Chan Chung Yee v. Chan Wah Cho, Joe and Another
Read the full judgment text of HCA 1419/2011 on BabelCite. This High Court CFI judgment was delivered on 20 March 2018.
1. This is the trial of two actions. In HCA 1419/2011, the action is essentially for specific performance of an oral agreement for transfer of shares in some family companies (the “first action”). The parties are siblings of the family. HCA 1228/2014 is an action for inter-company debt. The parties are two family companies held by the siblings (the “second action”).
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HCA 1419/2011 and [2018] HKCFI 611 HCA 1419/2011 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1419 OF 2011 ________________________
________________________ HCA 1228/2014 AND ACTION NO 1228 OF 2014 ________________________
________________________ (Consolidated) Before: Deputy High Court Judge To in Court Dates of Hearing: 19 – 23, 27, 28 June and 31 July 2017 Date of Judgment: 20 March 2018 _______________ JUDGMENT _______________ INTRODUCTION Introduction 1.This is the trial of two actions. In HCA 1419/2011, the action is essentially for specific performance of an oral agreement for transfer of shares in some family companies (the “first action”). The parties are siblings of the family. HCA 1228/2014 is an action for inter-company debt. The parties are two family companies held by the siblings (the “second action”). The background 2.The late Mr Chan Cheong Lun (the “Father”) and his wife (the “Mother”) used to operate a food trading business. In about 1986, they incorporated Huning Limited (“HL”) as a property holding company. In 1992, the Father died. In about 1997, the Mother incorporated Huning Import & Export Company Limited (“HIECL”) to run the food trading business trading mainly in flour. 3.The Father had seven children:
4.In 1997/98, HL incurred substantial loss in a property transaction due to the collapse of the property market. It had to pay compensation to the property developer. The compensation was paid by HIECL from its profits, which was then entered as a debt due from HL to HIECL in the books of the two companies. 5.In about 2005, five of the seven siblings, namely, Chung Yee, Yuk, Hin, Joe and Chui (collectively, the “five siblings”) took over the management of HL and HIECL. By that time, HL had started a logistic business to provide services to HIECL as well as outside clients. HIECL’s main business was in flour, but it also carried on a metal business managed by Chung Yee. 6.Prior to 2 July 2008, the five siblings’ shareholding in the two companies were as follows:
Hin used to hold one-fifth of the issued shares in HL, but he transferred them to Chung Yee, Yuk and Chui to hold on trust for him in 2006 following a traffic accident in China in 2002, probably for some dishonourable motives, which this court needs not be concerned. Later, he gifted his beneficial interest in those shares to Chung Yee. However, he continued to participate in the two companies. 7.There was some discord among the siblings in the operation of HL and HIECL. In January 2006, Chung Yee negotiated with Joe to buy out his shareholding in the two companies, but the negotiation failed. 8.On 2 April 2008, Joe called for a meeting with Chung Yee, Hinand Chui to discuss about splitting the two companies among the five siblings. He produced a schedule showing a proposed re-distribution of the assets of the two companies and their approximate value (the “asset schedule”) for discussion. According to Chung Yee, an agreement in principle for the split,subject to Yuk’s approval, was reached (the “Verbal Agreement in Principle”). The agreement is disputed by Joe and Chui. 9.Chung Yee’s case is that he and Joe had further discussions between the April Meeting and 7 June 2008 during which further terms of the split were agreed orally (the “Verbal Agreement”). It was then agreed that all five siblings should attend a meeting on 8 June 2008 with Yiu as moderator to formally sign a written agreement confirming the terms of the Verbal Agreement. Joe denied having had those discussions and agreement. His case is that two days after the April Meeting he telephoned Chung Yee and Hin to engage in further negotiation about the split but they refused. 10.On 8 June 2008, the six siblings attended a meeting (the “June Meeting”), had further discussions, after which Chung Yee, Hin, Yuk and Joe signed on the asset schedule which is now Exhibit-1. The siblings’ discussion was evidenced by the blue scribbles written on Exhibit-1. ChungYee’s case is that all the terms of the Verbal Agreement were agreed and thefour siblings signed on Exhibit-1 to confirm their agreement. Joe’s and Chui’scase is that the meeting was an impromptu meeting. Joe did not participatein the discussion but insisted that all assets had to be valued by a third party. The meeting came to an abrupt end when a dispute broke out between him and Yiu about Yiu’s contribution for the Mother’s maintenance. Joe signed Exhbit-1 only to indicate his attendance but not conclusion of the Verbal Agreement. Chui did not sign as there was no agreement. 11.On 2 July 2008, the siblings exchanged shares in the two companies and their shareholdings became as follows:
Chung Yee and Hin resigned from their directorship in HIECL, while Joe andChui resigned from theirs in HL. Since then, HL was owned and controlled by Chung Yee and Yuk; whereas HIECL was owned and controlled by Joe, Chui and Yuk. 12.Chung Yee’s case is that the above share transfers and resignations from directorship were part performance of the terms of the Verbal Agreement. Joe’s and Chui’s case is that the change was the result of a wholly separate agreement independent of the April Meeting or June Meeting or any discussions in between those two meetings. The issues 13.The issues in this case are: first, whether a valid binding agreement had been reached between the five siblings and the terms of that agreement; and second, whether the exchange of shares and changes of directorship in HL and HIECL effected on 2 July 2008 was part performance of that agreement or the result of a separate agreement. If the court finds that no binding agreement had been reached on the terms of the Verbal Agreement in Principle or the Verbal Agreement, Chung Yee would rely on the principle of estoppel and unilateral mistake to set aside the share transfers. 14.Ms Chan, counsel for Chung Yee presented his case on the basis that either, if not both, the Verbal Agreement in Principle and the Verbal Agreement were valid and binding agreements. With respect, that approachonly added to the confusion. In my view, an agreement in principle is only an agreement to agree on the basis of certain agreed principles or within certain agreed framework. It is merely an expression of intent and has no legal significance whatever. The parties have not yet finished agreeing. Itis short of a valid and binding agreement. Furthermore, Chung Yee pleadeda further Verbal Agreement. If both the Verbal Agreement in Principle andthe Verbal Agreement were valid and binding, the latter must have supersededthe former. As Chung Yee’s evidence revealed, after the conclusion of theVerbal Agreement in Principle, there were further discussions between 2 April and 8 June 2008 with further terms agreed upon. The Verbal Agreement in Principle pleaded cannot be a valid binding agreement and enforceable as such. CREDIBILITY OF WITNESSES Introduction 15.My fact finding on these issues depends on my finding of credibility of the witnesses. The most reliable test of credibility is inherentprobability of the witness’ evidence and its consistency with contemporaneousdocuments. Only Chung Yee, Joe, Chui, Yuk and Yiu testified. Exhibit-1 is the only contemporaneous document in this case. In some ways it casts light on inherent probability of the witnesses’ evidence. I shall test the witnesses’evidence against Exhibit-1 and such of the evidence as I am satisfied is true or is incontrovertible. 16.In assessing credibility, I bear in mind two considerations. First, the events occurred ten years ago and in a family-business context. Memory is likely to falter due to lapse of time and some allowance must be made for some minor inconsistencies. Second, the witnesses are siblings and were discussing about redistribution of their family business or assets. Some degree of informality and mutual trust must be assumed. 17.I made my assessment of the witnesses’ credibility only after reviewing all the evidence. Herein below, I deal with the general attacks on the witnesses’ credibility, leaving the more germane attacks to be dealt with in my analysis of the evidence. I begin with the credibility of Yuk and Yiu who were independent witnesses not interested in the outcome of this litigation. Yuk’s credibility 18.Yuk is not a party to this litigation. She holds equal shareholding in HL and HIECL and is not interested in the outcome of this litigation. She may be regarded as an independent witness. She did not want a split in the family assets and opted to keep equal shareholding in HL as in HIECL. Though she expressed some dissatisfaction about Joe’s and Chui’s subsequent dilution of her shareholding in HIECL, nevertheless, she impressed me as an impartial witness giving her evidence to the best of her recollection. She gave evidence in a straight forward manner. Her evidence is vague, understandably as she was indifferentto the split of the family assets. In view of the position she took, she had nointerest in the outcome of the split. Her evidence about her discussion withChung Yee about the split, albeit in vague and general term serves as strong corroboration of Chung Yee’s evidence. In particular, she gave a credible account of the atmosphere surrounding and in between the two meetings which and casts doubts on the credibility of Joe’s evidence. I consider her a credible witness and accept her evidence. Yiu’s credibility 19.Yiu is also not a party to these proceedings. He has no interest in the outcome of the June Meeting or these proceedings. He is an independent witness. He is a respected brother among the siblings and was invited to act as moderator at the June Meeting. I note that this point was challenged by Joe. Though he has no recollection of what precisely were discussed and agreed during the meeting, his impression of the outcome and the atmosphere of the June Meeting is of strong corroborative value to the evidence of Chung Yee and Yuk. I find him credible and accept his evidence. Chung Yee’s credibility 20.There is no dispute that Chung Yee and Joe were not on good terms as result of their disagreement in Joe’s intervention in Chung Yee’s metal business which he operated through HIECL. There is no need for meto make any finding on who was right or wrong. Suffice it is for me to bearin mind that the two of them were not on friendly terms when assessing theirevidence, but their relationship was, at least until the commencement of these proceedings, short of hostility. On his evidence, the two meetings and subsequent discussions were held in an amicable manner and he was pleased with the agreement reached. His relations with Joe probably improved during that period of time. He had no reason not to have trust and confidence in Joe. 21.Mr Lau, counsel for Joe and Chui attacked the credibility of Chung Yee on three fronts: multiple changes in his pleaded case; inconsistencies between his evidence and his solicitors’ correspondence; and inconsistencies between his evidence in court and his witness statement. 22.Mr Lau pointed out that initially Chung Yee pleaded that all fivesiblings, including Yuk, were present during the April Meeting and signed on Exhibit-1; and that he gave a mis-description of the trademarks. It is true that Chung Yee made multiple changes to his pleadings. But as the amendedversion is in line with the parties’ common ground, it could have no bearinginsofar as those issues are concerned. I accept that the criticisms are validly made. I shall caution myself on the reliability of his evidence. 23.Mr Lau referred to the letter of demand dated 19 March 2009 issued by Chung Yee’s then solicitor, Messrs Edward Lau, Wong & Lou (“LWL”) to which a copy of Exhibit-1 was attached. In the letter, LWL alleged that the gross valuations written in blue (the “scribbles”) in respect of some of the assets were revised and agreed by all relevant parties, suggesting therefore that the scribbles were written during the June Meeting. That is contrary to Chung Yee’s evidence that it was written during the April Meeting. Then, under cross-examination, Chung Yee changed and agreed that it was writtenduring the June Meeting. However, it is now not disputed that most of the scribbles was written during the June Meeting. In my view, when precisely the scribbles were written was immaterial, the inconsistency has little or no bearing on the outcome of my finding of fact. But I accept that it has a bearing on the reliability of Chung Yee’s evidence. 24.Next, Mr Lau referred to the inconsistency between the terms of the Verbal Agreement asserted in LWL’s letter and Chung Yee’s plea. One of the terms asserted in the letter was:
Mr Lau submitted, firstly, that nowhere in the pleading has Chung Yee ever alleged that there was an agreement that these assets would be transferred to “their nominees or holding exclusively for the benefit of the vendors”. Bethat as it may, the inconsistency is neither here nor there. It does not detract from the thrust of Chung Yee’s evidence that there was an agreement to transfer the shop and the car parking space. The alleged agreement to transfer the motor vehicle is a little problematic. 25.Then, Mr Lau referred to paragraph 9.9 of the amended statement of claim in which Chung Yee pleaded:
This is the pleading which bears the closest relation to the term asserted in the letter. Mr Lau submitted that there is a world of difference between transfer of the car demanded in the letter and the repayment of the sum of HK$500,000 used for the purchase of the Mercedes Benz and the cross border vehicle licence. Chung Yee’s pleaded case and his evidence is that he was claiming for the return of the sum of $350,000 and $150,000 taken from HL’s funds for the purchase of the Mercedes Benz registered under Joe’s name and the China/Hong Kong cross border vehicle licence. He is not claiming for thetransfer of the Mercedes Benz by Joe to HL. LWL’s letter must have been issued on Chung Yee’s instruction. The inconsistency suggests that Chung Yee did not even know what the terms of the Verbal Agreement were back in 2009, a year after the June Meeting and his entire case pleaded in 2011 two years later was an afterthought. An explanation for the inconsistency is indeed wanting. This inconsistency dented his credibility. 26.Mr Lau also pointed out many inconsistencies between Chung Yee’s evidence in court and in his witness statement. For example, in his witness statement, he said that Joe phoned Hin to call for a meeting in the afternoon. He had a hunch that the meeting was to discuss splitting of the family assets. Thus, Hin checked with the accounting staff, Iris, about the value of the companies before the meeting. However, when shown Iris’ letter of resignation during cross-examination which indicated that Iris had resigned half a year before the April Meeting, Chung Yee changed his evidence and admitted that the meeting took place in the morning and that Hin had not obtained information about the companies’ financial position before the meeting. Mr Lau submitted that Chung Yee was attempting to embellish a case that he was able to quickly reach the Verbal Agreement in Principle during the meeting called at short notice. I think Mr Lau was over playing the significance of the inconsistency in Chung Yee’s evidence. The event took place ten years ago. Memory was likely to falter. Whether Chung Yee had an update of the financial position of the companies was neither here nor there. After all, according to his evidence, other detailed terms and procedural terms were discussed and agreed during subsequent meetings. Whether the meeting took place in the morning or in the afternoon is immaterial. 27.My overall view after considering the evidence is that the evidence of Chung Yee was vague and lacking in specifics. Some of his evidence in court is inconsistent with his pleading, witness statement and the correspondence from his solicitors. However, except for one adverse finding of fact against him about the trademark “Pok Choy”, all in all when his evidence is tested against the parties’ evidence and incontrovertible evidence, these inconsistencies and taken together has little impact on Chung Yee’s credibility. I accept his evidence. Joe’s credibility 28.Joe’s case is one of denial. Little could be said about inconsistencies in a denial. For reasons as explained in my analysis of the evidence, his evidence, when tested against the incontrovertible evidence is inherently improbable. It has no ring of truth. Chui’s credibility 29.Chui was in charge of the secretarial and financial matters of the two companies prior to the split. She said that Chung Yee and Joe were not on good terms and seldom spoke to one another. They usually communicated with each other through her. She was neutral. That was probably true prior to the April Meeting. Her evidence since the April Meeting largely dove-tailed with Joe’s. 30.Her evidence about the April Meeting is not controversial except as to whether any agreement had been reached. It is all a matter of terminology and the parties’ understanding, particularly of the term “agreement in principle”. Even according to Chung Yee’s evidence, the Verbal Agreement in Principle reached was not, as matter of law, a binding agreement. What happened at that meeting is not crucial. It only set the scene of what happened thereafter leading to the June Meeting. 31.Chui has no part to play in the alleged intervening discussions between Chung Yee and Joe. Her evidence is that two days after the April Meeting Joe told her that Chung Yee had refused to restructure. This aspect of her evidence is corroborative only. It stands or falls with Joe’s credibility. 32.Her evidence about the June Meeting and the events leading to the share transfers is more controversial. For reasons as explained in my analysis of her evidence, I find it inherently improbable when tested against the incontrovertible evidence. Her evidence about Hin’s request for the share transfers is just too good to be true as to be probable. Hin’s witness statement 33.Hin gave a witness statement which corroborated Chung Yee’s evidence; but he was not called to testify. He would have been a key witness for Chung Yee as he attended both the April Meeting and the June Meeting, was a party to the Verbal Agreement and, on the defendants’ case, requestedfor the share transfers. Chung Yee has not been asked as to why Hin did not testify. Mr Lau accepted that it may be surmised that Hin did not want to answer questions about the traffic accident in China in 2002 which was the underlying reason for the transfer of his shares in HL to his siblings in 2006. He was declared bankrupt in 2011. The victim of that traffic accident is a well-known musical artist in Hong Kong who was left severely crippled and with an empty or almost empty judgment against Hin. Mr Lau raised questions about Hin’s transfer of his shares in HL when cross-examining Chung Yee and Yuk. That is clear indication that Hin would be searchingly cross-examined on these issue should he step into the witness box. That would be sufficient to scare him out of this court. 34.Mr Lau raised two points. First, he submitted that where a partyfails to call a witness who has given a witness statement an adverse inferencethat his evidence would have been either unfavourable or at least not helpful to the party intending to call him should be drawn from his absence: Li Sau Keung v Maxcredit Engineering Ltd [1]. This is trite law. But the inferenceto be drawn is not necessarily a mechanical one of drawing adverse inferenceregardless of the circumstances. The court only draws such inference whichis reasonable from the circumstances. Adverse inference will not be drawnor the adverse effect will be reduced if the absence of the witness is credibly explained, even though not entirely justified: Jiang Zhong v Up Cheer Ltd & Others [2]. The court will look at the whole of the circumstances to decide whether the explanation proffered was sufficient to reduce or nullify the adverse effect: Gleneagle Holdings Ltd v Tse Yue Fong [3]. Furthermore, it is inappropriate to draw such adverse inference if the other party does not have a credible claim: Lai Cheong Ming v Cheng Chung Yu Eric & Another [4], DBS (Hong Kong) Ltd v Sit Pan Jit [5] and Chan Chi Lam v Lam Woo & Co Ltd [6]. 35.Though no evidence has actually been given as to why Hin wasnot called, there is no doubt that the transfer of his shares to his siblings wasnot for an entirely honourable motive. Mr Lau has surmised a very probable reason which, in my view, is strong enough to scare him away from this court. Furthermore, the evidence Hin was able to give is covered by Chung Yee’s evidence and, though disputed, is well within the realm of Joe’sand Chui’s knowledge. The question is whether Chung Yee on the one hand or Joe and Chui on the other is to be believed. Joe’s and Chui’s evidence does not suggest there is anything for Chung Yee or Hin to hide, except the reasons for the transfer of Hin’s shares in HL. I am unable to draw any adverse inference from the above circumstances. 36.Next, Mr Lau pointed out that in his witness statement Hin just said he adopted Chung Yee’s statement and affirmations but has no independent input. He referred to the following passage of Deputy High Court Judge Saunders’ judgment in Ho Sin Ying v Chan Yui Ling [7]:
Mr Lau submitted that Hin’s statement is even worse as it was a mere adoption of Chung Yee’s witness statement and affirmations. Based on the above dicta, he argued that not only should Hin’s witness statement be excluded, but also no weight should be given to Chung Yee’s witness statement. 37.While I would not query the proposition of Deputy Judge Saunders,I do not think it should be taken as an over-sweeping statement of law. It isthe function of the court to make findings of fact based on its own assessment of credibility of witnesses. It is common knowledge that in a civil case, witness statements are prepared by solicitors on the instruction of the client and on the basis of what they were told by the witnesses. A witness is asked to prepare a witness statement because the evidence he is going to give is likely to be corroborative of the party’s evidence. The assertions are expected to be similar. Whether a witness statement is the product of copy and paste from another witness’ statement is easy to tell. Whether it is the product of paraphrasing or rephrasing or an independent input based ona similar account is sometimes difficult to distinguish. Of course, if it is the clear product of copy and paste, there is a need for caution. On the other hand, the court may not know which of the two is the original work and which is the copy product. The court’s function is not to penalize. It would be abdicating its fact finding function by giving both statements no weight andwould not be doing justice to the party or witnesses concerned. In my view,if a witness’s evidence has been tested by cross-examination, the court shoulddo its best to assess credibility. In the present case, though Hin was not called,Chung Yee testified and was cross-examined. The court would not be doingjustice by putting aside his witness statement, which is adopted as his evidence in chief, no weight. That said, the court shall not give any weight to Hin’s witness statement for the simple reason that he has not testified and should not allow it to add weight to Chung Yee’s credibility. THE FACTS Further background 38.HL and HIECL were run as one family business. HL is a property holding company. Its only asset is a shop space in Fung Shing Building (“Shop 168A”) and its rental income. HIECL operates a flour business which constitutes the major income of the family. Its turnover was$44 million in 2008. Its assets include two car parking spaces in Kwan YickBuilding, a Mercedes Benz motor car with a China/Hong Kong cross bordervehicle licence (the “cross border licence”) and 10% shareholding in a flour factory in Guangzhou 廣州福加德麵粉有限公司 (“GZFG”) which Joe attributed a value of $6.1 million on the asset schedule. The purpose of HIECL’s shareholding in GZFG was to secure a reliable source of flour. 39.Initially, Hin and Chui had management of the companies. Hinwas in charge of the flour business while Chui was in charge of secretarial and administration matters. When Joe finished his schooling in the 1990s, he and Chung Yee joined in the management. Then as Hin was detained for a year in China from November 2002 to December 2003 as result of the traffic accident, Joe became more involved in the flour business and was responsible for HIECL’s relationship with GZFG. With the assistance of Chui, he gained control over the two companies. After his release, Hin resumed work in the flour business. Chung Yee mainly ran the metal business under HIECL. 40.As from 2004, HL also operated a logistic business providing logistic services mainly to HIECL and to repay its debt owing to HIECL. In2007, the whole of its logistic business was transferred to HIECL after it was involved in an employment claim by one of its employees. 41.In 2006, Hin transferred his shareholding in HL to Chung Yee, Yuk and Chui to hold on trust for him. Presumably, the purpose was to insulate his interest in HL from liability arising out of the traffic accident in China. Unknown at least to Joe, Hin gifted his beneficial interest in his shares in HL to Chung Yee some time in 2008. Chung Yee and Hin formed one camp. Chui was independent until sometime after 2 July 2008 when she joined Joe’s camp Exhibit-1 and the asset schedule 42.The asset schedule was prepared by Joe before the meeting. It was dated 2 April 2008 with the word “Approx” written against the date, indicating that the valuations quoted in the schedule were approximates only. 43.It sets out two columns, listing four assets under HL and other assets under HIECL. The column under HL included the following assets with a total value of $5.95 million:
44.The assets listed under HIECL column were HIECL’s account receivables and account payables, cash in bank, values of stock in hand, shareholdings in GZFG, etc, to which Joe assigned a net value of $8.42 million. 45.Joe distributed copies of the asset schedule to Chung Yee, Hin and Chui for discussion at the April Meeting. Copies of the same were also distributed to the siblings during the June Meeting. It is remarkable that during the course of the April Meeting as well as the June Meeting, Chung Yee, Hin, Joe and Chui wrote some scribbles on the same copy and on which Chung Yee, Hin, Yuk and Joe signed. That copy was disclosed by Chung Yee and identified as “Exhibit-1”. The parties were in dispute as to whether a particular set of scribbles was written during the April Meeting or June Meeting. The scribbles indicate active discussion at the meeting in which they were written. In my view, that dispute is irrelevant. What is materialand relevant is the order in which three particular sets of scribbles were written and there is no dispute that they were written during the June Meeting. I shall return to this when I analyse the evidence about the terms agreed during the June Meeting. 46.There is no dispute that the asset schedule is not a complete list of the assets and liabilities of the companies. It does not include HIECL’s receivables or cash and the alleged liability to pay Chung Yee’s bonus. Mr Lau submitted that the significance of its incompleteness or inaccuracy was twofold. First, it diminished the force of Chung Yee’s argument that the presence of HIECL’s assets under the column of HL, such as the two car parking spaces, indicated unambiguously that Joe intended to reallocate those assets to HL. Second, Chung Yee’s bonus would reduce the value of HIECL’s assets and would affect the amount of equalization payment. Mr Lau therefore argued that the inchoate nature of the asset schedule is consistent with Joe’s and Chui’s case that the asset schedule was to provide a basis for preliminary discussion and not evidence of a concluded agreement. That is common ground and besides, it is Chung Yee’s case that further terms were discussed and agreed. As for Mr Lau’s second point, I think it is misconceived because the value of the two companies were subject to adjustment according to the audited reports of the two companies for the year ended 31 March 2008. That must have updated the companies’ asset position. April Meeting 47.It is common ground that Joe called for the meeting in the morning of 2 April 2008. Within an hour, the meeting was held. Chung Yee, Hin, Joe and Chui attended the meeting. Yuk did not. At the meeting,Joe proposed to split the two companies among the siblings and gave them acopy of the asset schedule. The schedule showed the assets reallocated to the two companies and their approximate value. After explaining the figures on the schedule, Joe proposed to split the companies among the siblings. The result was to achieve a clean break so that some siblings would exclusively hold one company while the other siblings wouldexclusively hold the other company. After the split, each sibling will hold assets in one company equivalent to one-fifth of the total asset value of the two companies (the “one-fifth principle”). Joe then asked the siblings to choose which company they would like to hold and with whom to partner with. Thereafter, the parties’ evidence diverged. 48.According to Chung Yee, Joe asked him to choose “between property and flour”, ie between HL or HIECL. He noticed that Joe had placed HIECL’s two car parking spaces and the cost of acquiring the MercedesBenz and cross border licence under the column of HL in the asset schedule such that the asset value of HL and HIECL was $5.95 million and $8.42 million respectively, with a ratio of approximately 2:3. If these items wereplaced under HIECL’s column, the value of HL would be $5 million whilethat of HIECL would be $9.37 million. That would make a 1:4 or 2:3 splitamong the siblings impossible. He thought Joe had redistributed the assetsof the two companies in the asset schedule with intention to enable a 2:3 split. He thought the offer was tailor made for him and Hin. He then sought further clarification and Joe confirmed that the re-distribution would be in accordance with the one-fifth principle, that the debt owed by HL to HIECL would be waived and that HL would be able to trade in flour using the trademarks. They agreed that the assets would be given the value as Joe assigned them and that there would be equalisation payment in case the assets of the companies do not tally with the split ratio. Chung Yee chose HL instantly and so did Hin. Then, Joe said that Chung Yee and Hin had to transfer their shares in HIECL to Joe and Chui and withdraw their directorship in HIECL and that he and Chui would do likewise with respect to HL. The meeting lasted for slightly more than one hour and was conducted in a friendly and business-like manner. The Agreement in Principle along the above line was reached for him and Hin to hold shares in HL only and for Joe and Chui to hold shares in HIECL only. There were two other matters which remained unresolved. These were the value of the trademark “Pok Choy” and HL’s right to use the trademark after the split. These will be dealt with when analysing the asset schedule and the terms ofthe Verbal Agreement. The other outstanding matter is that this agreement was subject to Yuk’s agreement and her choice whether to hold her shares solely in HIECL with Joe and Chui or solely in HL with Chung Yee and Hin, but not in both companies. 49.Joe’s evidence was that he was talking about restructuring of the two companies and that the siblings could take over the companies in any combination, ie 1:4 or 2:3. The other three siblings did not respond but just talked among themselves. Though they were within a small conference room, he could not hear what the siblings discussed. Specifically, he denied Hin had raised any questions with him. There being no further communication, the meeting ended without any discussion or counter suggestions. Joe asked the siblings to go back and consider. Chui corroborated Joe’s evidence and said that no consensus or agreement was reached as to who should take over which company. 50.What is telling is the inconsistency of Joe’s evidence with part of his own witness statement, which was not adopted as his evidence in chief. That part was not adopted because it related to a seriously disputed issue in which credibility was of paramount importance. Hence, viva voce evidencewas given to enable the court to assess credibility. The witness statement contained a declaration of truth. It stands as a previous inconsistent statement. In the statement Joe said that during the meeting he raised discussion with Chung Yee, Hin and Chui about the valuation of HL and HIECL and swapping shares in the companies on the basis of 20% shares in each company per person, ie the one-fifth principle. He went on to say that he and the siblings had a preliminary discussion about valuation of the assets. While I would not accept what he said in that part of his witness statement as evidence, it nevertheless discredits his testimony in court. I accept Chung Yee’s evidence as more credible. The meeting was not one in which Joe spoke to deaf ears while his siblings carried on their own discussion. There was active discussion as Chung Yee asserted and at least agreement on the clean break and one-fifth principle. 51.The Verbal Agreement in Principle was subject to Yuk’s agreement and her choice of which company to join. There were, as ChungYee’s evidence suggested, other matters to be agreed which was why on the ensuing days he had further discussions with Joe. At least two important issues as to the valuation of the trademark “Pok Choy” and HL’s right to use the trademark were unresolved at that stage. The situation was very fluid. At the highest, I can only find that the four siblings agreed to enter into an agreement to split the two companies such that Chung Yee and Hin would take over HL while Joe and Chui would take over HIECL under the one-fifth principle. The agreement was, however, subject to Yuk’s consent and her choice either to join HL or HIECL. Yuk was not free to participate in both companies. The split was intended to be a clean break. The siblings would put their heads together to work out the terms of an agreement under these principles which will give effect to their above intention. The fact that Chung Yee had to contact Joe to hold follow up discussions and then to confirm his choice must indicate that no concluded agreement had been reached during the April Meeting and the parties had to further negotiate. In his statement of claim, Chung Yee referred to that agreement as the Verbal Agreement in Principle. Ms Chan regarded that agreement as a valid and binding agreement. As I have indicated at the beginning, an agreement of this kind is precisely an agreement in principle, which is just an agreement to agree which is short of a valid and binding agreement. For this reason, save for the one-fifth principle, I do not find it necessary to attempt to make any finding of fact as to what other terms had been discussed or agreed during the April Meeting. The evidence regarding those issues is ambiguous. Events between the April Meeting and the June Meeting 52.Joe’s evidence is that two days after the April Meeting, he called Chung Yee and Hin for an answer about his restructure proposal. Both of them rejected the proposal. He informed Chui of their replies. 53.But according to Chung Yee, he had follow up discussions with Joe after the April Meeting on a host of other matters and confirmed his choice of taking up HL. Chung Yee’s evidence about his discussions with Joe on those matters is vague and unspecific. He gave no particulars as to when and which of these matters were discussed and the course of those discussions. I shall revert to those matters later. 54.Mr Lau criticised the total lack of documentation or writing to evidence the Verbal Agreement in Principle and the agreement of these otherterms. He also contrasted Chung Yee’s present case with his failed buy-outattempt back in January 2006 in which Chung Yee prepared a letter of intent resolution setting out the terms on which he proposed to buy out Joe’s interest in the companies. In my view, the circumstances were wholly different. That was a planned buy-out in which Chung Yee took the initiative in commencing the negotiation. Here, it was Joe who initiated the split or what he called “restructure”. Furthermore, one should not lose sight of the fact that the business was a family business and that the split was one among siblings who until then were not on hostile terms. There was no reason notto trust one’s siblings. It was not a transaction among strangers. There was nothing to suggest the need for caution and to reduce every discussion and agreement into writing signed by them. The inclusion of these terms into their agreement makes business sense, while the lack of discussion about these terms do not. All boils down to inherent probability. 55.Mr Lau criticised the lack of board minutes to reflect the agreement. Such criticism is fault finding. Many of these terms affectedthe obligations of the siblings as shareholders rather the companies. Insofaras they touched on the rights and obligations of the companies, one must not overlook the fact that these were, until then, family companies in which the siblings were shareholders and directors. The companies were just corporate vehicles. The same considerations in the preceding paragraph also apply. 56.Yuk had not attended the April Meeting, but she had discussions with the four siblings afterwards. Her evidence was vague. Obviously, this was because she did not desire the split and was not interested about thedetails. She said she was given a copy of the asset schedule, informed about transfer of assets, the clean break, the one-fifth principle, equalization payment, and that Chung Yee and Hin would take over HL, while Joe and Chui would take over HIECL. Her option was to continue to have a share in both companies. Though her evidence is vague, her option was unequivocal. Her evidence nevertheless discredited Joe’s evidence that Chung Yee and Hin rejected his proposal to split the companies two days after the meeting. If Chung Yee had outright rejected Joe’s proposal within two days, he would not have contacted Yuk about the proposal, Yuk would not have discussed the proposalwith the other four siblings. Furthermore, it is important that Yuk rejectedthe clean break. She insisted to have shares in both companies. That must have necessitated further discussions between Chung Yee and Joe. 57.Equally importantly, in the meantime, Yiu, a respected brother was invited by both camps and Yuk to attend the June Meeting as a moderatorafter a family dinner to tie the loose ends as result of the split. His evidencewas in line with Chung Yee’s and Yuk’s. I note that it was disputed by Joe.I have no reason not to accept his evidence. Mr Lau criticised Yiu for saying that he acted as convenor of the meeting. I think Yiu was being imprecise rather than dishonest. Though Yiu’s evidence has no bearing on whether a concluded agreement was reached during the April Meeting, his evidence, nevertheless, corroborates Chung Yee’s in that some agreement had been reached before the June Meeting. If both camps invited Yiu to act as a moderator in the June Meeting, Joe’s evidence that Chung Yee rejected his proposal to discuss the restructure is absolutely incredible. 58.Mr Lau raised some valid criticism about the inconsistencies between Chung Yee’s evidence and his pleading, witness statement and his solicitors’ correspondence. I have considered them in the previous section. Chung Yee’s assertion contained in LWL’s letter that the transfer of the Mercedes Benz to HL is indeed worrying. However, when considered in the round and having regard to the tenor of the evidence, I think those criticisms probably arose out of imprecise use of the language and/or misunderstanding between Chung Yee and his solicitors. They have little bearing in the totality of the evidence. 59.Though Chung Yee’s evidence lacks specifics, when his and Joe’s evidence is tested against Yuk’s and Yiu’s evidence which is beyond dispute, I find Chung Yee’s evidence inherently probable but Joe’s not. Chung Yee was desirous of buying Joe out in 2006. Though Joe’s proposalwas not one of buying-out but splitting of the family assets, it would achieve Chung Yee’s wish. There was brief discussion during the April Meeting. Even on Joe’s evidence, he asked Chung Yee to think about it and revert. On Yuk’s evidence, whichI have no doubt at all, Chung Yee had considered the proposal and discussedwith her. As result of her stance, Chung Yee and Joe must have had furtherdiscussions because of the change in split ratio and the lack of a clean break. On Yiu’s evidence, which I also have no doubt at all, he thought the parties had reached agreement. Under that atmosphere, it was most improbable that Chung Yee would have responded to Joe’s request for discussion with a blunt refusal. I find Chung Yee was telling the truth and Joe was not. 60.Accordingly, I find that at least some agreement was reached during the April Meeting and that Chung Yee had follow up discussions with Joe afterwards and informed him of Yuk’s option. It was not entirely clear how many such discussions were held, what was agreed on each occasion and when. But, one thing which was clear is that the clean break agreed during the April Meeting could not materialise because Yuk insisted to keep shares in both companies. It is therefore highly probable that there were further discussions between Chung Yee and Joe to work out something to accommodate Yuk’s wish. Then, it came a stage when the parties found it appropriate to have a further meeting on 8 June 2008 to finalise and formalise the agreement reached during those subsequent discussions and found it necessary to invite Yiu to act as moderator during that meeting. This suggests that another agreement in principle was reached as a result of these subsequent discussions and that the parties were close to a concluded agreement. There may still be some loose ends to be tied. At least, as the further evidence revealed, the questions about valuation of the trademark “Pok Choy” and HL’s right to use the trademark were not resolved. In my view, the agreement reached prior to the June Meeting was another agreement in principle which was not binding, though the parties were much closer to a concluded agreement. June Meeting 61.It is common ground that the five siblings and Yiu went to the coffee shop of a hotel in Water Street to discuss about the split after a family dinner in the Mother’s home on 8 June 2008. The meeting was brief and lasted for about an hour, while the siblings left their spouses and children waiting for them in the hotel lobby. Chui was the secretary of the meeting and took notes. Towards the end of the meeting, the siblings went on to discuss about maintenance for the Mother. Hitherto, the Mother’s maintenance was paid by HIECL as part of the expenses of the family business. With the split, it became necessary for the siblings to reach agreement for hermaintenance. Yiu only agreed to contribute half a share. The siblings left and the meeting came to an end. Chung Yee, Hin, Yuk and Joe signed on Exhibit-1, but Chui did not. 62.According to Chung Yee, all the terms of the agreement to be signed had been agreed before the meeting; the five siblings were to sign documents prepared by the company staff to give effect to the Verbal Agreement; the meeting was pre-meditated and Yiu, who was not a party to the impending agreement, was invited by both parties to join and act as moderator. A copy of the assetschedule was distributed to the siblings. There was no argument or heateddiscussion. The meeting proceeded very smoothly and peacefully. ChungYee, Hin, Yuk and Joe signed on Exhibit-1 to signify conclusion of the VerbalAgreement and not merely to signify attendance. He did not understand why Chui did not sign. 63.According to Yiu, there was a short discussion over the asset schedule during the meeting. Questions were raised and answered. Therewas no argument. Agreement was reached quickly. Though Yiu could not recall what was said by the siblings during the meeting, his impression was an agreement as to splitting of the family assets was reached. Yiu concluded saying: “Now it is fine. Everyone has his own business. Now my mission is accomplished.” That must reflect the sentimenthe felt at the meeting and that an agreement had been reached. He said that the siblings signed Exhibit-1 to signify conclusion of an agreement and not to signify attendance. He said he was not invited to sign as he was not a party to the agreement. He is a disinterested witness. I accept his evidence. 64.According to Yuk, well before the meeting, she had gathered from Chung Yee, Joe and Chui that a split was to be proceeded on the one-fifth principle. She could not recall the details of the discussion at the meeting, but the theme was to implement the one-fifth principle. She signed her name on Exhibit-1 to signify her agreement and not to indicate mere attendance. 65.Joe’s evidence is diametrically opposed to Chung Yee’s, Yuk’s and Yiu’s. He said that the meeting was an impromptu one held at Chung Yee’s suggestion. He did not know the purpose of the meeting beforehand. He admitted that there was discussion about the valuation of the assets shownin the asset schedule, but he did not participate in the discussion as he insisted on having third party valuations first. He just sat there looking at his own copy of the asset schedule while the other siblings discussed among themselves without communicating with him. He admitted that Chung Yeedid mention about the trademarks used by HIECL, two of which were registered in his own name. Then he went over to Chui’s seat, took her copy of the asset schedule and wrote down “仍需估價” (“still required to be valued”). At the time, the words “白菜” (“Pok Choy”) and “或共用” (“for share use”), which now appeared before and after what he had written were not there. Just at that time, the waitress told them that the coffee shop was about to close. Then Chui raised the issue of the Mother’s maintenance. The siblings agreed to contribute, but Yiu only agreed to pay half a share. That annoyed Joe and an argument ensued. As Joe was leaving, Hin said he should at least sign to indicate attendance. So he signed. He said that no agreement had been reached as the siblings had too many inconsistent opinions. 66.Chui’s evidence corroborated Joe’s. She was the secretary of the meeting and took note of the issues raised. She answered the siblings’ questions about the expenses of HIECL. She heard Joe saying that he wantedthird party valuation of the assets of the two companies. She said that there were too many differences and inconsistent opinions on the various issues and no agreement was reached. The meeting was brought to an abrupt endwith Joe and Yiu arguing about Yiu’s obligation to contribute to the Mother’s maintenance. As Joe was leaving, Hin asked him to sign to indicate his attendance. Then Joe turned back to sign on Exhibit-1. It was chaotic and she had to check and pay the bill. She was adamant that no agreement had been reached about splitting the companies and that the signature on Exhibit-1 was to indicate attendance, though she did not sign. 67.Joe’s and Chui’s case is inconsistent not only with Yuk’s and Yiu’s that the meeting proceeded smoothly without much disagreement, but also with Chui’s scribbles written on Exhibit-1. Those scribbles indicated discussion about joint use of the trademarks and the additional expenditure items. Joe’s evidence is incredible. More importantly, they indicated agreement on the amount of maintenance forthe Mother, Chung Yee’s and Yuk’s agreement to contribute and there was nodispute that Chui and Joe also agreed to contribute. Her notes that “Henrynot wanting shares” is most telling. It indicated that the discussion about the split had reached the stage of redistribution of the siblings’ shareholding in the two companies. That must indicate that all the terms of the Verbal Agreement had been settled and a concluded contract reached. It was only at that stage that it became necessary for Hin to make a declaration or confirmation that he was not going to have any shares after the split. 68.Joe’s evidence is inherently incredible. On his own case, he initiated the April Meeting to discuss about the split and two days later hepressed for an answer from Chung Yee and Hin. He was highly motivated to have a split. In the circumstances, it is incredible that he did not participate in the discussion but just sat there looking at his copy of the asset schedule, but suddenly jumped up and grabbed Chui’s copy to writedown the words “still required to be valued”. His evidence is both selective and artificial. 69.Joe’s evidence about the impromptu meeting is contradicted by Yuk’s and Yiu’s evidence, let alone Chung Yee’s. I have no reason not to believe Yuk and Yiu who were disinterested witnesses. Yuk said that the meeting was pre-meditated and the purpose was to sign documentation to give effect to the split. Yiu said the same. But importantly, he said he was invited by both parties including Joe to attend as moderator. The split had nothing to do with Yiu who had no shares in the two companies. Themeeting was clearly pre-mediated and that explained why copies of the assetschedule were available for distribution to the siblings. Joe was obviouslytrying to play down the fact that an agreement in principle had been reached earlier and that the June Meeting was a continuation of the April Meeting. 70.Joe’s and Chui’s evidence that that the signatures were to indicateattendance is absolutely artificial and incredible. According to Chung Yee, Yuk and Yiu, the signature was to signify a concluded agreement. There was no evidence of keeping formal record of family meetings. What was the purpose of indicatingtheir attendance if no consequence was to follow from that meeting? On theother hand, Joe’s evidence that Hin asked him to sign to indicate attendance and Chui’s evidence that as Joe was walking away he turned round and returned to sign to significate attendance is very artificial. As for why Chui did not sign, I think it was an omission rather than a deliberate decision not to sign to indicate non-agreement. On her own evidence, she was distracted at the end of the meeting with siblings arguing and leaving and with her checking and settling the bill. What is particularly telling is Yiu’s evidencethat he was not invited to sign as he was not a party to the agreement. That evidence and the fact that he did not sign puts it beyond doubt that the purpose of the signature known to the five siblings was to indicate agreement and not to mark attendance. Chui only attempted to take advantage of her omission as evidence to booster Joe’s case and hers. I find that by their signature, the five siblings signified that they had reached a concluded agreement, ie the Verbal Agreement, on the terms as I shall discuss later. The share transfers 71.Joe’s and Chui’s case is that no agreement whatever was reachedduring or in between the April Meeting and the June Meetings; and that afterthe June Meeting, Chung Yee and Hin separately telephoned Joe and said thatthey would not consider the split. Then all out of the blue on 30 June 2008,Hin asked Chui to transfer his 6,600 shares in HL under her name to ChungYee; his and Chung Yee’s shares in HIECL to her and Joe; and her and Joe’s shares in HL to Chung Yee. As result, Chui arranged the documentation for the share transfers and changes of directors in HL and HIECL. But, in addition and very significantly, she also arranged the documentation for Yukto transfer 6,600 of Hin’s shares in HL held by Yuk to Chung Yee. On 2 July 2008, Chung Yee, Hin and Joe signed the documentation in the conference room of HIECL. Yuk was not there and Chung Yee arranged for Yuk to signand then returned the signed documents to Chui. Joe and Chui asserted that these transfers were independent of the April Meeting or the June Meeting. 72.Even on the basis of their own case, what happened on 30 June 2008 was improbable. There was no agreement reached during the April Meeting. Chung Yee unequivocally refused to discuss about the split. There was no discussion in between the April Meeting and the June Meeting. A lot of inconsistent opinions was expressed during the June Meeting whichended abruptly without any agreement. After the June Meeting, Chung Yeeand Hin repeated their stance that they would not consider a split. Then all out of the blue, Hin on behalf of himself and Chung Yee requested Chui to arrange the share transfers in accordance ignoring the one-fifth principle and abandoning all the outstanding differences. The transfer was in far less favourable terms than that represented by the asset schedule. Most blatantly,there was no waiver of HL’s debt owed to HIECL which then stood at about$1.22 million (according to the subsequent audited financial statement of HLfor the year ended 31 March 2008); no requirement to pay HL $500,000 usedto acquire the Mercedes Benz and cross border licence; and that the two car parking spaces valued at $0.45 million need not be transferred to HL. These assets were worth $2.17 million ($1.22 million + $0.5 million + $0.45 million). By such transfer, HL would end up with a reduced asset value of$3.78 million ($5.95 million − $2.17 million), while HIECL’s asset value would be increased to $10.59 million ($8.42 million + $2.17 million). Under the one-fifth principle and with Yuk maintaining 20% shareholding in HL and HIECL, the asset ratio of these companies should be 50:50. Now it is reduced to 3.78:10.59 or 26:74, say 1:3. This is absolutely incapable of belief! 73.Another fatal flaw in Joe’s and Chui’s case is that they proceededwith the share transfer without consulting Yuk. This lacuna in their evidencewas never filled. While Chui testified that Hin requested the share exchange for him and Chung Yee without any condition, she gave no evidence of any such request from Yuk. All that she said was that she assumed Yuk had agreed with Chung Yee. Her evidence begs belief. Viewed objectively, the share transfer and change of directorship are acts of performance of the fundamental terms of the Verbal Agreement reached on 8 June 2008. It is trite law that subsequent actions of the parties are admissible to show whether there was a contract and the terms of the contract: see Chitty on Contracts [8] and American Orient Capital Partners Limited v General Enterprise Management Services Ltd [9]. Where the subsequent conduct of the parties cannot be explained except on the basis that they were performing the termsof the contract alleged, then the inference may be drawn that they had in factentered into the contract on those terms as alleged. Not only did their conductevidence the existence of the Verbal Agreement, it enables an inference to bedrawn, independently of Chung Yee’s evidence which I accept, that the parties had indeed entered into a concluded agreement. Conclusion 74.I find that the five siblings had reached agreement in principle during the April Meeting to split the two companies among themselves under the one-fifth principle with a view to result in a clean break so that some of them would only hold shares in HL and the others would only hold shares in HIECL. That agreement was subject to Yuk’s approval and her option as to which company she wished to join. That was the Verbal Agreement in Principle pleaded by Chung Yee. It was not a concluded agreement. 75.That agreement did not materialise as Yuk insisted to have shares in both companies. As result, Chung Yee and Joe had further discussions and reached agreement on the terms of the Verbal Agreement shortly beforethe June Meeting, which they intended to formalise in writing with their signatures at theJune Meeting. The five siblings invited Yiu to attend as a moderator at themeeting. There was no concluded agreement at that stage. It was subject to contract and, as the evidence reveals, further terms were discussed and agreed during the June Meeting. 76.At the June Meeting, the five siblings had further discussion and reached a concluded agreement on the terms of the Verbal Agreement. Chung Yee, Hin, Yuk and Joe signed on Exhibit-1 to signify conclusion of theagreement. Pursuant to the terms of the Verbal Agreement, the five siblings executed documentation to transfer their shares in HL and HIECL and to resign from directorship in the relevant companies to give effect to the Verbal Agreement. TERMS OF THE VERBAL AGREEMENT 77.Chung Yee’s evidence as to when the terms of the ultimate Verbal Agreement were discussed and agreed and the course of those discussions was extremely vague. Mr Lau also rightly criticized the inconsistencies of his evidence with his witness statement and the letter of his then solicitors. His evidence is unsatisfactory. It is impossible for me to make specific finding as to when these terms were discussed and agreed. I have warned myself to exercise cautious before accepting his evidence. However, having regard to the background of this case, particularly the family context in which it arose, that the events occurred ten years ago, and, most importantly, the inherent improbability of Joe’s and Chui’s case and the parties’ conduct, I accept Chung Yee’s evidence despite its unsatisfactory nature. As it is not possible to identify with precision when each term was agreed, I deal with all the terms globally after analyzing the other aspects of Chung Yee’s evidence. This is only a matter of presentation and does not mean I have not borne all these matters in mind when making my findings hereinabove. The relevant terms are analyzed herein below. 78.In paragraph 9.1 to 9.3 of his re-amended statement of claim, Chung Yee pleaded agreement on the valuation of Shop 168A, the GZFG shares, and the two car parking spaces (“Terms 1 to 3” respectively). 79.In paragraph 9.4, he pleaded that on the basis of these valuations, the combined value of HL and HIECL was preliminarily assessed at $14.37 million, which was subject to adjustment based on the audited report of HIECL and HL for the year ended 31 March 2008 (“Term 4”). 80.In paragraph 9.4.3, he pleaded the one-fifth principle, which is not in dispute. There are other terms pleaded which are repeated elsewhere in the re-amended statement of claim. 81.In paragraph 9.5 to 9.7, he pleaded:
82.In paragraph 9.15 and 9.16, he pleaded:
83.In paragraph 9.8 to 9.14, he pleaded:
These terms are considered below. Term 1 — Valuation of Shop 168A 84.Joe assigned a value of $5 million to this shop. Chung Yee did not dispute that the valuation was approximate only as indicated by the words “2/4/08 Approx” at the top left hand corner of the asset schedule. But his evidence was that this value was agreed after subsequent discussion. 85.In his evidence in chief, Joe said that he arrived at that valuation on the basis that the overdraft and trust receipt facilities granted by the bank on the mortgage of that shop was calculated at 70% of its market value. He insisted that the valuation was provisional and subject to valuation by third party and he said so during the June Meeting. On my finding, that assertion was only related to the trademark “Pok Choy” only andnot to each and every asset on the asset schedule[10]. The valuation based on the banking facilities granted by the bank is reasonable. Having rejected Joe’s evidence, having regard to the family context of the agreement and having found that the parties reached agreement during the June Meeting, I accept Chung Yee’s evidence that the valuation of $5 million for Shop 168A was agreed. Term 2 — Valuation of the two car parking spaces 86.Joe said that the valuation of $0.45 million for the two car parking spaces was based on information obtained from cold calls from estate agents. He adopted that information as he was in a hurry drafting the asset schedule. He repeated his argument that the valuation was provisional and subject to valuation by a third party. For the same reasons as stated in the preceding paragraph, I reject that evidence. 87.Chung Yee’s evidence is that those spaces were bought at the price of $0.47 million but due to the property market crash they were worth between $0.40 million and $0.42 million at the time. These figures were noted down in Exhibit-1 by Chui. There is no dispute that this issue had been raised and argued at the June Meeting. It would be against his interest to accept a higher figure. However, he accepted the valuation in the interest of a quick resolution. For the same reasons as in the preceding subsection, I accept his evidence that the valuation was agreed. Term 3 — Valuation of the shares in GZFG 88.GZFG is a flour manufacturer in Guangzhou in which HIECL hadacquired a 10% interest. The shareholdingwas acquired on Joe’s initiative. The purpose was to secure a reliable source of flour for the business of HIECL. Joe has become the controlling figure of HIECL’s flour business. He took lead in cultivating its relationship with mainland flour suppliers including GZFG. He managed and controlled HIECL’s relationship with GZFG and is its major shareholder. 89.According to Chung Yee, the source of flour supply from GZFG is the life blood of HIECL and is inseparable from HIECL. Without it, HIECL’s turnover would suffer a drop from $44 million to $10 to 15 million. Chung Yee considered Joe as the linchpin between HIECL and GZFG. Without him, even with the benefit of GZFG’s 10% shareholding, it would at least be sceptical that HIECL’s flour business would be as successful as it was. Joe also admitted that there would be a reduction of 30%. That would, nevertheless, have a significant impact on HIECL. However, Joe argued that GZFG’s shareholding was separable from HIECL and could be taken over by HL. I prefer Chung Yee’s opinion. GZFG is a private company in China. Its shares may not be freely transferrable. It may be inseparablefrom HIECL or Joe. Even if it is not, there will be very substantial difference in its value without Joe. 90.Joe said that he assigned a value of $6.1 million for HIECL’s shareholding in GZFG in a hurry. It was understood that this valuationwas an approximate one. Joe repeated his stance that the valuation was subject to valuation by a third party and he relied on the words “required to be valued” written on Exhibit-1 as his professed stanceexpressed at the June Meeting. For reasons as I shall explain when I analysethe evidence about valuation of the trademark, I reject his evidence[11]. That expression only applied to the trademark “Pok Choy” and not the GZFG shares. 91.Chung Yee’s evidence was that despite the valuation was initially expressed to be an approximate one, it was eventually confirmed. He was vague as to when it was confirmed. Given the above background, I have no reason to doubt his evidence. Joe has a good knowledge of the value ofthe GZFG shares. He was in control of the flour business of HIECL and responsible for its relations with GZFG. As can be seen from the asset schedule, GZFG’s shareholding is the single and most valuable asset under HIECL. It represented 72.45% of the total value of the assets of HIECL. Joe could not have dealt with it lightly. He initiated the April Meeting and prepared the asset schedule. Timing was a matter at his control. He must have considered the valuation of this single most important asset before putting ink to paper. On my finding, there were further discussionsbetween him and Chung Yee about the asset schedule and valuation. If Joehad second thoughts about the valuation, he must have raised it with Chung Yee or obtained a third party’s valuation. He did not. He chose to deny there were discussions and testified that he did not participate in them. Having rejected his evidence, it is open to me to accept Chung Yee’s evidence that Joe had raised no further issue about the valuation of the GZFG shares and had confirmed its valuation. On the tenor of the evidence relating to the June Meeting, I accept that the valuation was confirmed, if not during the earlier discussions, at the June Meeting. Term 4 — Adjustment based on audited financial statements 92.This term accords with business sense and the family context inwhich the Verbal Agreement was reached. I have no difficulties to find that this was one of the principle agreed during the April Meeting and formed a term of the Verbal Agreement. Terms 5 to 9 — The procedural terms 93.These five terms provide for the necessary procedural formalities to implement the Verbal Agreement. The shares were transferred and appointments and resignations of directors in the two companies were effected in accordance with these terms. As the parties conducted their affairs pursuant to these terms, I have no difficulty to accept Chung Yee’s evidence that these terms had indeed been agreed between him on his and Hin’s behalf on the one part and Joe on his and Chui’s behalf on the other. Term 10 — Transfer of the two car parking spaces 94.Chung Yee’s case is that it was Joe’s proposal that the two car parking spaces in Kwan Yick Building valued at $0.45 million were to be transferred to HL from HIECL for the purpose of splitting the family assets. Such a transfer would conveniently facilitate a 2:3 split. Chung Yee said it was a term of the Verbal Agreement. 95.Joe denied that he put the car parking spaces under HL’s column as his proposed redistribution of the assets. Initially, he said that he drafted the asset schedule in a hurry and gave no particular reason why he put the two car parking spaces under HL’s column. Later, he changed and said the two car parking spaces were just put under HL’s column as an example of a basis for discussion only and there was no concluded agreement to transfer them from HIECL to HL. 96.For the same reason as stated in paragraph 74, the transfer of the two car parking spaces together with the waiver of the debt and repayment of $500,000 were necessary to give effect to the one-fifth principle. Without these terms, the share transfer on 2 July 2008 did not make sense. This item in isolation has the same effect, albeit to a lesser degree. 97.On the fact, with the permission of HIECL the two car parking spaces had been used by HL since 2 July 2008. HIECL also passed management fee and rates demand notes to HL for settlement. At around the time when Chung Yee commenced the present action in 2011, HIECL demanded possession of the two car parking spaces. HL gave them up to avoid conflict with the management office of Kwan Yick Building. 98.HL’s use and occupation of the two car parking spaces for threeyears since 2 July 2008 when the share transfers took place is clear evidenceof part performance of the Verbal Agreement. HL’s abandoning the use and occupation of the car parking spaces did not have the opposite effect of neutralizing that evidence. This is because the Verbal Agreement is bindingon the five siblings but not on HL and HIECL. The car parking spaces are registered under the name of HIECL and the use of the parking spaces were under the control of the management of Kwan Yick Building which only recognized the paper ownership. It would be futile for HL or for Chung Yeeto resist HIECL’s demand for repossession of the car parking spaces. HL’s surrender of the two car parking spaces was pragmatic. I find HL’s use and occupation of the two car parking spaces from 2 July 2008 to 2011 clear evidence of part performance of the Verbal Agreement which evidenced the conclusion of that agreement and this particular term of the agreement. Term 11 — Repayment for the purchase price of the Mercedes Benz and the cross border vehicle licence 99.According to Chung Yee, it was agreed that Joe and Chui wouldpersonally, not HIECL, repay the sum of $350,000 and $150,000 paid by HL for the purchase of a Mercedes Benz and a cross border licence. The sales contract showed that the Mercedes Benz was purchased in Joe’s name on 29 March 2008, just a few days before the April Meeting. The purchase price was $347,500 and was paid by the trade-in value of a Toyota Alphard valued at $250,000 and cash of $97,500. It can hardly be argued that it wasnot an accurate valuation by reason of the difference of $2,500. As for thecross border vehicle licence, Chung Yee said that the market price was even higher while Chui said it was lower. 100.The purchase of the Mercedes Benz with the funds of HL was fresh in the minds of Chung Yee and Joe. The cross border vehicle licence was allocated by the Mainland authorities to Chung Yee as a member of the Consultative Committee in one of the cities in China. It was to be used on that car. There was no reason why Chung Yee would have overlooked these facts and failed to require the repayment of the costs of acquisition of these assets as a term of the Verbal Agreement. These are substantial assets. The Verbal Agreement without this term does not sit well with the one-fifth principle. For the same reasons as in the preceding two subsections, I accept Chung Yee’s evidence that the siblings had agreed to this term. 101.In the context of proving HIECL’s case under the second action, Chui testified that the purchase price of the Mercedes Benz in the sum of $340,000 had been set off against the debt owed by HL to HIECL between 5 and 8 May 2008. This may have an impact on whether the above term had been agreed and the quantum of damages for breach of that term. Chui produced a statement of account between HIECL and HL (the “statement”) containing the following entries:
102.The statement is confusing and illogical. Originally, the last two headings shown above read “Money paid by HL to HIECL” and “Moneyreceived from HIECL”. Under cross-examination and after an adjournmentto enable her to reconsider the statement, Chui admitted these mistakes and said that the headings should be reversed and read as shown above. Be that as it may, the statement is factually wrong in a number of respects. The purchase of the Mercedes Benz and sale of the Toyota Alphard to the car dealer took place on 29 March 2008, not more than a month later on 5 or 7 May 2008. I have verified the statement against the general ledgers of HL and HIECL. There was only one entry dated 6 May 2008 in the general ledger of HIECL which recorded the purchase of the Toyota Alphard from HL in the sum of $250,000. It was neither on 5 or 7 May 2008. There wasno corresponding entry in the general ledger of HL in relation to this sum of $250,000. Putting the question about the date of the entries aside, the first entry dated 5 May 2008 in the statement suggests that HIECL gave credit to the trade-in value of the Toyota Alphard used in the purchase of the Mercedes Benz for Joe or HIECL, and hence reduced HL’s debt owing from $1,215,144.89 to $965,144.89. This entry accords with Chui’s case and common sense. It is supported by the entry dated 6 May 2008 in the general ledger of HIECL, but is not supported by any entry in the corresponding general ledger of HL. 103.What is questionable is the second entry dated 7 May 2008 in the statement. This entry suggests that HIECL paid HL back $250,000 for the Toyota Alphard traded-in. That understanding also accords with Chui’s case and common sense. Butthat would be a duplicate of the first entry. Not only that, what is inexplicable is that thebalance column showed that the effect of this transaction was to increase HL’s debt back to $1,215,144.89, thereby cancelling the effect of the first entry. The net result of these two transactions is zero, except that the Toyota Alphardformerly under HL’s name evaporated from HL’s assets. This entry was notsupported by any corresponding entry in the general ledger of HL or HIECL. Apart from the question why the dates of these transactions were more thana month after the actual sale and purchase, the net result of these transactions is inexplicable and absurd. 104.It was then suggested that on 8 May 2008, HL was treated to have paid HIECL $340,000 to set off the sum of $250,000 paid by HIECL for the purchase of the Toyota Alphard and another fund transfer of $90,000 received by HL. Chui has not produced original documents to verify these transactions. But even assuming that they were genuine, these entries do not make sense in the scheme relating to crediting HL with the trade-in value of the Toyota Alphard and reducing HL’s debt. They may relate to something else genuine. Besides, the audited reports of both HL and HIECL ending 31 March 2008 dated 17 October 2008 showed that the debt owing by HL remained at $1,227,013 as it was before the set off of $340,000. This suggests that the general ledgers of HL and HIECL are unreliable and the statement prepared by Chui is probably a self-serving afterthought which is untrue. 105.Accordingly, I come to the conclusion that the statement of account is unreliable and that the entry dated 7 May 2008, at least, was fictitious created to avoid Joe’s and Chui’s liability or to support a false claimby HIECL against HL. If Chui was seeking to prove by these transactionsthat HL had been repaid the funds it used to pay for the Mercedes Benz, she failed to discharge the burden of proof. Term 12 — Waiver of HL’s debt owed to HIECL 106.As revealed in the background, there was a book debt owing by HL to HIECL arising from its loss in a property transaction which was paid by HIECL in 1998 at a time when the two companies were run as a family business and as family assets. HL’s obligation to repay and HIECL’s right to receive payment was just a question of “left pocket” or “right pocket” in the same coat. The situation is no different to the siblings (but may not as between HL and HIECL) after the share transfer on 2 July 2008 as result of the one-fifth principle. This is because if the debt has not been waived and remains enforceable, it would reduce the asset valueof HL and enhance that of HIECL. The siblings subsequently holding HIECL would have to make equalization payment to the siblings holding HL of precisely the same amount based on the one-fifth principle. 107.Chung Yee’s evidence is that he had specifically raised the issue about waiving the debt during the April Meeting or one of the intervening discussions before the June Meeting. He only agreed to take over HL on Joe’s confirmation of the waiver. His evidence is vague and unspecific. Joe’s and Chui’s evidence is one of denial. The question of ambiguity and lack of specificity does not arise. However, on the objective evidence, it was a huge sum of over $1.2 million in 2008. It was equivalent to 20% of HL’s value as indicated in the asset schedule. As indicated on Exhibit-1, Chung Yee had raised questions about the valuation of the two car parking spaces involving a difference of only $0.3 million to $0.5 million. It is highly unlikely that Chung Yee would have overlooked this debt. Evenif he had during the April Meeting, he would certainly have raised it during oneof his intervening discussions with Joe and had obtained Joe’s confirmationof a waiver. His evidence makes sense under the one-fifth principle or the“left pocket, right pocket” scenario. I find that the waiver was a term of the Verbal Agreement. Term 13 — Equalization payment 108.Chung Yee said that during the April Meeting Joe proposed that equalization payment would be payable by the siblings receiving assets of value in excess of their entitlement under the one-fifth principle. The equalization payment payable to Chung Yee in respect of his and Hin’s 80% interest in HL after discounting Yuk’s 20% interest is to be calculated according to the formula of 80% of the difference between 50% of the combined value of the two companies and the post completion value of HL. While Joe denied there was any such agreement, the fact that this proposal had been made was not seriously challenged. This term is fair and makes business sense in the whole scheme of splitting the assets of the companies among the siblings. Making equalization payment and the one-fifth principle were two of the principles agreed under the Verbal Agreement in Principle during the April Meeting. I have no difficulty to find that as result of Yuk’s opting to have shares in both companies, the siblings must have agreed at some stage between the two meetings or during the June Meeting that Chung Yee, Hin and Yuk would be given equalization payment by Joe and Chui according to the above formula. Terms 14 and 15 — Payments by HIECL to Joe and Yuk 109.It is Chung Yee’s evidence that Joe agreed that HIECL was to pay Joe a sum of $520,000 as bonus for his service from the years 2003 to 2008 and to pay Chui a sum of $40,000 as bonus for her service from the years 1996 to 2003. These liabilities were noted under the HIECL column in the asset schedule as $600,000 and $120,000 but with two brackets indicating two sum of $80,000 having been received by Joe and Yuk. I findthat these terms were agreed. I note that receipts for these sums of $160,000 have not been taken into account in the asset schedule. This indicates that they were added into the asset schedule during the April Meeting. Those additions resulted in an over-deduction of like amount as HIECL’s liability. However, I assume that these payments must have been taken into account in the audited report of HIECL. These terms therefore have no impact on Chung Yee’s claim. Term 16 — Valuation and shared use of the trademark “Pok Choy” 110.There is no dispute that Joe wrote down certain monthly recurring expenses of HIECL such as salaries, transportation, rental for the warehouse and office, and bad debt; and that Chui wrote down “白菜:” under the HIECL column in the asset schedule. There is also no dispute that either Chung Yee or Chui wrote down the figures “40 à 42” referring to the valuation of the two car parking spaces. The dispute is as to whether they were written during the April Meeting or June Meeting and who wrote those figures. When precisely they were written and who wrote them are, in my view, irrelevant or unimportant. These scribbles indicate that there were serious and active discussions about valuation of the two car parking spaces and the trademark “Pok Choy” during the June Meeting, if not during the April Meeting. 111.It it is common ground that Chung Yee raised the argument that the two car parking spaces were purchased at the cost of $0.47 million, though the market value was between $0.40 to $0.42 million in 2008 which was what the figures “40 à 42” represented. However, despite that, he finally accepted the value of $450,000 as assigned by Joe in the interest of a quick resolution. 112.On the other hand, Joe argued that there was no discussion whatever during the April Meeting or in between the two meetings and he heard nothing about the discussion as he was looking at his copy of asset schedule while the other siblings just discussed among themselves. That evidence is totally watered down by Chui’s evidence and her scribbles on Exhibit-1. Then, Joe said he heard the siblings discussing about the valuation of the trademarks and he went over to Chui’s seat, grabbed her copy of the asset schedule and wrote down “still required to be valued”, meaning every item and not just the trademark required to be valued by a third party. 113.His evidence is utterly selective and manifestly self-serving. I have rejected Joe’s evidence that the meeting was an impromptu meeting. It was a premeditated meeting to discuss splitting the family assets in which he was not only interested. He was highly motivated to have the split. On his evidence, he initiated the April Meeting and pressed Chung Yee and Hin for an answer two days afterwards. In the circumstances, it was improbable that he would not have participated in the discussion but merely kept looking at his copy of the asset schedule without paying attention to what was discussed. Then, he selectively chose to hear the siblings discussing about trademarks and reacted by going over to Chui’s seat and writing down the phrase “still required valuation”. 114.Joe went on to testify that when he wrote down that phrase the words “Pok Choy” and “or for share use” were not there. Hence, he argued that by that phrase he was referring to all assets, not just the trademark “Pok Choy”, required to be valued by a third party. There is a lot of topping up and artificiality in his evidence. First, there was no reference to valuation by a third party. Second and most obvious of all, there is no conceivable reason why he should start writing with an indent. Third, the words “Pok Choy” started precisely at the same margin as all the other items under the HIECL column. Chui could not explain why the order of the writings appeared the way as described by Joe, ie why she added the words “Pok Choy” before Joe’s. It is obvious that the siblings were discussing about valuation and/or use of the trademarks and hence Chui wrote down the words “Pok Choy” starting from the margin. Then, Joe raised the issue about valuation and wrote down “still required to be valued” after “Pok Choy”. Thus the agreement on valuation only related to “Pok Choy”. 115.However, Chung Yee said it was also agreed that the HL may share in the use of the trademark and he wrote down the words “或共用 (or for share use)” after the words “still required to be valued”. He said that Hin worked in the flour business of HIECL for all his life and it was important for Hin to be able to continue his flour business after the split. Hence, he had raised this issue and had agreed with Joe for HL to share in the use of the trademark with HIECL. Joe and Chui said that there was no such agreement. Chui suggested that Chung Yee might have added that phrase while she was attending to settling the bill. 116.The words “or for share use” apparently were squeezed in between the phrase “still required to be valued” and “Henry 不願有股份(Hin did not wish to have any shares). ” They were written in a different colour ink. The issue of Hin’s shares could only arise after the siblings had reached agreement on the split. This suggests that the words “or for share use” were added after the siblings had reached agreement on the terms of theVerbal Agreement and after they commenced discussion about share transfer. On this issue, I have to reject Chung Yee’s evidence and prefer Chui’s. I find that the parties reached agreement that they were unable to assign a value to the trademark “Pok Choy” which required to be valued. Next, they reached agreement that Hin’s entitlement to shares in HL were to be transferred to Chung Yee. Hence Chui wrote down “Henry 不願有股份 (Hin did not wish to have any shares)”. That was the last item agreed insofaras the Verbal Agreement was concerned. Hitherto, the Mother’s maintenance had all alone been paid by HIECL as the treasury of the family business. As a result of the split, it became necessary for the siblings to discuss provision for the Mother’s maintenance. Then, the dispute arose and Chui was busy checking and settling the bill. Chui’s suggestion that it was at that time that Chung Yee took Exhibit-1 and wrote down the words “or for share use” is the only reasonable inference to be drawn from all the surrounding evidence which I accept. Accordingly, I find that share use of the trademark “Pok Choy” was not part of the Verbal Agreement. 117.In his amended statement of claim and witness statement, Chung Yee mentioned two other trademarks, namely “2A Brand” and “Double 22 Brand” in addition to “Pok Choy”. In his witness statement, Chung Yee said that to his surprise he later found out that Joe had registered these two trademarks under his personal name instead of that of HIECL in 2005. These were not mentioned in the asset schedule suggesting that they were not discussed during the two meetings. I assume that Chung Yee has abandoned his claim in respect of these two trademarks. HCA 1419/2011 118.I am satisfied that the parties entered into the Verbal Agreement as alleged by Chung Yee on terms including those enumerated in the above section. Chung Yee has fully performed his part of the agreement, but Joe and Chui have only part-performed. Chung Yee is essentially seeking specific performance of the Verbal Agreement. This is an obvious case in which the only appropriate remedy is specific performance as the parties cannot be restored to their respective position before the contract. Chung Yee seeks specific performance of the following terms:
Transfer of the two car parking spaces 119.Mr Lau submitted that as HIECL was not a party to the Verbal Agreement and these proceedings, the Verbal Agreement may not be enforceable against HIECL under the rule in Tasker v Small. He quoted the following passage of Lord Cottenham LC from Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies [12]:
The learned authors then cited the following passage from Howard v Miller[13] as authority for the application of the above proposition to transfer of land:
Mr Lau therefore submitted that Chung Yee may not circumvent the rule in Howard v Miller through the back door by obtaining a mandatory injunction requiring Joe and Chui to procure HIECL to transfer the car parking spaces to him. 120.The propositions contained in Meagher, Gummow and Lehane are trite law. It is trite that only parties to a contract may seek specific performance of the contract. Chung Yee is seeking to enforce the Verbal Agreement against Joe and Chui who are parties to that agreement; and not seeking to enforce any other contract to which HIECL is a party but Joe and Chui are not. Indeed, Meagher, Gummow and Lehane actually reinforces Chung Yee’s position that he is entitled to specific performance where, as in the present case, damages are inadequate and the parties cannot be restored to the position they were in before they entered into the Verbal Agreement. 121.Howard v Miller is a case of dispute between parties with competing interest in land under the Canadian Land Registry Act. In that case, a husband conveyed six acres of land to his wife by deed, who by a second deed of the same date re-conveyed 4.14 acres of it back to the husband. The husband died intestate in 1906, leaving the wife and an infant daughter, Mildred Howard, surviving him. The wife applied for administration of the husband’s estate and included the 4.14 acres of land as part of that estate. She took both deeds to the Land Registry for registration. By some misconception, only the conveyance by the husband was registered. Thus, the wife appeared on the register as if she were the owner of all six acres of land. In 1908, the wife sold the 4.14 acres to the respondent Miller, who re-sold it to the respondent Wilkinson. The present action was brought by the respondents against the wife and the daughter for specific performance of the sale of the 4.14 acres. The daughter was joined as a co-defendant onthe ground that she claimed an interest in the 4.14 acres adversely to the wife. The wife did not defend the action, but the daughter, ie the appellant, did. Her case is that the land formed part of the estate of the husband and that subject to the wife’s right of dower, it descended to her and the wife had no authority to sell it. The court of British Columbia made a decree for specific performance against both the wife and the daughter. That decision was affirmed by the Supreme Court of Canada. On appeal to the Privy Council, Lord Parker held that the daughter should not have been joined as a party and dismissed the action so far as the daughter was concerned. 122.Thus Lord Parker’s dicta quoted above were made in the context of a party to a contract for sale of land seeking to enforce that contract by specific performance against the true owner who was not a party to that contract. It should not be read as wide as Mr Lau did as an over-sweeping statement that under no circumstances could a landowner be deprived of his land by specific performance of any contract to which he is not a party. In other words, so long as the party to the contract is not seeking to specifically enforce it against the landowner who is not a party, he could achieve the same result by enforcing that contract against someone who is a party to the contract and who has lawful authority to dispose of the land. Mr Lau called it a way by the backdoor, but I can see no legal or moral objection to such a course. This is particularly so where the landowner is just a corporate vehicle of the party against whom the contract is sought to be enforced. That is what a party has covenanted to perform and should be ordered to perform if he does not or refuses to honour his obligation. Lord Parker’s dicta should not be used as a shield against the legal consequences of breach of contract. I am by no means limiting the width of Lord Parker’s dicta. It is only that Mr Lau was misreading them. Waiving the debt owed by HL to HIECL 123.Not only did Joe and Chui fail to procure HIECL to waive the debt owed, they even took active action to enforce the debt by procuring HIECL to commence proceedings in HCA 1228/2014 to enforce the debt. This is clear breach of the term of the Verbal Agreement for which the appropriate remedy is entitled to specific performance. Payment to HL of the sum of $500,000 124.I am satisfied that payment of this sum is a term of the Verbal Agreement. Joe’s and Chui’s defence is not that they had paid but that there was no agreement to pay. Chui has also failed to prove any part of the sum had been paid by HIECL. I therefore have no difficulties accepting Chung Yee’s evidence that the sum has not been paid. This is another clearbreach of a term of the Verbal Agreement for which Chung Yee is entitled to specific performance against Joe and Chui, which is effectively damages for breach of agreement. Equalization payment 125.Under the term of the Verbal Agreement, the party holding assets in excess of its entitlement under the one-fifth principle shall make equalization payment to the other party. According to the audited report for the year ended 31 March 2008, the net liabilities of HL was $245,700 which included the debt of $1,227,013 owed to HIECL and the book value of Shop 168A of 545,072, which would have to be adjusted upwards to $5,000,000. Had the Verbal Agreement been performed, the asset value of HL would have been increased by the amount of debt owed to HIECL, the value of the two car parking spaces and the payment of the sum of $500,000. Accordingly, the adjusted asset value of HL as at 31 March 2008 would be $6,386,241, which is arrived at as follows:
126.According to the audited report for the year ended 31 March 2008, the net asset of HIECL was $4,623,119 which included the book value of the GZFGshares of $943,800, which would have to be adjusted upwards to $6,100,000 as statedin Exhibit-1. Had the Verbal Agreement been performed, its assetwould be reduced by the value of the two car parking spaces transferred to HL and HL’s debt waived. The value of the two car parking spaces had been revised to $413,799 in the audited financial statement. Accordingly, the adjusted asset value of HL as at 31 March 2008 would be $8,138,507, which is arrived at as follows:
There is no need to give allowance for the $500,000 to be repaid to HL as theliability for that repayment was agreed to be Joe’s and Chui’s and not HIECL’s. The combined value of HL and HIECL as at 31 March 2008 was therefore $14,525,748, 50% of which is $7,262,374. 127.Based on the above figures, Joe and Chui are required to pay Chung Yee equalization payment in accordance with the formula of 80% of the difference between 50% of the combined value of HL and HIECL and the adjusted value of HL in accordance with the audited report for the year ended 31 March 2008. The amount payable is $700,906, ie ($7,262,374 − $6,386,241). Value of the trademark “Pok Choy” 128.On this issue, I accept Joe’s evidence that the parties had not agreed on the value of the trademark “Pok Choy”. I find that the words “or for share use” were added after the Verbal Agreement was concluded. What was agreed was that the trademark shall be subject to valuation and equalization payment payable. Though no valuation was made, that does not prevent the Verbal Agreement from coming into being. All the essential terms were agreed, including that the trademark shall remain as an asset of HIECL and its value be assessed. What was left to be done is for the parties to initiate steps to have it valued and then adjust the equalization payment in accordance with the agreed formula. Joe and Chui will have to pay Chung Yee a sum equivalent to 80% of half of the assessed value of the trademark “Pok Choy”. Chung Yee or his companies may not use the trademark save with the consent or licence of HIECL. Conclusion 129.Accordingly, I enter judgment in favour of the plaintiff in HCA 1419/2011 against the defendants and make the following order:
130.In view of the above conclusion, there is no need to consider the plaintiff’s claim based on estoppel, mistake and misrepresentation. HCA 1228/2014 Introduction 131.In this action, HIECL claims against HL for repayment of debtin the sum of $956,874.89. HIECL’s pleaded case is that the amount claimed represented the balance of advancement in the sum of $1,227,013 as stated in the audited reports of HL and HIECL for the year ended 31 March 2008 net of any subsequent repayment up to the date of issue of the writ. Mr Lau argued that by his acknowledgement of the debt in HL’s audited report for the year ended 31 March 2009, HL affirmed its liability for the debt. Chui also produced the statement to prove the claim. 132.Save for the fact that the sum of $1,227,013 was stated in its audited report, HL denied liability. HL’s defence is that the debt was not meant to be loans and the common intention of HL and HIECL has always been that the debt need not be repaid. Its case is that until the split the two companieswere integral parts of one family business. The debt represented allocation of funds and there was never any intention that it shall be repaid or shall carry interest. As stated in HL’s and HIECL’s audited reports, it did not carry interest. 133.It is common ground that the debt was created in 1998 when HIECL paid compensation to the developer on behalf of HL in respect of a property transaction. It was reduced throughout the years. The entry of the debt in the sum of $1,227,013 in the audited reports from which the outstanding balance is now claimed is not disputed. To successfully resist HIECL’s claim, HL bears the burden of proving that there was no intention that such debt need be repaid. The evidence of Chung Yee on the one part and that of Joe and Chui on the other are diametrically opposed. The accounting treatment of the debt as revealed in the general ledgers provides the best evidence as to the parties’ intention. The fact 134.Chui was in charge of the financial matters of the two companies and responsible for the preparation of the general ledgers. Her evidence is that the operation of HIECL was financed by banking facilities secured by a mortgage over Shop 168A held under the name of HL. HL being a property holding company had few expenses but substantial rental income. It also operated a profitable logistic business up to 2007. It had little need for the banking facilities. To minimise interest arising from the use of the banking facilities, HL’s funds were used whenever available to make payments for HIECL. That is why there were not many occasions of largesums being transferred by HIECL to HL, but there were series of inter-company fund transfers in small amounts between the two companies all over the general ledgers. There were also occasions when HIECL paid on behalf ofHL expenses which HL had the financial ability to pay, such as Chung Yee’s entertainment expenses in China and the expenses of the Toyota Alphard. In summary and in Chui’s own words, she just withdrew moneyto discharge the liabilities of HIECL from either accounts of the two company from which funds were available and when funds were not available she would use the banking facilities. Despite the pre-existing debt, HL with its Shop 168A and banking facilities was the treasury of the family business. 135.There are four significant events which are reflective of the true financial relations of HL and HIECL. First, since 31 March 2003, the two companies resolved that HIECL should pay HL a handling charge of $280,000 per year for its use of the banking facilities. In comparison with the bank charges of about $36,000 per year, this handling charge was exorbitant. It was a pure accounting manoeuvre involving asset transfer within the family business of which HL and HIECL form part. Chui could not offer any credible explanation for the resolution. This resolution is inexplicable except on the basis that it was a conscious decision of both companies to reduce HL’s outstanding debt by using of HIECL’s assets. Effectively, HIECL was repaying HL’s debt. 136.Second, a remarkable transaction shown in Chui’s statement of account is that a sum of $4,704,868.64 was repaid by HL to HIECL on 31 March 2005 HL resulting in a very substantial 62% reduction of HL’s debt from $7,572,521.96 to $2,867,653.32. The particulars describing that transaction were “RJE6 to directors Bal[ance] to HIECL”. This repayment was accompanied by the following changes in HL’s audited reports:
The entry in Chui’s statement of account and the entry in (c) above suggest that the four directors of HL, namely, Chung Yee, Hin, Yuk, Joe and Chui, were treated as having borrowed $4,704,868.64 from HL to repay HL’s debt owing to HIECL. The debt in that amount due from the directors disappeared in the audited report for 2006. That suggests the debt due to HLhad been repaid. In her evidence, Chui confirmed that she had not paid any or any part of that debt. Most probably, the fund came from Honest Word. The inference must be that via the four directors the debt owed by Honest Word to HL was used to repay the sum of $4,704,868.64 owed by HL to HIECL. Even without drawing that inference, it can be seen that byaccounting manipulation, about 62% of HL’s debt was treated as having been repaid without HL or any of its directors contributing a cent. 137.Third, a very profitable logistic business of HL was set up in 2004 to provide transportation services mainly to HIECL. HIECL could have simply set it up for itself instead of for HL. Chui explained that the purpose was to assist HL to repay its debt owing to HIECL. The logistic business produced considerable profits. By 31 March 2007, it generated $2.7 million profit for HL. It is not disputed that due to an employment claim in 2007 by one of its employees, the entire logistic business was transferred to HIECL for no consideration. There was no evidence in the ledgers or audited reports of the two companies of payment of any consideration. It was transferred for free. It is inexplicablewhy when HL was heavily in debt to HIECL in a sum exceeding $1 million,this very lucrative business was just transferred to HIECL for free when the proceedsof sale could have easily paid off the balance of the debt owing and providedHL with substantial surplus. The transfer was not an arms’ length transaction,but internal reallocation of assets within two companies as one integral part of the family business to protect the family assets from execution. 138.Lastly, the trade-in of the Toyota Alphard for the Mercedes Benz is another example of such treatment. There is no evidence in whose name the Toyota Alphard was registered. Presumably it belonged to HL as all its expenses were paid by HL and the confusing transactions relating to the trade-in for the Mercedes Benz also suggests its resale value was credited to HL. It was used to trade-in for the Mercedes Benz purchased by Joe and treated as an asset of HIECL. Conclusion 139.Until the split in 2008, HL and HIECL were owned by the same siblings in equal shares, subject to Hin’s shareholdings were held on trust for him by Chung Yee, Yuk and Chui. 140.Throughout the years, HL’s very substantial debt of about $8 million was gradually reduced to $1,227,013 by accounting manipulations. In 2004, a very profitable logistic business was created forto serve HIECL which HIECL could have operated on its own. By consciousdecision, HIECL passed a resolution to pay HL exorbitant handling charges of $280,000 per year for the use of its banking facilities which it could also have obtained by mortgaging the two car parking spaces and use of trust receipts facilities. A very substantial debt of $4,704,868.64 was treated as having been repaid by accounting manoeuvre without HL or any of its four directors contributing funds to make the payment. These accounting manoeuvres only brought about internal reallocation of assets within two companies. They served no commercial purpose except to reduce HL’s debtowed to HIECL. 141.Despite the substantial debt, HL with its banking facilitieswas used as the treasury of the family business. The assets of HL were used freely for the purpose of HIECL, including funds and trading-in of HL’s Toyota Alphard. The logistic business was then transferred to HIECL in 2007 for no consideration, shortly before the split, to insulate that asset from possible execution in a pending litigation. This shows that the assets of the two companies are treated as common or mutual assets. Though the two companies were separate legal entities, all these indicate that they formed an integral part of the same family business. If they were truly separate entities, HIECL could have allowed HL to be wound up in 1998 on failing to pay compensation to the property developer. From the accounting treatment of the accounts of these two companies and Chui’s own evidence, I find that until the split, these two companies were operated as integral parts of one family business. The debt incurred in 1998 was also the debt of the family business. 142.When HL’s debt owing to HIECL is viewed against the above background, I have no difficulties to draw the inference that from the time it was created in 1998, there was no intention that it shall be repaid as if it were a debt contracted at arms’ length. All repayments since the creation ofthe debt were just accounting manipulations or internal asset redistribution for business purposes, such as bookkeeping or tax avoidance. In the course of discussion about the split, Joe readily agreed to HIECL waiving the debt. His agreement is another confirmation of this common intention. As for HL’s acknowledgment of the debt in its audited report for the year ended 31 March 2009, Chung Yee explained that he was bound to make the acknowledgement because the debt could not be removed save by synchronized act of both companies. Obviously, HIECL was not prepared to take synchronized action. Indeed, it even sought to enforce the debt. I accept his explanation. Accordingly, I find that the common intention of HL and HIECL was and has always been that the debt need not be repaid. For the above reason, HIECL’s claim is dismissed with costs.
Ms Winnie Chan, instructed by Or & Lau, for the plaintiff Mr Raymond Lau, instructed by Lee & So, for the 1st and 2nd defendants [1] [2004] 1 HKC 434 [2] DCPI 2047/2011 and DCEC 1267/2010, 5 February 2016 [3] HCA 2807/2006, 12 May 2009, at paras 24 – 28 [4] HCPI 504/2009, 7 January 2013, at paras 25 – 26 [5] FAMV 45/2016, 17 February 2017, at para 12 [6] HCCT 52/2014, 13 March 2017, at para 57 [7] (Unreported) HCA 90/2010 [8] 29th ed, General Principles, para 12-126 [9] CACV 175/2006 (unreported) 20 July 2007, per Yuen JA [10] See paragraphs 112 to 114 [11] See paragraphs 112 – 114 [12] 5th edition, 2015, para 20-250 [13] [1915] AC 318 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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