Mr. Mok executed a declaration that he held the interest in trust for Sang Lee (G14).

6. The response from the public was even better than anticipated. Within six months, that is by the end of March, 1962, the joint venture had received almost $400,000 by way of deposits from intending purchasers.

The forty-seven flats

7. Mr. Mok had promised the members of the syndicate that apart from eventual profit they would have a speedy return of their initial investment. He kept his word. His plan was again simple: to borrow money from the joint venture, use that money to purchase some of the flats to be built by the joint venture and sell the flats immediately at a discount for cash. The cash would then be returned to members of the syndicate.

8. The execution of the plan was more complicated. It will be necessary later to go into detail but for the moment it is sufficient to say that in February, 1962 the joint venture sold forty-seven flats to the syndicate under the name Far East Investment Ltd., a private company belonging to the Mok family which acted on behalf of the syndicate until it was incorporated in its own right. The price agreed was $1.26 million (we speak in round figures), not quite 20% lower than the list price of those flats. 90% was to be paid immediately, the balance on assignment. Payment was treated in the accounts of the joint venture as a debt due from Ball Land, though it does not actually figure in the balance sheet until the following financial year, that is the year ending 31st March, 1963. To keep matters even within the joint venture Sang Lee was credited with a loan equal to the 90%. This did not figure in the balance sheet until the financial year ending March, 1964.

9. The syndicate immediately sold the forty-seven flats en bloc to the Wing Kwai Investment Co. Ltd. (the first respondent in these proceedings and the plaintiff below). That company is accepted to be the alter ego of Mr. Lai Kwai Tim. The price was $771,875 - 10% down, and the balance by two monthly instalments. This was an apparent loss to the syndicate of nearly half a million dollars but it must be remembered that they were getting immediate cash, at least on paper, sufficient to cover their initial investment. The documents show the purchase price as having been paid in full by the 7th July. Thus the syndicate members were able to receive back all that they had put in the previous October.

The agreements

10. The joint venture thus far had been conducted upon a verbal agreement. On the 31st December the same year, that is 1962, a formal partnership agreement between the two companies was drawn up and signed (G34). Ball Land had been formally incorporated as a limited company on the 5th of the month. The capital of the joint venture was to be $6,097,000, the cost of the land, contributed by the partners in equal shares. Approximately half of each contribution was to be made by the end of June, 1963, the balance on or before the 30th December, 1964. There was provision to increase the capital from time to time and the further contribution, unless otherwise agreed, was also to be in equal shares. The payment of $609,120 by Ball Land was acknowledged, leaving that company with express future commitments totalling some $3,049,000. Amongst the other customary provisions in the deed was a requirement for each partner to be "faithful and just to the other in all dealings or transactions relating to or affecting business".

11. The agreements for the sale of the forty-seven flats from Sang Lee to Far East and then from Far East to Wing Kwai had been formally recorded in writing. Early in 1963 those agreements were replaced by further agreements, this time between Sang Lee and Ball Land and between Ball Land and Wing Kwai. Nothing turns upon the fact that the earlier documents are no longer available although we have a draft copy of one. It is accepted by all that the later agreements were intended, and did as between the parties, put Ball Land into exactly the same position that Far East had earlier occupied on behalf of the syndicate. The later agreements are dated respectively the 17th January 1963 (E7) and the 20th February 1963 (E20).

The mortgages

12. Davie Boag conveyed the land to Sang Lee by two assignments. The first was on the 22nd July 1964 (G23). On the same day Sang Lee mortgaged part of the land to the Bank of East Asia for $3,000,000 by way of an immediate advance of $1,500,000, an increase of overdraft facilities by $765,000 and a further advance of $750,000 to be paid in stages tied to the progress of Po Lee and Wai Lee Estates, the first to be constructed (G46). Interest on the monies was payable at 1% monthly, compound with monthly rests.

13. On the 28th October, 1964 the first meeting of the joint venture was held between the directors of Sang Lee and Ball Land. Mr. Kwan took the chair. He reported that although there was some cause for concern at the slow progress of the piling work, which had brought complaints from some of the intending purchasers, matters should improve in the coming winter months. At his request the meeting ratified the mortgage he had earlier obtained. With the money thus obtained, the monthly income from instalments of the purchase prices and the raw material already in hand Mr. Kwan felt confident that the financial resources of the joint venture would prove adequate.

14. Davie Boag assigned the remaining part of the land on the 7th January 1965 (G28). The following day Sang Lee mortgaged that further part to the bank on terms similar to those of the first mortgage (J232). Although it was expressed as a separate and independent mortgage, which would therefore have raised the total facilities granted by the bank to $6,000,000, the second mortgage seems to have been treated by everyone merely as additional security for the original $3,000,000.

15. By the end of the year the joint venture was running into financial difficulties. $2,300,000 were outstanding in unpaid purchase monies and the Bank of East Asia was reluctant to lend more. However, Sang Lee managed to squeeze a further $700,000 from the bank in January 1966 (G62), and then in March mortgaged some of its own private properties for a further $750,000 (see note to F41).

16. During 1966 the situation became worse. In July the bank pressed for repayment. The outstanding purchase monies were said to be $3,000,000, although they were later found to be only $1,300,000. Solicitors were instructed to recover the monies but little was achieved. The purchasers were not happy with the way things appeared to be going and some actually issued writs. The position was desperate. Both Sang Lee and Ball Land would have liked, if they could, to give up the joint venture, taking out only the $1,136,000 that each had already received way back in 1962. They needed a third party to take it off their hands, but none was found. There were some negotiations in September, but they fell through.

17. The turn of the year saw renewed consultation with the bank. Construction had stopped and drastic action was necessary. In order to satisfy the disgruntled purchasers the bank was willing to assume responsibility for the completion of both the Po Lee and Wai Lee Estates and to advance a further $3,500,000 to that end. However, it insisted that all the instalment monies received thereafter were to go direct to the bank and that for each completed unit released to the actual purchaser the joint venture would have to reduce the outstanding loans by $10,000. These terms were agreed (G72). When the accounts were drawn up at the end of March 1967 total advances to the venture had reached the high point of $7,200,000.

18. We should add that from the very beginning each and every one of the advances had been backed by the personal guarantee of three of the directors of Sang Lee, that is Mr. Kwan, Mr. Ma To Sang and Mr. Hudson Chen Wood (G58 and ORS).

The end

19. The Po Lee and the Wai Lee Estates were likely to be finished in October 1967. As that month approached the joint venture had again to look for cash, because of the $10,000 needed for the release of each individual unit to its purchaser. In September (H103) they offered unsold flats to the shareholders of their own companies at 10% discount for cash, or to pay interest at 2% per month to any shareholder willing to lend money on a bare promissory note. There seems to have been no initial response. However, eventually the three directors that we have just mentioned agreed to lend together a total of $900,000. That was in November 1967 (H105). The money was provided in the following year.

20. By March 1969 the financial position had changed very little. The mortgage debt had been reduced only to $6,916,000 and the bank was again pressing. Some flats were still unsold and there was considerable money outstanding on others. Moreover, the contracting company had sued and obtained judgment against the joint venture. It was decided to sell the unfinished Tak Lee Estate. That realized $3,560,000. It was less than they had hoped.

21. During the next two years the same three directors of Sang Lee lent more money to the joint venture, so that at least the bank was paid off in full by the end of March 1972. The balance sheet then showed a deficit of $5,714,000. Three quarters of that was the capital and interest due to the three directors. Before then, however, the directors had sued to recover the $900,000 initially lent. Sang Lee consented to judgment. Ball Land did not satisfy the conditions imposed upon the giving of leave to defend and judgment was entered in default. The directors presented a petition to have Ball Land wound up in November 1971. The order was made in the same month. Since then the company has been in the hands of the Official Receiver.

The litigation

22. When the occupation permit was issued on the 27th October 1967 Sang Lee should have assigned the forty-seven flats to Ball Land in accordance with their agreement of the 17th January 1963. They did not do so then nor have they ever done so since. Consequently Ball Land have been unable to give their assignment to Wing Kwai.

23. On the 3rd October 1973 Wing Kwai issued a writ. They followed with a statement of claim in February 1974 asking for specific performance of the agreement with Ball Land of the 20th February 1963 and for damages. Ball Land brought in Sang Lee as third party. In addition to the claim for specific performance and damages they added their own claim for breach of the partnership agreement, fraud and other breach of fiduciary duties and prayed an account of the joint venture on the footing of wilful default. Sang Lee was given leave to defend directly against Wing Kwai as well as against Ball Land and brought counterclaims against each that the two agreements should be set aside. Other matters were included in the pleadings that are no longer relevant.

24. The action did not come on for trial until the 8th January last year. It was then agreed that the trial should be held in two parts, one dealing with the question of specific performance and the other with the partnership issues. Wing Kwai was of course not interested in the latter aspect. The specific performance question was to be dealt with immediately, the partnership issues adjourned to a future date. The balance of the purchase price due from Ball Land upon their agreement was paid into court pending the outcome of the partnership issues. For reasons which now escape us the figure of $126,000 has been abated to $96,000.

25. The first trial was concluded on the 15th February. Judgment was reserved until the 10th March. Specific performance was ordered of both agreements and Sang Lee's counterclaims dismissed.

26. The trial of the partnership issues took place towards the end of last year. In a further reserved judgment the trial judge entered judgment for Ball Land and ordered that an account be taken of the joint venture on the footing of wilful default and that the damages suffered by Ball Land should be assessed subsequent thereto.

27. Sang Lee lodged notices of appeal against both decisions and the two appeals were directed to be heard together. However, soon after commencement of the hearing before us the appeal against the order for an account was abandoned, together with certain of the grounds of appeal against the orders for specific performance. Before turning to the remainder it is necessary to look more closely at some of the earlier transactions.

Wing Kwai and the syndicate

28. The syndicate sold the forty-seven flats to Wing Kwai for $771,875. It was an agreed fact at the trial that payment was made in full. However, only $248,156, that is less than half, was paid in actual cash (E34 and 35). The rest was accounted for in this way:

29. Since the fact of payment was agreed in the court below no evidence was led as to the manner in which it was made. There was therefore no evidence as to whether or not the syndicate members were actually offered or took the flats in lieu of repayment. Mr. Ching, who appears for Wing Kwai, argues that it could be that members did pay actual cash. However, that seems to us most unlikely. The net result is that certain members of the syndicate received in specie part of the assets that the syndicate had purchased; the remainder received back their initial investment in cash. The records show the transactions as being entirely in cash and as taking place on the 11th April and the 28th June 1962 (D48 to 54).

Ball Land Investment Co. Ltd.

30. The limited company was incorporated on the 4th December 1962 with a share capital of $640,000 divided into 64,000 shares of $10 each. They were allotted substantially according to the amount contributed by each member to the syndicate, although there were one or two small changes and whereas there had been eighteen original syndicate members, there are now twenty shareholders.

31. The very next day, i.e. 5th December, the company paid out $128,000 to those shareholders who had been members of the syndicate. This represented a 20% bonus on their original investment. Then on the 29th October 1963 $51,200 was paid out to the then shareholders. All these payments are recorded in the cash ledger as individual items against "current account" (D178 and D182) and in the personal accounts of each shareholder.

32. It is not so easy to find the next payment out which occurred in March 1966 and totalled $64,000. The individual sums are recorded in the personal accounts, where they are entered on the 31st March 1966 against "1965 dividend". There is one exception, where the entry appears on the 1st April 1965 and is referred to as "interest for 1965", although the date is perhaps in error (D213). There are no apparent corresponding entries in the cash ledger. One suggestion is an entry of $64,000 against "interest", and the money could have been part of $75,000 borrowed from Sang Lee, the balance going out as $11,000 for Directors' Fees. The difficulty in the way of this suggestion is that the latter entries appear in August 1964, a date which is confirmed by the cheque book stubs of Sang Lee.

The grounds of appeal

33. Although the notice of appeal by its terms asks us to set aside the two agreements of sale and purchase, that aspect is no longer pursued. It is accepted that the two agreements are good as such. What we are asked to say instead is that the conduct of Ball Land and Wing Kwai has been so unconscionable that we ought not in equity to enforce those agreements but rather leave Ball Land and Wing Kwai to their remedies at law. The argument, as we finally understand it to be put, rests on three contentions which either by themselves or in conjunction are sufficient grounds for the refusal of equitable relief.

34. Firstly it is said that there was a fraudulent scheme between Mr. Mok and Mr. Lai Kwai Tim, and perhaps some other members of the syndicate, and thus between the two companies of Ball Land and Wing Kwai, to strip Ball Land of its assets so that even if the joint venture should fail neither shareholders of Ball Land nor those of Wing Kwai would suffer a loss. Indeed, they would at worst be bound to make a small profit while Sang Lee would be left holding the financial baby. It was, it is suggested, a deliberate "fail safe" mechanism.

35. The scheme is to be inferred from the transaction itself. By the time the company was formally incorporated it had no real assets left. The initial investment had been spent. Part had gone into the purchase of the land, but all that remained in that respect was the hope of a profit in the end. Against that the company had incurred a large debt and "a trading loss" of nearly half a million dollars. The shareholders had received back all that they had put in yet they represented to the outside world that the company had a paid up capital of $640,000. Later the shareholders were to take out even more, some of it at a time when they knew the company was about to be called upon for heavy construction costs. When the calls did come they made not the slightest response, unlike their colleagues in Sang Lee, even though they themselves were said to be rich men. What other inference can then be drawn from their forming themselves into a limited company? Had they been honest in their intentions they need not have done so. They might equally well have remained private partners in the joint venture. Even if they were not deliberately fraudulent they knew full well what they were doing and some at least of their actions were unlawful. Their conduct therefore amounted to a civil conspiracy: Belvoir Finance Co. Ltd. v. Stapleton^(1). That was a case where parties honestly tried to get round the deposit provisions of the Hire-Purchase and Credit Sale Agreements (Control) Order, 1964 by giving a discount on the initial purchase price, but were nevertheless said by Lord Denning, M.R. to be "guilty of conspiracy".

36. That leads to the second contention that the three payments of $128,000, $51,200 and $64,000 were either an unlawful reduction of capital or an unlawful payment of dividend from non-existent profits, which is much the same thing: In re Exchange Banking Co.^(2). A recent case in point is the Australian case of Australasian Oil Exploration Ltd. v. Lachberg^(3). A company in serious financial difficulties agreed to sell its most valuable asset, the shareholding in a second company, to a third company, partly for cash and partly for a right to its own shareholders to purchase most of the shares in the third company; the shares to be offered were worth far more than the cash price paid, hence the desire to preserve the interests of the existing shareholders; yet any of those who did not take up the offer would have been left with shares in a company denuded of almost all its assets. The High Court of Australia confirmed the trial judge's view that the agreement constituted an unauthorized return of capital and was therefore ultra vires and void. To an alternative argument that the company would have been entitled to distribute the proceeds of sale as dividend, the court answered (at p.133):

"It is enough on this point to say that a company has no capital profits available for dividend purposes unless upon a balance of accounts it appears that there has been an accretion to the paid up capital.^"

37. At the trial the judge accepted, we think with some hesitation, the argument that all these monies and the earlier repayment of $640,000 were loans from the company to its shareholders, under which guise they appeared regularly in the balance sheet. He was impressed by the evidence of the witness from the auditors, who said that when he first started to audit the books in 1963 he advised the shareholder then in charge of the accounts, a Mr. Chan Kwok Wah, of Wah, impropriety of returning capital or of distributing profits before they were earned and thereafter year by year he sent out circulars to the various shareholders requiring confirmation of the loans. Although these confirmations were no longer available, the witness was satisfied that the accounts could not have been made up as they were unless the confirmations had been regularly received back. Mr. Lai Kwai Tim's evidence was that Mr. Chan Kwok Wah had told him that the payments had been changed to loans. The judge accepted that and took the view that even if the other shareholders had not come to realize the position over the years, which he thought they would, they would nevertheless be bound by the acceptance of their colleagues, Mr. Lai and Mr. Chan.

38. Mr. Ross-Munro, counsel for Sang Lee, respectfully disputes the reasoning of the judge, and further points out that no advice from an auditor can subsequently change the nature of a payment already made. He suggests that it is clear from the whole of the evidence that although the company paid lip service to the auditor's advice, it continued to treat the original and subsequent payments as absolute. He instances the use of the word "dividend" in the accounts and the fact that there is no minute recording the loans. Above all at no time whatsoever has any request been made for repayment, not even by the Official Receiver. Nor, until after the trial started, had anyone offered to repay. A few shareholders have now repaid their part of the $640,000 in full and most of the others who are still alive have acknowledged their debt and paid 20%. It is of course not unlawful for a company to lend money to its shareholders.

39. The third contention of Sang Lee is that Ball Land was in flagrant breach of its fiduciary duties under the partnership agreement and the joint venture generally, in particular by not paying the $3,480,000 that was expressly provided for in the partnership agreement. This was perhaps excusable in the early years for at that stage the partnership was not short of funds. But Ball Land should have paid later when funds were urgently needed. In fact it did not contribute one single cent to the venture from the date of its incorporation to the order for winding up, and it has adamantly refused to pay its half share of the monies still owing to the three directors of Sand Lee.

40. In addition, the "fail safe" scheme and the return of capital and dividends without profit are themselves breaches of the fiduciary relationship.

41. Mr. Ross-Munro argues that there is only one way in which a court of equity can exercise its discretion where one partner thinks of a scheme whereby he can only win and not lose, even though he does not deliberately intend that scheme to operate to the detriment of the other partners, and then proceeds to put that scheme into effect by means which are themselves a series of breaches of company law or practice. The court must refuse equitable relief.

The answer

42. The gist of the answer by both Ball Land and Wing Kwai can we think be put as simply as this - "If you think we behaved badly, you yourself have behaved far worse; and indeed if it had not been for your misuse of the joint venture funds for your own private ends the joint venture would have weathered the storms of the mid 1960s and come safely to port and perhaps still made a little profit."

43. There were other arguments directed to persuading us that there has been no deliberate "fail safe" scheme, and no unlawful reduction of capital or payment of dividends without profits; or that even if there had been illegality, that illegality had been repented in time; that there had been no failure to contribute by Ball Land, for Ball Land had not been asked to do so; and that in any event the two agreements for the sale of the forty-seven flats were independent transactions having no relevance to the internal affairs of the partnership and ought not now to be prejudiced by the private quarrels of the partners.

Sang Lee's conduct

44. Sang Lee was the active partner in the joint venture. In particular it was responsible for collecting the monies, paying the bills and keeping the accounts. Yet it opened no separate bank account. Mr. Kwan had other large business interests in which Sang Lee were involved. Some were joint ventures with yet other partners. The revenues from the Ball Land venture were freely intermingled with other Sang Lee funds and were drawn upon indiscriminately as and when Sang Lee required money regardless of whether it was for the joint venture or not. One early consequence of this policy was to saddle the joint venture with debts it need not have incurred. Mr. Chang, counsel for Ball Land, has shown clearly that at least at the time of the first mortgage for $3,000,000 the joint venture had in fact sufficient funds for its own needs. The year before, when Davie Boag gave vacant possession of the site, the joint venture could have paid off the balance of the purchase price, yet Sang Lee allowed it to incur interest charges thereon until 1964 or 1965. Another consequence of mixing the monies was that Sang Lee failed to obtain any interest upon the admitted credit balances that the joint venture held in the first few years.

45. The question of interest is important, for once monies are borrowed interest is a continuing expense. If there was an error in the first instance that error would be continued and compounded month by month and year by year. Mr. Ross-Munro attempted to show from the accounts that at least a substantial part of all the monies eventually borrowed were expended on the joint venture. With respect we are not so persuaded. Mr. Chang goes to almost the other extreme. He argues that although the joint venture would have had to borrow to some extent it could have raised the necessary amounts comfortably upon its own land without resort to other properties or loans from the three directors. He is confident that when the accounts are ultimately put in order and due allowance made for these and other matters to which we shall refer in a moment - and we should add, further allowance is made for the greatly increased value of the few flats that still remain unsold - the joint venture will come out with a profit rather than a loss. We feel the matter is too complicated even to hazard a guess. We are certain however that Ball Land will finish in a considerably better position than it now occupies.

46. One specific transaction was admitted in the second trial below: Sang Lee made a secret profit of $182,719 upon a consignment of steel bars purchased for the joint venture. Another transaction was admitted in which Sang Lee benefited to the extent of $125,000, but that it was in any way dishonest was denied. The judge dealt with the matter very fully in his second judgment. He came to the conclusion that it was a "secret commission to Sang Lee which Mr. Kwan in his curious and devious way sought to 'wash' through the accounts" (A85).

47. Finally there are what have been called the "confirmor sales". These were instances where original purchasers defaulted in payment. The sales agreements provided that in that case Sang Lee would be entitled to rescind the sale, forfeit any sums already paid, whether by way of deposit or instalments, and resell the property, retaining to itself any increase in the resale price over and above that of the original sale. However, instead of doing that and accounting to the joint venture for any profits thus made, Sang Lee allowed one of its own employees to take the benefit. He was the assistant to Mr. Kwan's own son.

Our conclusions

(a) "The scheme"

48. The trial judge came to the conclusion that there was no deliberate fraud. His judgment is explicit. He disposes of the suggestion "that one of the partners was endeavouring dishonestly to overreach the other" (A59) and later finds "a scheme of duplicity ........ to be non-existent" (A62). That is essentially a finding of fact. We are not persuaded that the transactions speak so strongly for themselves that the finding ought to be reversed. By the same token we are not persuaded that the conduct of Mr. Mok and Mr. Lai amounted to a civil conspiracy. The judge's finding shows that they did not intend to injure Mr. Kwan and Sang Lee; they intended only to benefit themselves. The case of Belvoir Finance Co. Ltd. v. Stapleton can be distinguished. What the parties did there amounted to a crime.

(b) The illegal reduction of capital

49. The judge held that the return of $640,000 was not illegal because at that time Ball Land was still a partnership and there is no rule of law which prohibits partners returning their own capital to themselves. He thought that "the payment was not subsequently rendered unlawful by the later payment of $128,000, which was itself improper but later acknowledged to be repayable together with the earlier and larger sum as a loan".

50. We have remarked earlier why the judge considered these and the other payments to be loans. With the greatest respect we disagree with him on this point. When one looks at the whole picture it is obvious, as Mr. Ross-Munro contended, that Ball Land were doing no more than pay lip service to their auditors. The payments were never intended to be nor were they treated as genuine loans. That was only a way of keeping the books. The learned judge commented that what he had to seek was the substance rather than the shadow. With respect, it was only the label that he found. In our view the payments after incorporation were unlawful.

51. We agree with the judge's findings as to the $640,000. That repayment was within the law. However equity cannot regard with approval what followed almost immediately, namely the incorporation of the syndicate into a limited company with that money registered as fully paid up capital. All that the company had in point of fact, once the $128,000 had been paid out, was its hope of eventual profit in the joint venture.

(c) Failure to contribute

52. It is true that Ball Land did not contribute anything to the joint venture other than its initial investment. It is true that it did not honour its commitment under the partnership agreement or respond to the calls made from 1965 onwards. With respect to Mr. Ching it is a verbal quibble to say that they were not called upon. They knew there was urgent need of money. Minute after minute recorded desperate cries for help. The short answer is that by that time Ball Land was not in a position to help. That is clear from the record (H56). But neither was Sang Lee (H41), which made no attempt to repay the $1,136,000 taken by it until much later. We do not know whether the individual shareholders of Ball Land could have done anything. There is some dispute whether Mr. Mok was still the wealthy man he had been in 1961. Mr. Kwan and two other directors of Sang Lee still had money. They were prepared to let it be used. However, Mr. Chang has observed - and we think quite rightly - that it was a question of Hobson's choice once they had committed themselves personally in 1964. They had to make the joint venture survive if at all possible.

Should there be specific performance?

53. It is argued that we ought to concern ourselves only with the conduct of Ball Land and its shareholders. It is they who seek equitable relief and it is they who must show that their conduct has been up to the standards demanded by equity. It is immaterial that Sang Lee may have misbehaved itself as well, and that if the boot were on the other foot the court would refuse them assistance. Equity should stand aloof and leave the parties to their legal remedies.

54. In our view that argument would be correct if there were little to choose between the competing parties - for example with regard to the conduct of Ball Land in reducing itself to a financial shell in 1962. As we have mentioned earlier, equity would not approve of the greater part of its conduct and the remainder was unlawful. Yet Sang Lee knew full well what Ball Land was doing and gave its blessing. It knew that the forty-seven flats would be sold out immediately at a heavy discount. That was the only way for Ball Land to raise immediate cash, which was what both Ball Land and Sang Lee wanted at the time. Sang Lee took cash directly.

55. However there is a great deal more to the present situation than that, and in our view it is Sang Lee which is by far the worse offender. Firstly it abused its position as keeper of the purse strings by using joint venture monies for its own private ends. That was at the root of many of the later financial problems or seeming problems. The trial judge referred to their conduct as "obvious folly". Mr. Kwan was an experienced businessman. We see it more as a conscious breach of obligation. Secondly there is the private profit of $182,000. And finally the secret commission from the contractor and the confirmor sales. The trial judge described these as "flagrant breaches of confidence amounting to equitable fraud".

56. The value of the flats in question is now many many times higher than it was in the 1960s. If the orders for specific performance were revoked, Sang Lee would gain the benefit of half that increase. It would not benefit from all the flats. Sang Lee is willing to complete assignments to any purchaser who is not part of the Mok family nor associated with the syndicate or Wing Kwai. We do not know to how many that might apply. Yet it makes no difference. Sang Lee would still retain properties which long ago it fully intended to belong to Ball Land and which on Mr. Kwan's own admission, it fully believed to do so. In view of its grave misconduct that would not be fair and just. We think the appeal should be dismissed.

Representation:

C. Ross-Munro, Q.C. and R. Tang (Messrs. H.H. Lau & Co.) for the appellant/third party.

C. Ching, Q.C., P. Fung and Miss C. D'A Remedios (Messrs. Philip Remedios & Co.) for 1st respondent/plaintiff.

D. Chang and M. Ozorio (Messrs. Chu & Lau) for 2nd respondent/defendant.

(1) [1971] 1 Q.B. 210

(2) [1882] 21 Ch. 519

(3) [1958] 101 C.L.R. 119