Chip Tak Weaving Factory Ltd v. Nicholas David Hunsworth and Law Wing Chung, Vincent, Appointed By Order Dated 2 March 2017 To Represent the Estate of Lou Chor Hee (Alias Lou Pak Chuen and Lou Also Spelled As Lau) (Deceased)

HCA 1796/2015

[2018] HKCFI 349

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1796 OF 2015

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JUDGMENT

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1.By the summons dated 13 July 2017 (“the summons”) the plaintiff seeks summary judgment under Order 14, rule 1 of the Rules of the High Court against the defendants.

2.The plaintiff is and was at all material times a private limited company incorporated in Hong Kong.

3.The plaintiff commenced this action on 7 August 2015 against the personal representatives of the late Lou Chor Hee alias Lou Pak Chuen and Lou also spelled as Lau (“Lou”) who passed away in Hong Kong on 9 October 2011. 

4.The defendants Nicholas David Hunsworth and Law Wing Chung, Vincent, partners of Mayer Brown JSM, were appointed to represent the estate of Lou.  By an order made by Anthony Chan J on 2 March 2017 it was ordered, inter alia, that the defendants be appointed to represent the estate of Lou for the purposes of these proceedings and that these proceedings be carried on against the defendants as if they had been substituted for the estate of Lou.

5.On 7 March 2017 the plaintiff amended the writ of summons to rename the description of the defendants.

6.On 5 April 2017 the plaintiff filed and served its statement of claim.

7.The defendants filed and served their defence on 20 June 2017.

8.By the summons the plaintiff applied for summary judgment.

9.Lou was a co-founder of the plaintiff and was one of its directors until he passed away on 9 October 2011. 

10.Lou was the father of Lau Lee Hok Thomas (“Thomas”), LauLee Cheung (“LLC”), Lau Lee Tung (“LT”) and Lau Lee Tsun (“Lee Tsun”).   

11.Thomas, LLC and LT are, and were at all material times, the beneficial owners of the shares of the plaintiff through direct holdings in the shares of the plaintiff and indirectly through Quality Denim Ltd, a BVI company.

12.The board of the plaintiff presently comprises of Thomas, his three children, LLC and LT.  The effective control of the plaintiff is in the hands of Thomas and his three children Wendy, Wayne and Wilson.

13.Lee Tsun is the eldest daughter of Lou but has never been a director or shareholder of the plaintiff.

14.Prior to his death on 9 0ctober 2011, Lou was a director of the plaintiff.  Immediately prior to his death, the board of the plaintiff comprised of Lou, Thomas, LLC and LT.

15.As pleaded and particularized at para 4 of the statement of claim, the plaintiff’s claim against the estate of Lou is for the sum of HK$110,000,641.67 made up as follows:

(a)   HK$109,485,566.67 being the total amount due from Lou as director of the plaintiff as at 31 December 2009;

(b)   HK$515,075 being the total balance of various loans advanced by the plaintiff to Lou on divers dates from 1 January 2010 onwards.

16.The total sum of HK$109,485,566.67 has been admitted by Lou as being due to the plaintiff.  This was an admission made by him in the written audit confirmation dated 23 June 2010 from M B Lee & Co to Lou.  By the said audit confirmation Lou confirmed, by signing the same, that as at 31 December 2009 the sum of HK$109,485,566.67 was owing by him to the plaintiff. 

17.As detailed in the ledger of the plaintiff, the sum of HK$515,075 is the total balance of various loans advanced by the plaintiff to Lou on divers dates from 1 January 2010 after deducting repayments by Lou or amounts credited in favour of Lou in the ledger. 

18.In view of the documentary evidence which supports the plaintiff’s claim the plaintiff applied for summary judgment on its claim.

19.The defence that was filed and served on 20 June 2017 does not, in my view, show a triable issue.  Bare assertions are made at para 6 that the defendants are given to understand that the audit confirmations signed by Lou were simply accounting entries and was not intended to create any liability on the part of Lou, and that any amounts paid by the plaintiff on behalf of Lou or for his benefit did not constitute loans advanced to Lou. 

20.The defendants did not condescend to particulars in the defence and it hardly surprising that the plaintiff applied for summary judgment by the summons.

21.The affirmations in support of the summons were made by Thomas by his 1^st affirmation and by Lau Wendy Yee (“Wendy”) by her 3^rd affirmation which were filed also on 13 July 2017. Wendy is also a director of the plaintiff and the daughter of Thomas.

22.Mr Hunsworth made an affidavit on 28 July 2017 in opposition.  Essentially it was asserted that the defendants were unable to verify the amounts of the alleged loans to Lou and that as there may be other grounds to oppose the application he asked for time to file and serve further evidence in opposition.

23.By an order made by Master J Wong on 31 July 2017 it was ordered that the hearing of the summons be adjourned to a judge in chambers.  Directions were given for the filing and serving of further evidence.

24.An application was made by the defendants by summons dated 28 September 2017 for an order that LLC be examined before an examiner of the court or an examiner to be agreed.  The application was supported by the 2^nd affidavit of Mr Hunsworth.

25.By an order made by Lok J on 7 November 2017 it was ordered that LLC be examined viva voce on oath or affirmation by the defendants before an examiner to be agreed.  It was also ordered that the depositions taken at the examination be filed in the Registry of the High Court and that office copies thereof may be given in evidence at the hearing of the summons.

26.LLC was examined on 21 November 2017 pursuant to the order of Lok J. The transcript of his deposition has been placed in Bundle A.

27.Wendy’s 4^th affirmation on behalf of the plaintiff was filed on 14 December 2017 pursuant to a consent order made by Lok J on 12 December 2017.

28.By a consent order made by Master M Lam on 19 December 2017, the defendants were given leave to file and serve the affirmation of Chan Yung Chau (“Chan”) as per the copy annexed to the defendants’ summons dated 15 December 2017.  Chan is the chief accountant of the plaintiff.  By the said consent order the plaintiff was also given leave to file and serve an affirmation in reply on or before 8 January 2018.

29.Pursuant to the consent order made on 19 December 2017, the affirmation of Chan was filed on 22 December 2017 and the 2^nd affirmation of Thomas was filed on 8 January 2018.

30.At the hearing of the plaintiff’s summons for summary judgment before me, Mr Hunsworth applied for leave to file and serve a further affidavit to exhibit the correspondence attached to his written skeleton submissions namely, the letters that his firm Mayer Brown JSM had written to LLC’s solicitors and to LT and the reply from LLC’s solicitors.  I gave leave to the defendants to adduce and to rely on the letters at the hearing on the undertaking that was given by Mr Hunsworth that an affidavit exhibiting those letters would be filed. 

31.In the course of the hearing I also gave leave to the plaintiff to adduce and to rely on the memorandum and articles of association of the plaintiff and the annual returns of the plaintiff for 1962, 1995, 1996, and 2010 on the undertaking that was given by Mr Leung, for the plaintiff, that an affidavit exhibiting the same would be filed. 

32.It is trite that in an Order 14 application for summary judgment it is for the defendant to show a triable issue.  The defendant must condescend to particulars to show what the defence is and the facts relied on. 

33.I would also refer to the often quoted observations of Godfrey J (as he then was) in Unic Co v Centus Development Ltd [1988] HKC 643 at 647:

“ The power to give summary judgment under O 14 is intended to apply only to cases where there is no reasonable doubt that the plaintiff is entitled to judgment and where therefore it is inexpedient to allow the defendant to defend for mere purposes of delay: see Jones v Stone [1894] AC 122.

As a general principle, where a defendant shows that he has a fair case for defence or reasonable grounds for setting up a defence, or even a fair probability that he has a bona fide defence, he ought to have unconditional leave to defend.  Leave to defend must be given unless it is clear that there is no real substantial question to be tried, or that there is no dispute as to the facts or law which raises a reasonable doubt that the plaintiff is entitled to judgment.  Order 14 is not intended to shut out a defendant who can show there is a triable issue applicable to the claim as a whole from laying his defence before the court, nor to make him liable in such a case to be put on terms of paying into court as a condition of leave to defend.”

34.Rogers VP in the Court of Appeal in Pacific Electric Wire & Cable Co Ltd v Harmutty Ltd [2009] 3 HKLRD 94 emphasized that:

“ … Applications for summary judgment are only suitable where the court can be satisfied that not only is there no defence but there is no fairly arguable point to be argued on behalf of the defendant. The court cannot embark upon a mini-trial based on affidavit. Except in the most clear and blatant cases, it is impossible for a court to put itself in the position of having to make findings of fact. It should rarely be necessary for a plaintiff, in making an application for summary judgment, to do more than verify the statement of claim. If, thereafter, a defendant can show a triable issue that should, there and then, be an end to the application.”

35.There is no dispute that the documentary evidence supports the plaintiff’s claim.  The relevant entries in the ledger, the audit confirmations signed by Lou and the financial statements all confirm that the plaintiff advanced loans to Lou over the years.  Lou has signed audit confirmations as shown in the evidence which confirm his indebtedness to the plaintiff for the amounts as set out therein. 

36.The plaintiff also relies on the minutes of the meeting of the board of directors held on 31 December 2008 where all the directors including Lou were present.  It was resolved, inter alia, that the advances made to Lou as a director were unsecured, interest free and were approved, confirmed and ratified.  All the directors including Lou signed the minutes. 

37.Mr Leung submitted that the plaintiff’s claim was a straightforward claim for repayment of director’s loans advanced to Lou which was admitted by Lou signing the audit confirmations and the minutes of the board minutes of the meeting held on 31 December 2008.

38.Mr Hunsworth, with Mr Vincent Law, submitted that Lou did not regard the amounts as claimed as being a debt that he owed to the plaintiff.  It was his intention that the amounts recorded as owing by him to the plaintiff would be written off and his expectation that his three sons who were the shareholders would agree to his request.  It was submitted that Lou’s intention and expectation was founded on his conviction that the plaintiff was his company which he had built and that he could do with it as he pleased and that his sons being loyal sons would recognize that and accede to his wishes.

39.It can readily be seen that none of this was pleaded in the defence that was filed and served.  It seems to me that if leave to defend were to be given to the defendants, they would need to apply for leave to amend the defence with a properly formulated pleading in the usual way.  Mr Hunsworth acknowledged that the defendants would need to apply to amend the defence if leave to defend were given.

40.In seeking leave to defend Mr Hunsworth relied on all the evidence before the court.

41.Lee Tsun, the eldest daughter of Lou, made an affirmation on 14 July 2016 in support of her application to appoint the defendants to represent the estate of Lou in these proceedings.  In her affirmation she said that she understood from her father that the plaintiff was founded by him and that it has always been the common understanding amongst all the members of the family that the plaintiff was her father’s company.  Lee Tsun was neither a shareholder nor director of the plaintiff at any time.

42.When LLC was questioned before the examiner he said that the plaintiff was founded by Lou and his brother.  LLC joined the family business in 1977.  He said that Thomas and LT were involved in the family business before he became involved in it.  Thomas was involved in the accountancy side of the business whereas LLC was involved in the plaintiff’s factory which spun yarn.  LLC was appointed a director in 1982 and has remained a director since then.

43.LLC gave evidence that the whole family lived together under one roof and that Lou took care of all the household expenses from the withdrawals made from the plaintiff.  These were part of the advances made to Lou by the plaintiff over the years.  There was also evidence of remittances for Lou’s investments in real estate in the Mainland which also formed part of the advances made to Lou.

44.LLC also gave evidence of a conversation that he had with Chan.  He was informed by Chan that Lou had told him that he would ask Thomas to write off the debts owed by him to the plaintiff. 

45.At Bundle A pp 100 – 101 there is the following evidence of LLC at the examination:

“ Q. […] So going back to this conversation between Mr Chan and your late father, it was your father’s wish and intention, as far as you understand it, that this loan account simply be written off as far as the company was concerned.

A. Yes.

Q. But obviously, it doesn’t appear that this ever happened.

A. Yes.

Q. Because there’s no documents to evidence that it was …

A. Yes.

Q. … and it still appears in the …

A. Yes.  Because my father always think that this is his company, even though he transfer [sic] the share to we three brothers.”

46.Mr Hunsworth in his 2^nd affidavit said that he understood that these proceedings form part of a larger dispute between the various children of Lou concerning his estate.  He also mentioned that Thomas and LLC are in opposing camps.

47.When LLC was examined by Mr Leung, it was put to him that he was in a position of conflict as a director of the plaintiff and as a person interested in the estate of Lou in the Mainland and in his Mainland assets.   It was suggested to him that if and when judgment is obtained against the estate in these proceedings, the plaintiff would seek enforcement in the Mainland and trace the Mainland assets.  For that reason it was put to him that he was in an embarrassing position of conflict as a director of the plaintiff and as a person interested in the Mainland assets of Lou. 

48.Be that as it may, the question to consider is whether on the material before the court a triable issue has been raised.  If LLC is in a position where his duty as a director of the plaintiff is in conflict with his interests as a beneficiary in the Mainland assets of Lou, that is a matter that can be taken into account by the trial judge in assessing the credibility of LLC as a witness at trial. 

49.When questioned by Mr Leung at the examination, LLC also said that he agreed with the understanding of his sister Lee Tsun in her affirmation that the plaintiff was founded by their father Lou and that it has always been the common understanding amongst all the family members that the plaintiff was Lou’s company.

50.LLC was questioned further by Mr Leung and was taken through the ledger which showed repayments made from time to time by Lou to the plaintiff by crediting amounts due to him for salary and bonus.

51.It is also important, in my view, to have regard to the evidence of Chan.  He is, as I have said, the chief accountant of the plaintiff.  He joined the plaintiff in 1994 and had been in charge of all the accounting affairs of the plaintiff since about 1998.

52.Chan had known Lou since before joining the plaintiff and Lou had a lot of trust in him.  He even took care of Lou’s personal bank accounts and when Lou was away from Hong Kong he had left signed blank cheques with Chan for him to make payments for him.

53.Chan said at paras 4 and 5 of his affirmation:

“ 4. Mr. Lou was the head of Chip Tak and his family, and he had final say on every matter. As far as I know it, Mr. Lou was responsible for all expenses of his family, including the expenses of his sons living with him and their families. Since Chip Tak was Mr. Lou’s family business, Mr. Lou always had the practice of withdrawing money from Chip Tak to meet his personal, family and other business expenses. Mr. Lou sometimes withdrew money from Chip Tak and thendeposited it into his personal bank accounts, and then further withdrew money from his personal accounts. From time to time, Mr. Lou also withdrew money directly from Chip Tak and such sums would be recorded in the company’s shareholder’s account.

5. As far as I understand it, Mr. Lou never considered that withdrawing money from Chip Tak would constitute any debt owed by him to Chip Tak.  Mr. Lou always regarded Chip Tak as his own company and also considered Chip Tak’s money as his own money.  When Mr. Lou was alive, I had never heard anyone expressing any opinion or disagreement with Mr. Lou’s practice of withdrawing money from Chip Tak, including Mr. Lau Thomas Lee Hok, the eldest son of Mr. Lou who was responsible for the financial matters of Chip Tak.  I also had never heard anyone demanding Mr. Lou repay Chip Tak.  The practice of Mr. Lou withdrawing money from Chip Tak always existed.”

54.Chan said that he personally prepared the detailed ledger produced in evidence.  As regards the audit confirmations signed by Lou, Chan said that these were prepared by the auditor and he remembered that he handed the same to Lou for signature before returning them to the auditor.   Chan also said that the plaintiff would remunerate the directors including Lou and that since Lou considered the plaintiff to be his own company, when it came to accounting, Chan would credit the remuneration to offset the amount in Lou’s account.

55.And at para 8 of his affirmation Chan said:

“ 8. I remember that in 2008 or 2009, I noticed that the audit confirmation for that year showed that Mr. Lou had accumulated a large sum of ‘debts’ owed to Chip Tak. I therefore asked if Mr. Lou would like to do anything with the record. At that time, Mr. Lou told me not to worry about it because Chip Tak had always been his own company and Chip Tak’s money is his own money, and he would instruct Thomas to write off the sums at the end of the year. I do not know whether Mr. Lou actually instructed Thomas to do so.”

56.Thomas in his 2^nd affirmation disputes the evidence of Chan.  It seems to me that these raise disputes of fact which cannot be resolved at the interlocutory stage on affidavit evidence without the benefit of cross-examination.

57.At para 8 of Thomas’ 2^nd affirmation he says that for the reasons he gives it is untenable for Chan to allege that the money advanced by the plaintiff to Lou after he sold his shareholding in the plaintiff to his three sons in 1996 were not loans.  He also says that for the reasons he set out, Lou had every intention to repay the loans.

58.In reply to what Chan had said at para 8 of his affirmation as set out above, Thomas said at paras 21 and 22 of his 2^nd affirmation:

“ 21. At paragraph 8 of his Affirmation, Mr Chan said that my father had told him that he would ‘instruct’ me to ‘write off’ the debt at the end of the year. As far as I can recall, my father had asked if we (the Three Sons) could repay the Loanson his behalf, or ‘forgive’ part of or the entirety of the Loans. He did not, however, ‘instruct’ me to do it. In fact, his intention was not so much writing off or forgiving the Loans but to borrow more money for his investment projects in Shantou.

22. I explained to my father that it was not possible for me to unilaterally ‘forgive’ the Loans as the Company was also co-owned by my two brothers in equal shares.  I also suggested to my father that he should discuss with my two brothers if he was serious about getting the Loans ‘forgiven’.I do not know if my father had subsequently raised this issuewith them, but I believe that if he did, my two brothers wouldnot have agreed to it.  This is because ‘forgiving’ the Loans would only encourage my father to borrow more money from the Company.  Again, all the above demonstrates that the Deceased was well aware of his liability regarding the Loans and that he ultimately had to repay them.”

59.It seems to me that these also raise disputes of fact which cannot be resolved on affidavit evidence.

60.Mr Hunsworth submitted that it was Lou’s intention that the loans advanced to him be written off and that it was his intention and expectation that the shareholders namely, his three sons who had inherited the company from him and who were loyal and dutiful sons would recognize that the plaintiff was his own company which he had built and that they would agree to his request to write off the loans.

61.Mr Hunsworth relies on the Duomatic principle.  In In re Duomatic Ltd [1969] 2 Ch 365 Buckley J (as he then was) said at 373:

62.In EIC Services Ltd & anor v Phipps & ors [2003] BCC 931 Neuberger J (as he then was) said at 956:

“ The essence of the Duomatic principle, as I see it, is that, where the articles of a company require a course to be approved by a group of shareholders at a general meeting, that requirement can be avoided if all members of the group, being aware of the relevant facts, either give their approval to that course, or so conduct themselves as to make it inequitable for them to deny that they have given their approval.”

63.Mr Leung relied on Rolfe and another v Rolfe and another [2010] Bus LR D99 where Newey J expressed the view at para 41 that an objective approach should be applied to the Duomatic principle. Newey J said:

“ … In my judgment, there must be material from which an observer could discern or (as in the case of acquiescence) infer assent. The law applies an objective test in other contexts: for example, when determining whether a contract has been formed. An objective approach must, I think, also have a role with the Duomatic principle.”

64.I would observe that Newey J said at para 42 that he was willing to assume, without deciding, that the assent of the beneficial owners of a share will meet the Duomatic requirements.  And at para 43, he said:

“ Whether or not, however, the assent of all the beneficial owners of a share will suffice, I do not think that the assent of just one of a number of such owners normally will.”

65.Although Mr Leung submitted that the Duomatic principle did not apply on the facts, it seems to me that whether or not the principle applies is also a matter to be resolved at trial and is not suitable for summary determination.

66.The defendants also rely on the letters dated 4 January 2018 which Mayer Brown JSM wrote to LT and to LLC’s solicitors Herbert Smith Freehills asking for an answer to the question:

“ If your late father, when he was still alive, had asked the shareholders of the Plaintiff to write off the Loan, would you have agreed to this request?”

Herbert Smith Freehills by letter dated 9 January 2018 replied on behalf of LLC that in his capacity as the son of Lou and shareholder of the parent company of the plaintiff, the answer to the question posed in the letter of 4 January 2018 is “yes”.

67.There was no reply from LLT.

68.Mr Leung submitted that Thomas was never asked the question posed in the letter of Mayer Brown JSM and that LT has not replied to the effect that he would have acceded to Lou’s request. 

69.It seems to me that even if Thomas had been asked the same question and had said “no”, that would raise an issue of fact which needs to be tried with the benefit of cross-examination.

70.It seems to me that on the evidence it is fairly arguable that if Lou had asked his three sons, who were all the beneficial shareholders of the plaintiff, to write off the debt, they would have acceded to that request. 

71.I am satisfied that a triable issue has been shown by the defendants and that the matter will have to be resolved at trial.

72.As the matter will have to go to trial, it is neither necessary nor desirable for me to express a view on the strength or weakness of the other matters raised by Mr Hunsworth and Mr Leung in their submissions.

73.I make an order that there be unconditional leave to the defendants to defend the action. 

74.I make an order nisi that the costs of the application be costs in the cause.

Mr Allan Leung, of Hogan Lovells, for the plaintiff

Mr Nicholas Hunsworth (solicitor advocate) and Mr Vincent Law (solicitor advocate), of Mayer Brown JSM, for the defendants