Tien Sau Tong Medicine Company (Hong Kong) Ltd v. Cheung Po Ling and Another

HCA 400/2016

[2019] HKCFI 1258

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 400 OF 2016

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BETWEEN

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Before: Hon Coleman J in Court

Dates of Hearing: 6-14 May 2019

Date of Judgment: 14 May 2019

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J U D G M E N T

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Introduction

1.The plaintiff company is wholly owned by its sole shareholder Mr David Ng, who is also its sole director.  Mr Ng is not a businessman but an artist, and he spends the majority of his time in the United States.

2.The 1^st defendant had been employed by the plaintiff since 2007, and the 2^nd defendant (who is the son of the 1^st defendant) had been employed by the plaintiff since 2013.

3.There is no dispute that Mr Ng (and so the plaintiff) reposed considerable trust and confidence in the 1^st defendant, who dealt with much of the day-to-day management and administration of the plaintiff and its business (as well as some of Mr Ng’s personal administration, during his lengthy periods out of Hong Kong).  For that purpose, the 1^st defendant had been granted signing rights as an authorized sole signatory for the plaintiff’s bank accounts.  It cannot be seriously disputed that the nature of her appointment, employment and activities created fiduciary duties which the 1^st defendant owed to the plaintiff.

4.The central question in this trial is whether the 1^st defendant has acted in breach of those duties.

5.The question arises in the undisputed context that the 1^st defendant used approximately $6 million of the plaintiff’s funds to purchase a property in the name of the 2^nd defendant (“the Property”), for his and his wife’s residential use.  The funds were obtained by 3 cheques drawn on the bank account of the plaintiff, each signed by the 1^st defendant only.

6.Shorn of the surrounding detail, in essence the 1^st defendant says that the money was provided by the plaintiff by way of a non-interest-bearing loan, specifically authorized in advance by Mr Ng, and taken pursuant to an alleged oral agreement between her and Mr Ng.  The 1^st defendant points to the fact that a loan is recorded in the audited financial statements for the plaintiff for the financial year ended 31 March 2015, on the face of which Mr Ng signed his approval as sole director.  The 1^st defendant says that whilst the amount originally borrowed was slightly in excess of $6 million, a repayment was made to bring it down to $5.8 million; but, thereafter, Mr Ng insisted on waiving any repayment of $800,000 and agreed that the remaining $5 million could be repaid by 10 equal instalments of $500,000 on each 2 March commencing in 2016.

7.As witness for the plaintiff, Mr Ng denies the alleged oral agreement for any loan, and any waiver of any part of any loan.  Rather, he says the money has been extracted from the plaintiff without authorization, so that the funds and/or the Property purchased are held on constructive trust for the plaintiff.

8.The parties have not really contested the law, and neither Mr Kevin Hon, Counsel for the plaintiff, nor Mr Arthur Yip, Counsel for the defendants, has cited any authority except as to how to assess evidence and as to estoppel. Instead, it is agreed the case turns on the resolution of a “he said, she said” contest on the factual question as to what were the circumstances of the monies being used to purchase the Property. The central question is: was there an oral loan agreement, or not?

9.There is rather little documentation which is likely to assist much in resolving the dispute.  Therefore, as well as turning on the credibility of the witnesses which can be assessed in part by reference to their demeanour (though demeanour can be misleading), and looking at what documents there are, I am also bound to consider inherent likelihoods and probabilities, and by reference to commercial business or ordinary common sense.

10.I accept the submission made by Mr Yip that what makes business or ordinary common sense depends in each case on context, and here is to be judged against the particular relationship between Mr Ng and the defendants, especially the 1^st defendant.

11.I also accept that where the allegations made by the plaintiff against the defendants are of a misappropriation of funds, which are serious allegations, the Court needs to find sufficiently cogent evidence commensurate to the seriousness before it could be satisfied that those allegations have been made out.

Common Ground

12.Despite the dispute on the central issue, there is a considerable amount of common ground between the parties as to the facts.  Some of this was evident well in advance of the trial, and more common ground was reached during the evidence given at trial.

13.The plaintiff is a company incorporated in Hong Kong, conducting the business of Chinese medicine manufacturing and trading.  The business was founded by Mr Ng’s grandfather over a century ago.  The core business is in the production and sale of two particular medicine pills.

14.Mr Ng is the sole shareholder and director of the plaintiff.  In about 1998, he inherited the business from his father, who had himself inherited the business from his own father.  To be precise, Mr Ng inherited 70% of the business from his father, as the other 30% had been given to Mr Ng’s then wife by the father because she cared for him before he passed away.  However, as part of a divorce settlement, Mr Ng purchased that 30% to become the sole owner.

15.It seems likely that since 1998 the business has made at least some operational profit each year.  But there was also some debt which it took Mr Ng a few years to clear.  When he took over the business, the actual manufacturing process was outsourced, but it was Mr Ng’s plan to improve or upgrade the company.

16.In 2007, the plaintiff hired the 1^st defendant as an administrative assistant at a salary of $10,000 per month, with certain allowances.  Her duties were mainly data input and taking orders.  The 1^st defendant’s salary increased over time to almost $50,000 per month prior to termination of her employment in early 2016.

17.After 3 months of her employment, Mr Ng entrusted to the 1^st defendant the management of the plaintiff.  Indeed, because Mr Ng spent a significant amount of time out of Hong Kong, the 1^st defendant was also authorized to operate the plaintiff’s bank accounts on her sole signature.  From about 2012, the 1^st defendant was entrusted with almost full management powers and permitted access to all confidential information belonging to the plaintiff.

18.When Mr Ng was not in Hong Kong, most of the contact between the 1^st defendant and Mr Ng about the plaintiff’s and his personal matters were conducted through telephone calls.  Mr Ng does not really use email.  Sometimes messages were relayed to Mr Ng through his mother, with whom he lived and for whom he cared in the US.

19.It seems that Mr Ng, his mother, and his 2 younger brothers (one of whom was unwell for a period of time, and who passed away in 2015) were always maintained through the income received by him from the plaintiff.  That income was from director’s emoluments, not from distribution of dividends.

20.In around 2011, the 1^st defendant agreed to act as a guarantor of the plaintiff and Mr Ng for mortgage finance against 3 properties (two owned by the plaintiff, the other by Mr Ng).  At the same time, the 1^st defendant and the plaintiff were parties to an ‘exemption agreement of guarantor’ under which it was agreed that she need not be responsible for and carry out any legal obligations under the guarantee signed by her, and instead the plaintiff itself should be so responsible.

21.From sometime in 2013, the 2^nd defendant was employed by the plaintiff through the 1^st defendant, his mother.  Mr Ng maintains that the 2^nd defendant was not employed at his request, or even with his prior knowledge, but that may not matter in circumstances where he clearly subsequently accepted the fact of employment, did nothing to revoke it, and indeed (through the plaintiff) provided financial support to the 2^nd defendant’s studies.  The 2^nd defendant was not unique in receiving such support, as Mr Ng similarly did that for other employees (his thinking being that it was mutually beneficial to encourage employees to study and apply new learned skills for the benefit of the plaintiff).

22.For a period of many years, the plaintiff’s financial statements were audited by KC Oh & Co, and in particular William Chan of that firm.  Naturally, he became very familiar with the plaintiff and its business and accounts.  The accounting year ended on 31 March each year, and it seems that the audited accounts were signed off in about the October or November following the year end.  The plaintiff’s financial statements and audited accounts were likely on many occasions sent to Mr Ng in the US for his signature and return.

23.Mr Ng also engaged an accounting firm in the US, Chuck Roth CPA, for the purpose of filing his tax returns in that country.  As a US citizen, Mr Ng was and is liable to US tax on his global income.

24.In addition to dealing with matters relating to the management of the plaintiff, the 1^st defendant also assisted him with various private matters, such as his Hong Kong home and tax affairs.  From 2013 onwards, she probably asked the 2^nd defendant to assist with those private matters.

25.At some point in 2013 or 2014, the 1^st defendant asked Mr Ng if he would allow the plaintiff to make her a loan for the purposes of her assisting the 2^nd defendant in purchasing a property, so that he could get married and live in that property with his wife.

26.In late 2014, the Property was purchased in the name of the 2^nd defendant using funds which had come from the plaintiff’s bank account.  The funds were drawn by way of 3 cheques, all signed by the 1^st defendant alone.  The first cheque was dated 20 December 2014 in the amount of $280,000, and was payable to the vendor of the Property.  The second cheque dated 30 December 2014 in the amount of $456,740 and the third cheque dated 16 February 2015 in the amount of $5,343,260 were made payable to the 2^nd defendant.  The total amount of the 3 cheques was $6,080,000. This total was used to purchase the Property, the consideration for which was $5,798,000.

27.A sum of $280,000 was credited to the plaintiff by the 1^st defendant or 2^nd defendant on about 13 February 2015.  Therefore, the net amount of the plaintiff’s funds used after that repayment was $5,800,000.

28.There are 3 IOUs or loan notes signed by the 1^st defendant as borrower in respect of those sums withdrawn by way of cheque.  There is a confirmation for audit purposes signed by the 1^st defendant in which she confirmed owing the plaintiff the principal sum of $5.8 million loaned to her, and interest of $19,600.

29.The loan is also recorded in the financial statements of the plaintiff for the financial year ended 31 March 2015.  The statement of financial position, or balance sheet, as at that date identifies one current asset as being “Loan to a staff” in the sum of $5,819,600, with reference to a note to the financial statements with the same heading, which states that it represents an unsecured loan advance to a member of staff (un-named) and the corresponding interest receivable therefrom, the loan having no fixed repayment terms with details being principal loan at 2.5% per annum in the sum of $5,800,000 and interest receivable of $19,600.

30.The balance sheet page of the financial statements bears Mr Ng’s signature as sole director, against the statement that the financial statements were approved and authorized for issue by the board of directors on 4 November 2015 and signed on its behalf by him.

31.Mr Ng placed increasing reliance on the 1^st defendant in managing the plaintiff, and she became the key member of staff, and it is clear that the business did well. She was the person who gave practical effect to Mr Ng’s plans to improve the business performance. The financial statements of the plaintiff for the 2 years ended 31 March 2014 and 2015 identify increases in turnover and profit.  The turnover in the financial years 2013, 2014 and 2015 were $9,910,744, $15,470,818 and $23,607,987 respectively.  The profit for each of those years was $944,830, $3,876,976, and $9,058,746 respectively.

32.Mr Ng attended as a guest at the 2^nd defendant’s wedding in Hong Kong in November 2015.

33.There is a receipt dated 23 December 2015 which records a payment by the 1^st defendant to the plaintiff of $19,000 (for the avoidance of doubt, not $19,600).

34.On 30 December 2015, the 1^st and 2^nd defendants were suspended from their employment, and they were subsequently summarily dismissed in around March 2016.

35.In February and March 2016, Mr Ng made a complaint to the police that the 1^st defendant had taken money from the company without his permission or consent.  She was subsequently arrested and released on police bail, but the bail money was returned in May 2017.

36.No part of the $5.8 million has been returned or repaid to the plaintiff by the 1^st or 2^nd defendants.

Analysis of evidence

37.I have had the benefit of written and short oral closing submissions today. The evidence contained in the witness statements, and that elicited at trial, is fresh in mind.  Obviously, I shall not rehearse all of the evidence and submissions, but shall focus on those matters which seem to me to carry most weight in the analysis.  I have taken some account of the demeanour of the witnesses, though as I have already pointed out I have tested their evidence against such of the contemporaneous documents as might assist, and by reference to inherent probabilities and likelihoods and what seems to me to make commercial and common sense in context.

38.Mr Ng seemed to me to come across as a broadly reliable witness.  He is by his own admission an artist and not a businessman or particularly commercially astute, and his mode of expression reflected that. His inheritance of the plaintiff company from his father might have been both a benefit and burden; it provided an income which maintained himself and his family, but it was not something which he felt particularly interested or able to manage on a day-to-day level.  Nevertheless, I accept that he was generally aware of the business and had taken decisions and steps to seek to improve it.  His evidence was essentially unshaken in cross-examination, was generally internally consistent, and contained the kind of concessions or agreement to matters put to him which tended to show his fairness and honesty. It is fair to say, however, that there was some vagueness in some answers, which as Mr Hon accepted were far from succinct, and which answers were sometimes offered even before the question had finished. There was certainly a sense of impatience at the process of giving evidence, but I did not generally regard that as showing he was being evasive.

39.On the other hand, in general terms, neither of the defendants were terribly convincing witnesses. The 1^st defendant gave evidence which was firm, but it was at times internally inconsistent, at times confused and confusing, and it led to retractions and restatements.  Her evidence was also often not consistent with the contemporaneous documents, such as they were.

40.The 2^nd defendant had less to say (as much of the relevant dealing did not involve him directly), and other than his insistence on matters of which he could have had no direct knowledge, he was perhaps more frank, though that tended to reveal potential holes in the story.

41.The defendants say that the 1^st defendant first raised with Mr Ng the possibility that the plaintiff might loan money to her or the 2^nd defendant sometime in 2013.  The assertion is that Mr Ng agreed to the loan, even though no figure was mentioned at all.  I regard this as inherently unlikely, though I accept the possibility of some kind of a loan was raised.

42.But the actual loan alleged is said to have been the product of an oral agreement reached between the 1^st defendant and Mr Ng over the telephone in October 2014.  As identified already, whether there was or was not such an oral agreement is at the crux of the matter. The defendants’ case is that in that telephone call Mr Ng agreed that the plaintiff would lend around $6 million to permit the 2^nd defendant to purchase a home for his marriage, and agreed to the suggestion that the loan be repayable by 10 instalments over 10 years.  It is also said that Mr Ng agreed that no interest need be payable on the loan.

43.I find as a fact that when the 1^st defendant raised with Mr Ng the possibility that the plaintiff might make a loan to help the 2^nd defendant purchase a property in 2013 and again in October 2014, that was either express or at least implicitly a possibility relating to the down payment only.  It seems to me that was a possibility which Mr Ng might well have considered, and so did not immediately reject, as indeed he says he did not immediately reject it.  But it seems to me that if the possibility of lending an amount for the whole purchase price of a property had been raised, particularly the sum of around $6 million, that would likely have been rejected on the spot. That likelihood seems even moreso if the borrower (and hence the person apparently liable for repayment) had been identified as the 2^nd defendant, as was the allegation.

44.The defendants’ suggestion is that Mr Ng agreed the loan, then had a change of heart as a result of an investigation conducted into his tax affairs by the US Inland Revenue Service.  I do not accept that suggestion.

45.The 1^st defendant had assisted Mr Ng in relation to his tax matters in Hong Kong, on his personal tax matters as well as those relating to the plaintiff.  I accept that he placed reliance on her in relation to those matters, as well as significant reliance on William Chan.  Therefore, if there was some incorrect reporting made to the IRS, no doubt Mr Ng would have felt some disappointment that he had been let down.  But I do not think that would have extended to “blame”, as was suggested by Mr Yip.

46.It is relevant that Mr Ng had a personal bank account with the Wing Lung Bank, where the plaintiff also maintained a bank account.  Thus, whilst the 1^st defendant in evidence suggested that she received and passed on to the Hong Kong accountant a letter from the Wing Lung Bank saying that it had received notice that the IRS was investigating the plaintiff’s matters, I reject that suggestion.  The plaintiff is subject to Hong Kong tax and pays tax in Hong Kong.  It is not subject to any US tax regime, and I can see no basis upon which the IRS would ever be interested in the plaintiff’s tax matters.  I cannot see any reason why the existence or non-existence of the alleged loan could make any difference to Mr Ng’s US tax position, or why it would be the subject of any interest from the IRS.

47.On the other hand, the IRS would be interested in Mr Ng’s tax position arising from his Hong Kong bank accounts.  Therefore, I accept his evidence that whatever investigation or enquiries were initiated by the IRS related to his own personal tax matters, unconnected to the plaintiff’s accounts.  I accept his evidence that the IRS enquiries were focused on what assets he held in his bank accounts, including his savings account with the Wing Lung Bank in Hong Kong and an investment account with Hang Seng Bank.

48.Indeed, the existence or non-existence of the alleged loan in the accounts of the plaintiff are also essentially irrelevant to any Hong Kong tax matters either.  The loan was made out of cash held by the plaintiff.  If the current assets did not include the loan, they would have included the cash not loaned.  The total current asset figure would not have changed (except by reference to the very small amount of alleged interest recorded).  Though the current assets include such profit as was retained by the company and not distributed by way of dividend, the current assets held do not affect the annual profit on which tax was payable by the plaintiff.

49.I also accept that the IRS tax enquiries were quickly resolved with the assistance of Mr Ng’s Hong Kong and US accountants, by a corrected tax return and the payment of some additional tax, but without penalty.  This probably happened within 2015. Though mildly troublesome, this alone is unlikely to have created any ill feeling sufficient to have made Mr Ng renege on a promise relating to a loan.

50.It seems to me that the tax enquiries or investigation are not and were not relevant to any question of a loan.  Instead, it has been seized upon by the defendants in an attempt to provide an explanation for what they say was a change of stance.  I reject as somewhat ludicrous the suggestion put to Mr Ng in cross-examination that the whole reason why the plaintiff is suing the defendants in this action is to have some explanation for the IRS in the US.

51.As to the record of the loan in the plaintiff’s financial statements to year end 31 March 2015, my analysis and conclusions are as follows.  Mr Ng described the process by which he would ordinarily be sent and sign the plaintiff’s financial statements, including the audited accounts.  He said that the accounts would be drawn up and audited by William Chan’s firm after being provided with the accounting material by the 1^st defendant.  This was confirmed by the 1^st defendant in her own evidence, though she could not recall when she provided the documents to William Chan for the accounts to 31 March 2015.

52.Thereafter the financial statements as drawn would be sent to Mr Ng (normally in the US) for his signature.  He would receive a pile of documents, and on some of the pages would be stickers with arrows indicating where he should sign.  He simply turned to those pages and signed them, and did so without paying any real attention even to those pages, let alone the remainder of the pages.  This was because after many years he trusted both the 1^st defendant and William Chan, and he himself did not have any real understanding of accounting or how accounts are drawn up.  I accept that evidence. It does not seem to me to be inherently unlikely; rather, rightly or wrongly, it is likely a common approach taken by non-businessmen or non-executive directors of small companies.

53.I accept Mr Ng’s evidence that the fact of the loan being recorded in the plaintiff’s financial statements for the year ended 31 March 2015 was not noticed by him, but was only subsequently drawn to his specific attention by his US accountant, who thought it unusual and worthy of an enquiry.

54.So, although it can of course be said that Mr Ng should at least have known of the alleged loan when he received the financial statements to sign and approve, I find as a fact that he did not have that knowledge until it was brought to his attention subsequently.  He cannot have agreed – and I find that he did not approve and agree – the making of the loan in advance.

55.As an aside, I accept that there is some legitimate criticism to be made of Mr Ng in that he appeared at times to overplay his language difficulties. He took his degree in the US, and has mainly lived there for some years, so he clearly has good English. But understanding the words does not necessarily mean understanding the concepts described. But, anyway, I have accepted he paid little attention to what was in the accounts – figures or words – and simply signed against where he was asked to append his signature. I reject the idea that the US IRS enquiries already made by the time he signed the 2015 accounts would have made him give greater attention to the content of the accounts, when the IRS enquiries had nothing to do with the plaintiff.

56.I also think it is a point to be taken against of the defendants when they identify that the near $6 million amount of the loan was a significant proportion of the overall assets of the plaintiff, as recorded in its accounts.  As at 31 March 2015, that represented about one quarter of the total assets.  I agree with Mr Ng that he was unlikely to have agreed for the plaintiff to have lent anything like that sum of money, not least when it does not look realistically repayable by the defendants, and (as he said) he might even be dead by the end of the 10-year repayment period suggested. It can also be noted that the amount of the loan was significantly in excess of the profit made by the plaintiff in the previous accounting period (although I recognise that it was a smaller proportion of the total profit carried forward in the plaintiff’s books).

57.As to the question of the ability to repay, it seems to me that the relevant evidence is telling.  According to the 1^st defendant, her salary in 2014 was somewhere between $30,000 and $40,000 a month.  Taking even the top end of the range, and counting 13 months, but deducting salaries tax at 15%, her annual earnings in 2014 (after tax) would have been $442,000.  Even adding in the salary of her son, the 2^nd defendant, the total annual income would have been barely above $600,000.

58.Yet the 1^st defendant alleges that in October 2014 she entered into an agreement which would have required a repayment of $600,000 each year.  It seems to me that this completely flouts any commercial reality or common sense.  The complaint in her evidence that this assumed she in fact borrowed $6 million when she actually borrowed less misses the point that it was her own case that the original agreement was for a loan of $6 million repayable over 10 years (and it was only later reduced by part repayment and part waiver).

59.When these figures – and the apparent unaffordability – were pointed out to the 1^st defendant in cross-examination, she tried to suggest that she had additional income by way of bonus payments from the plaintiff.  After some floundering around as to what might have been the level of any bonus, she seemed to settle on a potential figure of about $70,000 which might have been paid in January or February 2014. A sum of that order, if paid, would not significantly have increased her annual income such as to make the alleged loan repayment amount realistically foreseeably repayable.

60.The other problem for the 1^st defendant, arising from her suggestion that she was also paid a bonus, is that in her witness statement she relied on the absence of previous bonus payments as a reason why Mr Ng agreed certain aspects of the loan arrangement.  First, she sought to justify the alleged agreement that the loan would be interest free as a reward for the improved performance of the plaintiff.  Later she asserted in terms that the agreement to waive $800,000 of the then loan amount of $5.8 million was suggested by Mr Ng because of his pleasure at the improved performance of the plaintiff and his statement that the sum could be treated as bonus, because the plaintiff had not paid bonus to her or her son for so many years.

61.Leaving aside the point that the waiver might have been in place of a bonus or bonuses previously not paid, I think it inherently unlikely that Mr Ng would suddenly have volunteered a waiver of a significant part of the loan without even being asked to do so.

62.Also relevant to this aspect of the evidence was the 1^st defendant’s own oral evidence elsewhere that she was the person who recommended levels of and increases for staff salaries, including her own, taking into account cost of living, individual performance, and the performance of the plaintiff company.  Hence, it seems that the increased or improved performance of the plaintiff had already been reflected at least in part within the salary increases.  This much must be evident from the 1^st defendant’s own salary, which increased from around $10,000 to around $50,000 in just 8 years, about a five-fold increase.

63.The argument put forward by the defendants that affordability needs to be seen in the context that, if earnings were not sufficient for repayment of the loan, a mortgage could have been obtained on the Property flies in the face of why the alleged loan was needed in the first place.

64.I also take into account that there is a mismatch between the terms of the loan alleged by the 1^st defendant, and the terms of the loan recorded in the plaintiff’s financial statements on information provided by the 1^st defendant.  Leaving aside the mismatch on the question of whether the loan was to bear interest, the 1^st defendant’s pleaded case and her evidence was that the loan was agreed on the basis that it would be repaid over 10 years, whereas the financial statements state that there were no fixed repayment terms.

65.There was also significant confusion in the defendants’ evidence as to who was actually the borrower of the alleged loan.  Their pleaded case is that the 2^nd defendant was the borrower. But, in her oral evidence, the 1^st defendant first identified that she was the borrower.  She said so clearly and more than once.  Later, and after a break during the evidence, the 1^st defendant sought to correct her earlier evidence by saying that the borrower was in fact her son, the 2^nd defendant.  But, other than the fact that the 2^nd and 3^rd cheques were made out directly to the 2^nd defendant, there is no other contemporaneous written material which identifies him as the borrower.  It would seem the accountants thought, from the materials provided to them, that the 1^st defendant was the borrower.  They asked her to sign and she did sign an audit confirmation to that effect.  Amongst those materials were the loan notes on which the 1^st defendant acknowledged receipt as “borrower” of the sums of money described as “loan to staff Cheung Po Lin [ie. her]”.

66.I have not lost sight of Mr Yip’s submission that against the context there may have been some degree of imprecision about who was borrowing. As he said, against the relationship between the 1^st defendant and Mr Ng, she asked for money to be loaned for the 2^nd defendant to be able to buy a home on his marriage, and it may be that she had in mind being jointly responsible in some way for its repayment. But who was the real borrower, who would be liable for repayment, how repayment would be effected and how it could be afforded, all seem to me to be important considerations for any lender. But that this was not canvassed in the alleged discussion with Mr Ng make the agreement to the loan less likely, in fact unlikely. I think it would have been necessary to identify who was the borrower, and indeed the documents created by the 1^st defendant of course did that, and identified her.

67.Against the idea that the 2^nd defendant was the borrower was his own evidence that the first time he discussed any possible repayment terms with anyone, either his mother or Mr Ng, was after he had already signed the agreement to purchase the Property.  The tenor of his evidence was also that he had never really applied his mind to how he might afford to repay the loan, or how he might contribute to the repayment of the loan if repayment were to be shared with his mother.

68.As it happens, his own salary from employment with the plaintiff was around $15,000 per month in 2014.  Again, assuming 13 months’ payment each year, and even ignoring payment of tax, he had an annual pre-tax income in 2014 of about $195,000. After tax it would have been lower. I note that the 2^nd defendant gave evidence that he is wife had enjoyed earnings at a similar level to his own, but even then the ability to repay the alleged loan in accordance with the ledge instalments would have been at best very tight, when account is taken of the other expenses of living.

69.It can also be remembered that it was the defendants’ own case that they needed to take the loan from the plaintiff because the 2^nd defendant could not have afforded to take a loan from a bank or financial institution.  Even if the alleged loan from the plaintiff were to be interest-free, the supposed agreement that it would be repaid over 10 years seems to me to make it likely less affordable than if the 2^nd defendant had borrowed money from a bank or financial institution over the more usual 20 to 25-year period.  In fact, in his oral evidence, the 2^nd defendant said that he did not discuss any period of repayment even with his mother before October 2014, the date when they assert his mother had agreed the terms of the loan with Mr Ng.

70.The 2^nd defendant also said that he had never made enquiries of any bank or financial institution as to what he might borrow for the purchase or financing of a home, and on what terms.  This seems to me to be contrary to the suggestion made by him and the 1^st defendant in evidence that the reason why a loan could not be obtained from the bank was because the bank would require the 1^st defendant to act as a guarantor, but she could not do so because she was already a guarantor in relation to 3 properties owned or used by the plaintiff.  Without making any enquiry, the 2^nd defendant simply could not have known that fact.  Nor does it deal with whether or not somebody else might have given a guarantee, if one were really required, for example his father or the parents of his wife to be.

71.Also, I would have thought that if the perceived inability of the 1^st defendant to provide a guarantee was the true obstacle to the 2^nd defendant obtaining a mortgage loan, the logical thing to have done would have been for the 1^st defendant to suggest to Mr Ng that the cash in the plaintiff might be used to pay down its loans, or for her in some other way to be released from any guarantee for the plaintiff.  This was not done.

72.None of this provides any convincing evidence that there was a genuine loan made, with previously obtained clear approval and Mr Ng’s agreement, to either of the defendants.

73.I have taken into account that at one point in cross-examination, Mr Ng appeared to give equivocal evidence about whether or not he had agreed for the plaintiff to lend money to the defendants for the purchase of the property.  In answer to a question from the Court he seemed to say he had at some point agreed to lend money. However, the point was revisited, and he was asked the relevant question from a number of different angles on a number of different occasions, and it was clear the overall position taken by him in his evidence was that he did not give any such agreement.  It seems that he might have considered, and did not actually reject, the possibility of loaning an amount for a down payment only.  But that is not the agreement alleged against him or the plaintiff, and his evidence was overall perfectly clear that he did not agree what is alleged.  I accept his evidence.

74.I accept that there was some discussion in late 2015 relating to interest as might be payable on a loan.  I do not accept the discussion arose in the context of any enquiries being made by the IRS on the plaintiff’s tax affairs.  Rather, as part of the reaction of the accountants to the idea that there was a loan, they raised the topic of interest and at what rate it might be if there was indeed a loan.  I accept that it is at least slightly odd for Mr Ng to have discussed interest with the accountant at all, rather than simply asserting that there was no loan, but there may have been a lack of clarity of the basis of discussions between Mr Ng and the accountant. Anyway, I do not think that the lack of immediate refutation of any loan, against all the other evidence, can be taken as amounting to a prior approval or agreement that there would be a loan. I do not think there was acceptance by subsequent conduct, and anyway that is not the basis of the claim.

75.In answer to direct questions put in cross-examination, Mr Ng said he had no recollection of discussing interest at all with the 1^st defendant, and he posed the question that as he had real no idea about rates how could he have discussed it with her.  I accept no such discussion took place between them.  I have already rejected the idea that whether or not there was a loan or interest on any loan made by the plaintiff would have been of interest to the IRS in the US. I have also taken into account the mismatch between the amount of $19,600 said to be interest due, and the amount of $19,000 shown on the receipt.

76.I have also taken into account Mr Yip’s submission that the alleged loan was not hidden in any way. On their face, the 3 cheques were drawn in favour of the vendor of the Property and the 2^nd defendant who bought the Property. Also, it seems all the money borrowed went into the Property (and were not diverted for any other purpose). The loan was then recorded in accounting documents and as a result reflected in the financial statements of the plaintiff. It may be unusual that someone who misappropriates funds leaves such a clear path back to themselves, leaving them (to use Mr Yip’s phrase) “sitting ducks” for the plaintiff to pursue them. But I think that happened precisely because of the nature of the history of dealings between the 1^st defendant and Mr Ng, which I touch on again below.

77.I find as a fact that there was no oral agreement for the loan.  Because there was no agreement for a loan, there was no agreement that any loan would be interest-free, nor repayable over 10 years by equal instalments, nor any waiver of any part of the loan.  There was no agreement to pretend that the loan was interest-bearing but with a private arrangement for any interest paid by the defendants to be reimbursed by Mr Ng.

78.There was therefore no authorization to issue the 3 cheques for the purposes of any loan.  To have issued them was a breach of duties owed by the 1^st defendant to the plaintiff.  It might be added that it is difficult to see how such a loan could ever have been thought to be generally in the best interests of the plaintiff.

79.It seems to me that the monies were simply extracted from the plaintiff by the 1^st and 2^nd defendants.  It may be that they did ultimately hope to repay – or perhaps even intended to repay – the monies extracted, but there was no agreed loan and no basis for them to have taken and used the money.

80.Indeed, I am left with the strong overall impression from the evidence and the apparent characters of Mr Ng and the 1^st defendant that the greater the degree of autonomy afforded the 1^st defendant, the greater she exercised her various delegated powers without seeking prior approval from Mr Ng, and also expecting minimal scrutiny or push-back after the event.  As she herself put it in her evidence, Mr Ng rarely intervened about any of her operation of the company.  It was also specifically put to Mr Ng in cross-examination that as a matter of fact he had given the 1^st defendant almost unlimited authority to manage the business.  He agreed.  He did not even read the accounts properly.

81.Mr Ng also described in his evidence a number of steps taken by the 1^st defendant for which she did not seek his prior approval, but which he felt he had little choice but to accept after the event.  This seems to me to be the reason why the 1^st defendant would not have felt any great need to hide using the plaintiff’s funds. First, she would have expected little if any scrutiny. Secondly, even if scrutiny identified the alleged loan, she might not have expected Mr Ng to react as he did on this occasion. She probably did hope to or intend to repay the money in due course. But she knew she did not have Mr Ng’s approval to do what she did.

82.Mr Ng’s stance appears to have been born of his trust in, and particular reliance on, the 1^st defendant.  He is not a businessman, and he must have generally known that the business performance was improving – perhaps at times, apparently markedly so – under the near sole stewardship of the 1^st defendant.  I think this is what Mr Ng meant when he agreed that both defendants were not ordinary employees, and were “special” to the plaintiff.  Clearly, he would have preferred not to lose the 1^st defendant’s services and tended to act so as not to provoke her to want to leave the plaintiff.  But I do not think that any of those matters can properly have justified any honest belief on the part of the 1^st defendant that she had a prior agreement, or even obtained a subsequent agreement, to the alleged loan arrangement. When Mr Ng said the defendants were not worthy of such a loan being made, I think he was saying that on top of their salary they did not deserve such other benefits such as a loan of a large sum or the suggested gift of shares.

83.So I think there is force in the submission made by Mr Hon that the monies used by the defendants to purchase the Property may originally have been intended to be “borrowed” for a short period. It is odd that the first amount of $280,000 was repaid just 3 days before the 3^rd cheque was drawn (which might simply have been in a sum $280,000 less than it was), and when on the defendants’ case there was already an agreed repayment schedule. I am not sure the 1^st defendant’s explanation for that, namely that a time deposit had matured, really answers the point, not least when that answer lacked any particulars.

84.I have also had regard to the fact that in an accounting review, conducted on agreed upon procedures, reference was made to 24 August 2012 when a sum of $200,000 was paid from the plaintiff to the 1^st defendant by cheque, recorded as a loan to the 1^st defendant, and repaid by depositing a cheque of the same amount on 9 October 2012. There was no other supporting document than the accounting voucher prepared by the 1^st defendant herself. Whilst in cross-examination the 1^st defendant said that that prior loan had also been approved by Mr Ng, there is some force in Mr Hon’s submission that if that were true one might have expected this fact – being a precedent to the alleged subsequent loan – to have been deployed by her in evidence, but it was not.

85.Nor do I think the likelihood that there was some discussion between the 1^st and 2^nd defendants and Mr Ng as to the Property having been purchased, and even how it might be decorated, assists the defendants’ case.  That is a topic which was in my view likely to have arisen in chats between these parties, even without the alleged loan arrangements having been in place.  Rather, in what I considered convincing evidence, Mr Ng said that if he had been told at the plaintiff’s spring dinner in February 2015 that over $5.3 million of the plaintiff’s money had been used the previous day to complete the purchase of the apartment, he would not have been able to eat.  His exasperation at the continued line of questions also elicited a retort along the lines that he would have had to have been drunk.  Whilst I reminded him not to be flippant in giving evidence, the instinctive indignation emphasized how ludicrous he thought a number of the propositions put to him were.  I tend to agree.

86.I have considered whether the position of the 2^nd defendant falls to be treated radically differently from the position of the 1^st defendant. I do not think it likely that the 2^nd defendant would have come up with the idea of appropriating the plaintiff’s funds by way of an apparent loan. Rather, I think he went along with his mother’s proposals and actions. Where his stance is predicated on being in the know as to what his mother was doing in her conversations with Mr Ng, it seems to me that if I find (as I do) that there was no prior approval of the loan, the 2^nd defendant must be taken to have known that fact as well.

87.The defendants’ argument based on estoppel adds nothing to the claim, as that argument is dependent on the alleged oral agreement and the alleged waiver, which I have rejected.

The Result

88.The claim against the 1^st defendant succeeds. Though the claim has been pleaded with multiple strands, it is accepted by both Mr Hon and Mr Yip that the real claim is to misappropriation of the plaintiff’s funds giving rise, if accepted, to a proprietary remedy. Hence, I grant a declaration that the 1^st defendant was a constructive trustee of the $5.8 million, and that the plaintiff is entitled to follow or trace that sum.

89.The claim against the 2^nd defendant also succeeds. The appropriate remedy is a declaration, which I grant, that the 2^nd defendant holds the Property as constructive trustee for the benefit of the plaintiff. I also grant an injunction restraining the 2^nd defendant from disposing of the Property or in any way in encumbering it, save for the purposes of conveying to the plaintiff or for selling it so as to provide the sales proceeds to the plaintiff. If the property is sold for that purpose, the sales proceeds will be held to benefit of the plaintiff until paid over to the plaintiff.

90.There is a pleaded claim for an occupation fee arising from the 2^nd defendant’s occupation of the Property. In the trial bundle there is a valuation report providing expert opinion as to the market rental of the Property at various dates in 2015, 2016 and 2018. However, this question was not visited at all in evidence during the trial, nor was it touched upon by anyone in any submissions. In all the circumstances, and in the exercise of my discretion, it seems to me that this claim has not really been pursued and I decline to make any order relating to occupation of the Property.

91.The counterclaim originally included a claim by the first defendant that she should receive 10% of the shares in the plaintiff, because Mr Ng promised to give them to her in return for her committing herself to working for the plaintiff and treating it like her ‘baby’.  That part of the counterclaim was, however, dropped, probably because the plaintiff was not a party to the alleged agreement sued upon, and the suggested counterparty – that is, Mr Ng – is not personally a party to this action.  Nevertheless, the point was pursued by the 1^st defendant in her evidence and in cross-examination of Mr Ng, essentially as part of the context within which Mr Ng might have subsequently agreed to the making of the alleged loan.

92.The 1^st defendant’s assertion was that the promise to give her 10% of the shares was made just 3 days after she commenced employment with the plaintiff in 2007.  I have no difficulty in rejecting this assertion.  The plaintiff’s only formal education was up to Form 5 level.  Prior to working for the plaintiff, 1^st defendant had for 6 months or so been unemployed, and before that had been working at a salary of around $9,000 to $10,000 a month.  When she joined the plaintiff, she had a slight salary increase to $10,000 a month plus some allowances.  That salary seems to me entirely apt for the duties for which she was employed and which she began to undertake.  There is no suggestion that Mr Ng knew anything about the 1^st defendant before she interviewed for the job with the plaintiff.  It defies common sense to suggest that Mr Ng would have offered a virtual stranger and brand-new employee any shareholding at all in a family company passed down from generation to generation.

93.I also reject the assertion that Mr Ng promised the 1^st defendant the 10% of the shares “again”, in 2011 when she stood as guarantor for the grant of mortgage lending facilities.  Instead, I accept Mr Ng’s evidence that the 1^st defendant volunteered to stand as guarantor, at least in the sense that she was willing to do so, in return for which he entered into the exemption from guarantee agreement designed to relieve her of obligations as guarantor.  Whether as a repeat or as a first time, I reject the suggestion that the 1^st defendant was promised shares in the plaintiff.  I have taken this into account in my overall assessment of the evidence.

94.The only remaining claim to the reimbursement of the $19,600 is dependent on a genuine loan, so that claim is dismissed.  But credit should be given as appropriate for the sum of $19,000 repaid against the claim.

95.In the light of my findings, the counterclaim is dismissed.

Postscript

96.I would extend my thanks to Counsel for their assistance, and for the courteous way in which they dealt with each other, the witnesses and the Court.

[Discussion on costs]

Costs

97.As to costs, I see no reason why costs should not follow the event.

98.The defendants will be jointly and severally liable for the plaintiff’s costs of the action, including any costs reserved, to be taxed if not agreed. The order will be an order nisi only insofar as it relates to any orders of costs reserved, but will become absolute if no application for variation is made within 14 days.

Mr Kevin Hon, instructed by Gloria Chan & Co, for the Plaintiff

Mr Arthur Yip, instructed by Lennon & Lawyers, for the 1^st and 2^nd Defendants