Feishang Non Metal Materials Technology Limited ( Now Known As “Hangkan Group Limited” v. Tong Chung Ming t/a Kai Muk Co.

HCA 1767/2018

[2021] HKCFI 117

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1767 OF 2018

________________________

________________________

Before:  Mr Recorder Manzoni, SC in Court

Date of Hearing:  7 – 10 December 2020

Date of Judgment: 20 January 2021

___________________

J U D G M E N T

___________________

A. Introduction

1.The plaintiff is a company incorporated under the laws of the Cayman Islands and its shares are listed on the GEM of The Stock Exchange of Hong Kong Limited (stock code: 8331).  Through its subsidiaries it is engaged in the business of bentonite mining, the production and sale of drilling mud and pelletising clay.

2.There were the following executive directors of the plaintiff during the period material to this action:

Name	Date Appointed	Date resigned
Mr Deng Li	13 March 2017	9 February 2018
Mr Zhang Yongmin	23 March 2017	9 February 2018
Mr Tsai Nam Lun (Johnny)	5 December 2017	9 February 2018
Mr Su Chun Xiang	9 January 2018

3.The defendant is a lady trading as Kai Muk Co. I shall refer to her either as the defendant, or as Kai Muk, which is the terminology that has been used throughout the hearing.

4.On or around 28 November 2017 the plaintiff entered into an agreement with the defendant for the procurement of 2000 tons of aluminium, at a total contract value of RMB25,600,000[1]. 

4.1.  The purchase price was payable in RMB, or the equivalent amount in Hong Kong dollars, using an exchange rate based on 0.85 as specified by clause 5 (1). 

4.2.  Delivery of the goods was to be before 1 March 2018 (although the document itself says 2017, that is clearly a typographical error).

4.3.  The purchaser was to pay an advance deposit in the amount of RMB7,680,000, or the equivalent amount in Hong Kong dollars.  In fact the sum of HK$9,030,000 was paid into a bank account of Kai Muk in Hong Kong.

5.The procurement agreement did not go according to plan.  In early 2018, and in particular either January 2018 or March 2018 depending whether one assesses the defendant’s case or the plaintiff’s case, the procurement agreement was terminated, and it was agreed between the parties that the deposit was to be repaid by the defendant.

6.The dispute arises because the plaintiff says that the defendant has not repaid the deposit as agreed.  The defendant contends that she has repaid the deposit in accordance with the instructions of a former director of the plaintiff, a Mr Deng.  Those instructions are contained in a letter dated 4 January 2018^[2] which requires HK$500,000 to be repaid by 30 January 2018 (in Hong Kong) and the balance (HK$8,530,000), together with interest if any, to be paid by 15 March 2018.  The letter permits the balance to be paid in an equivalent amount in RMB in the Mainland to a wholly-owned subsidiary of the plaintiff namely a company called Lucky Investments Holdings Limited (“Lucky Investments”), or its designated person.

7.The defendant says that this amount was paid in cash to Lucky Investments Holdings Limited on 15 March 2018 by a company incorporated in Shenzhen, called Shenzhen City Xueyelin Investment Company Limited (“Xueyelin”).  There is a dispute as to whether any amount has been paid, and if so what amount.  The documents are not consistent on the amounts.  According to a receipt on the headed paper of Xueyelin signed by Mr Deng, the amount of RMB7,530,000 was paid^[3]. Another receipt issued by Lucky Investments dated 15 March 2018, also signed by Mr Deng, records the amount paid as RMB7,350,000, which amount is said to be equivalent to HK$8,650,000^[4].

8.The plaintiff denies that the letter dated 4 January 2018 is a genuine document.  It says that it was not produced until July 2018 when the disputes had crystallised, and its physical characteristics demonstrate that it is in fact counterfeit. 

9.The plaintiff relies upon a Termination Agreement dated 16 March 2018^[5], signed by Mr Cheuk of the defendant which records the obligation to repay and makes no mention of the alleged payment which is now said to have been made the day before signature.  The defendant admits that this agreement was entered into, but does not admit the date, contending that it was “in or about mid March 2018”, and that the date of 16 March 2018 which appears on it was affixed on it by Mr Im^[6]. The defendant says that the 16 March 2018 Termination Agreement is not inconsistent with the terms of the 4 January 2018 letter.

10.The defendant contends in its written closing submissions that the following issues need to be resolved:

10.1.  Whether the 4 January 2018 letter was a genuine and contemporaneous document, containing instructions from Mr Deng to direct the repayment of the refund to Lucky Investments.

10.2.  If yes, whether Mr Deng had the authority (actual/ostensible/apparent) to issue the 4 January 2018 letter for and on behalf of the plaintiff.

10.3.  Whether the defendant did make the payment of RMB7,350,000 in cash to Lucky Investments.

10.4.  Whether the refund direction contained in the 4 January 2018 letter was superseded or rescinded by the Termination Agreement.

11.The plaintiff, in its written closing submissions, suggests that there are only really two issues to be resolved:

11.1.  Whether there was an arrangement in January 2018 to terminate the Procurement Agreement in the manner recorded in the 4 January 2018 letter.

11.2.  Whether the defendant did indeed make a relevant payment (in whichever sum the court considers to be relevant) to the plaintiff pursuant to the January 2018 arrangement.

B.   Burden of Proof and Adverse Inferences

12.I heard evidence from three witnesses:

12.1.  Mr Su, who is the executive director of the plaintiff.  He was appointed on 9 January 2018 and was the involved with the matters relating to the dispute since that date.  He gave evidence via video as he was located in the Mainland.

12.2.  Mr Im, who is the financial controller of the plaintiff.  He was appointed in that role in April 2017 and has remained there ever since.  He was involved with the initial payment of the deposit under the Procurement Agreement as well as the drafting of the termination agreement dated 16 March 2018 under the directions of Mr Tsai, who was a director of the plaintiff at the relevant time.

12.3.  Mr Cheuk, who describes himself as a representative of the defendant.  He was entrusted by the defendant with the management and operation of Kai Muk from October 2017.  He was personally involved with all of the relevant dealings between the plaintiff and Kai Muk, and his signature appears on the procurement agreement, the 4 January 2018 letter and the termination agreement dated 16 March 2018.

13.There are two other gentlemen that play a significant role in the facts, but were not called as witnesses:

13.1.  Mr Deng Li (referred to throughout the trial as “Mr Deng”).  He was a director of the plaintiff until 9 February 2018.  He signed many of the important documents on behalf of the plaintiff including the Procurement Agreement, the 4 January 2018 letter, and the two receipts recording payment from Xueyelin.

13.2.  Mr Tsai.  He was also a director of the plaintiff until 9 February 2018.  He was closely involved in the negotiations of the Procurement Agreement and the subsequent termination agreement.  He did not sign any of the documents, but he does appear to have been the central point of contact as between the plaintiff and the defendant.

14.Neither of these gentlemen were called as a witness, and both sides have criticised the other for not calling them and suggested that the court should draw adverse inferences against the other as a result. 

15.The defendant contends that as the ex director of the plaintiff, Mr Deng should have been contacted by the plaintiff so as to investigate what happened, and the plaintiff should have called him as a witness.  The defendant relies upon the evidence of Mr Su and Mr Im that they were in contact with Mr Deng until July 2018, and says that when the defence became clear (as it did by way of letters from the defendants lawyers dated 20 July 2018 and 31 July 2018[7]) they should have investigated.  Instead the evidence is that they simply never contacted Mr Deng.

16.The plaintiff contends that the burden of proof of the alleged January 2018 termination and instruction lies with the defendant and hence the defendant ought to have called Mr Deng to prove the matters it alleges.  It also contends that the burden of proof rests with the defendant to establish that the January 2018 arrangement did exist, and that all disputed documents are in fact genuine (relying upon Club Deluxe Ltd v Club Metropolitan Ltd [1995] 2 HKLRD 69 for the proposition that a person who produces a document has the burden of proving its genuineness).  As a result, it contends that the defendant ought to have called Mr Deng, and I ought to draw inferences adverse to the defendant as a result of her failure to do so.

17.In my view this is not a case which turns on either the burden of proof or the drawing of adverse inferences due to the absence of Mr Tsai or Mr Deng.  It was open to either party to call either, or both, of them.  I do not express any views on why they did not, although I can well understand the litigation decisions which both parties may have wrestled with when considering this issue.  Their evidence would be unlikely to have brought new material before the court.  Instead it would have been likely simply to support one side’s case rather than the other.  Therefore, having the benefit of their evidence may have resulted in a contest of credibility rather than identifying new objective facts which would assist the court to decide the issues in dispute. 

18.The failure to call supportive evidence of the nature that Mr Tsai or Mr Deng may have given (if it is a failure) does not give rise to the drawing of adverse inferences.  The relevant law in this area was most recently stated by Lord Sumption in Prest v Petrodel Resources Ltd & Others [2013] 2 AC 415 at 492, [44], where he quoted Lord Lowry in R v Inland Revenue Comrs, Ex P TC Coombs & Co [1991] 2 AC 283,300:

“In our legal system generally, the silence of one party in the face of the other party’s evidence may convert that evidence into proof in relation to matters which are, or are likely to be, within the knowledge of the silent party and about which that party could be expected to give evidence. Thus, depending on the circumstances, a prima facie case may become a strong or even an overwhelming case. But, if the silent party’s failure to give evidence (or to give the necessary evidence) can be credibly explained, even if not entirely justified, the effect of his silence in favour of the other party may be either reduced or nullified.”

19.This is not a case in which there is silence from either party.  Each party has produced evidence of what it says happened. The evidence may not be perfect, but nonetheless there is evidence.  Hence the obligation of the court is to decide the case based upon that evidence. 

20.The court is entitled to look at the absence of evidence as part of its balancing exercise.  It may take the view that one party’s case is less likely to be correct as a result of the absence of evidence which that party could have adduced.  The strength of that factor in the overall balance will of course depend entirely upon the circumstances, including the likelihood that the party could in fact have adduced such absent evidence, and the anticipated probity of that absent evidence.  But weighing such matters in the balance is very different to the drawing of adverse inferences. 

21.The exercise of balancing the evidence will of course take into account where the burden of proof lies because the burden of proof is an important part of our adversarial system. But, burden of proof is a complex subject, involving numerous considerations.  “Burden of proof” as an expression is not the only relevant expression used in the various text books and authorities.  Other expressions such as “legal burden”, “probative burden”, “ultimate burden” and “persuasive burden” are also used.  The persuasive burden is fixed by the pleadings at the outset, and will not shift throughout a trial.  In general terms the burden lies on the party who substantially asserts the affirmative of an issue.

22.But the persuasive burden is different to what is known as the “evidential burden”, which places a burden on a particular party to adduce sufficient evidence (himself or by way of cross examination) for the matter to become an issue of fact for the fact finder to determine. Generally speaking the evidential burden on an issue will rest with the party holding the legal burden but, in contrast to the legal burden, the evidential burden may sometimes shift throughout the course of proceedings depending on the state of the evidence. 

23.Thus it can be seen that the question of where the burden lies is not always easy.It will often be somewhat nuanced and may vary depending upon which type of burden is being spoken of. 

24.Whilst a court will recognise and take into account the burden of proof when balancing the evidence and making its decision, the burden of proof should only determine the case if a court cannot say that either version of events has been satisfied on the balance of probabilities (being the relevant standard in civil cases).  A court should dispose of a case on this basis only if it cannot reasonably make a finding one way or the other on a disputed issue.

25.The English Court of Appeal addressed this issue in Stephens v Cannon [2005] EWCA Civ 222, per Mr Justice Wilson, with Arden and Auld LJJ agreeing, at [46]:

From these authorities I derive the following propositions:

(a)   The situation in which the court finds itself before it can despatch a disputed issue by resort to the burden of proof has to be exceptional.

(b)   Nevertheless the issue does not have to be of any particular type. A legitimate state of agnosticism can logically arise following enquiry into any type of disputed issue. It may be more likely to arise following an enquiry into, for example, the identity of the aggressor in an unwitnessed fight; but it can arise even after an enquiry, aided by good experts, into, for example, the cause of the sinking of a ship.

(c)   The exceptional situation which entitles the court to resort to the burden of proof is that, notwithstanding that it has striven to do so, it cannot reasonably make a finding in relation to a disputed issue.

(d)   A court which resorts to the burden of proof must ensure that others can discern that it has striven to make a finding in relation to a disputed issue and can understand the reasons why it has concluded that it cannot do so. The parties must be able to discern the court's endeavour and to understand its reasons in order to be able to perceive why they have won and lost. An appellate court must also be able to do so because otherwise it will not be able to accept that the court below was in the exceptional situation of being entitled to resort to the burden of proof.

(e)   In a few cases the fact of the endeavour and the reasons for the conclusion will readily be inferred from the circumstances and so there will be no need for the court to demonstrate the endeavour and to explain the reasons in any detail in its judgment. In most cases, however, a more detailed demonstration and explanation in judgment will be necessary. 

26.Thus it will be a rare case which is decided based only on the incidence of the burden of proof.  It cannot be used as a substitute for the court making decisions based on the evidence presented.   

27.In this case there is adequate evidence upon which the court can reach its findings, and I am satisfied that it is not appropriate to draw adverse inferences, or to decide the case based upon the burden of proof.

C.   The Witnesses

28.Mr Su was a straightforward witness who gave evidence in a clear and straightforward manner.  He was appointed to the board of the Company on 9 January 2018 and attempted to make assessments of what the Company had done, and how the new board should act in the best interests of the Company.  I generally accept his evidence.

29.Mr Im also gave evidence in a straightforward manner, although I did have some concerns that he was seeking to downplay the extent of communication that occurred between him and Mr Tsai.  Notwithstanding that slight misgiving, I generally accept his evidence as honestly given.

30.Mr Chuek did not impress me as a witness.  There were numerous times during the course of his evidence when I felt that he was being deliberately evasive in his answers.  For example he appeared to be very evasive as to the financial status of Kai Muk, and how it operated both in the Mainland and Hong Kong.  His answers about the annual turnover of Kai Muk were evasive and he appeared very reluctant to assist the court to understand the scope and size of the business.

31.In addition, there were parts of his evidence which were contrary to what was previously stated in his witness statement.  He also gave evidence which substantially changed the case which was being advanced by the defendant, or evidence which was, in my view, simply untruthful.  To give examples of the matters that have created that impression I highlight:

31.1.  The oral evidence he gave that he negotiated with Mr Tsai in relation to the procurement agreement, whereas his witness statement was clear that he in fact negotiated with Mr Deng.

31.2.  Similarly in relation to the negotiations that occurred leading to the letter of 4 January 2018 he told the court that he negotiated only with Mr Tsai, whereas his witness statement made it clear that he was negotiating with Mr Deng.  His explanation of this discrepancy was, at least to me, meaningless:  he suggested that Mr Tsai did not represent Mr Deng, and that somehow explained it.

31.3.  He told the court that it was Kai Muk that approached the plaintiff seeking to terminate the Procurement Agreement.  That is consistent with his statement, but is not consistent with the board resolution of the plaintiff which suggests that it was the plaintiff that sought to terminate the Contract.  Whilst this does not demonstrate contradictory evidence by Mr Cheuk, it does cast some doubt on the veracity of his evidence in this respect.

31.4.  He gave contradictory evidence of what had happened to the deposit that had been paid by the plaintiff.  At one point he told the court that it had been sent to the Mainland, but when that no longer suited another aspect of his evidence, he changed to say that it had been paid to suppliers in Hong Kong.

31.5.  Perhaps the nadir of his evidence was that relating to the repayment by Xueyelin to Lucky Investment Holdings Limited of the deposit that had been paid by the plaintiff under the Procurement Agreement.  I deal with that in more detail below.

32.Overall I found Mr Cheuk to be a dishonest witness and I do not accept his evidence save where it is undisputed or supported by documents which are undisputed.

D.  The Primary Facts and Contentions

33.The following is a summary of the primary facts and contentions of the parties.  The facts are largely undisputed.  Where they are disputed, what is set out in this section represents my findings having heard the evidence and considered all the documents.  I reach conclusions on the contentions in the section below headed “Analysis”.

34.The Procurement Agreement was entered into on 28 November 2017, and was signed by Mr Deng on behalf of the plaintiff.  The plaintiff suggests in its statement of claim that it is a “purported” procurement agreement, and has hinted throughout the trial to the proposition that it was not a genuine agreement.

35.There are some oddities about it, in particular:

35.1.  the fact that the plaintiff and the defendant had never done business before

35.2.  Mr Cheuk told me that the annual turnover of Kai Muk was between HK$3-4 million for its business in Hong Kong, and around RMB2-3 million in the Mainland, and yet this single contract was in the sum of RMB25,600,000. 

36.Although the case does not turn upon the validity of the Procurement Agreement, the defendant relies upon it to demonstrate its proposition that Mr Deng did enter into contracts on behalf of the plaintiff without any board resolutions, and that those contracts were accepted by the plaintiff as binding upon it.  The defendant uses this to demonstrate a course of conduct by which Mr Deng was given actual, or apparent, authority to sign on behalf of the plaintiff such that the letter dated 4 January 2018 could be relied upon by the defendant as being a genuine instruction of the plaintiff.

37.I accept that Mr Deng did have authority to sign the purchase agreement, that it was entered into in the ordinary course of business of the plaintiff and that it constituted an agreement that was binding on the plaintiff.

38.On or around 28 November 2017 the plaintiff paid a deposit of HK$9,030,000 to Kai Muk.  The deposit was paid by way of a cheque signed by Mr Im, on the authority of Mr Deng and one other in accordance with the normal internal management rules of the plaintiff.  The cheque was drawn on an HSBC bank account, in Hong Kong dollars and was paid into a Hong Kong Bank account of Kai Muk.

39.Mr Cheuk confirmed (and I accept) that Kai Muk did not have a bank account on the Mainland, but instead operated through bank accounts of “agents”.  Mr Cheuk told me that Kai Muk had between 5 and 10 “agents” in the Mainland, including himself, who all had personal accounts, and who would make, and receive payments for Kai Muk as and when asked to do so. He did not explain why this mode of business was utilised, and it was not necessary for me to enquire further.

40.At or around the time that the Procurement Agreement was signed, a shareholder of plaintiff, who was referred to in the financial statements for the year ending 31 December 2017 as the ultimate controlling shareholder, requested the plaintiff to procure an EGM for the purposes of voting to replace the board of the plaintiff, including the replacement of Mr Deng.  That EGM did not occur, and the shareholder issued an Originating Summons in the High Court seeking relief against Mr Deng, Mr Tsai and Mr Zhang (another executive director of the plaintiff at that time) arising out of certain share subscription agreements and share options granted.  On 15 January 2018 that Originating Summons was settled on terms and the Originating Summons was permanently stayed.

41.Perhaps as a result of the actions of the majority shareholder (although I make no such finding) there came about a change in the constitution of the board of directors of the plaintiff.  On 9 January 2018 Mr Su was appointed as an executive director and the non executive directors were changed.  Mr Su said in evidence (which I accept) that one of the reasons he was appointed was to investigate the conduct of Mr Deng. On 9 February 2018 Mr Deng, Mr Zhang and Mr Tsai all resigned, leaving Mr Su as the sole executive director, assisted by three non executive directors.

42.On 28 January 2018 a payment of HK$499,985 was received into the HSBC Bank account of the plaintiff.  This payment has become known as the payment of HK$500,000 with, I assume, the difference between these two figures being accounted for by bank charges.  The payment was made by Kai Muk by telegraphic transfer.  There are disputed documents that surround this payment, and there is some dispute as to why it was made. 

42.1.  The plaintiff says that it was a refund, made apparently unilaterally by Kai Muk and without request, because there was delay in delivery of the goods under the Procurement Agreement.

42.2.  Kai Muk says that it was paid as a result of an agreement (which is disputed) made between Mr Cheuk and Mr Deng (possibly through Mr Tsai), as a part payment for the termination of the Procurement Agreement, which termination had been negotiated and agreed during early January 2018.

43.From this point onwards there is little, if any, agreement between the parties as to what happened. 

44.The defendant says that:

44.1.  The HK$500,000 payment was made pursuant to a letter dated 4 January 2018[8], signed by Mr Deng, which is in the following terms:

“Regarding the negotiations between both parties on 2 January 2018, our company now accepts the request that your company may, due to fluctuations in the exchange rate and the price of aluminium, terminate the procurement agreement numbered 201171128 AL. When your company refunds the deposit in the total amount of HK$9,030,000, the agreement shall immediately terminate without compensation, both parties shall no longer need to fulfil the obligations under the said agreement, and shall have no right to claim against the other any liability under the said agreement. If your company agrees to terminate, a total amount of not less than HK$500,000 to our company must first be repaid to our company by 30 January 2018 [sic]; due to factors such as foreign exchange control, the balance of the total amount of HK$8,530,000 (together with interest, if any), can be settled in the equivalent amount in Renminbi by 15 March 2018, and be paid in the Mainland to our wholly-owned subsidiary Lucky Investments Holdings Limited or its designated person.”

44.2.  The payment was made to Lucky Investments by Xueyelin, in cash on 15 March 2018.  It is said to be evidenced by a receipt issued on the note paper of Xueyelin, signed by Mr Deng which records receipt of RMB7,530,000[9].

44.3.  There is a further receipt dated 15 March 2018, issued under the heading of “Lucky Investments Holdings Limited”, again signed by Mr Deng, which is in the following terms[10]:

“Here by received the payment from Hong Kong Kai Muk Co. in Mainland China cash of RMB7,350,000 (¥7,350,000/HK$8,650,000). Such sum was at the time the refund of the deposit and interest under the trading agreement of Feishang Non-Metal Materials Technology Limited with Agreement number (201171128AL): our company agrees to receive payment on its behalf in the Mainland, if there is any price discrepancy, it shall be verified by our company and the parent company.

44.4.  The plaintiff permitted Lucky Investment Holdings Limited to receive the amount on its behalf because the plaintiff owed Lucky Investments various sums as evidenced in a letter dated 16 July 2018, signed by Mr Deng, from Lucky Investments to the plaintiff^[11] in the following terms:

In relation to the procurement agreement numbered 201171128AL, with regard to your company’s claim against Kai Muk Co. for the refund of the deposit balance in the total amount of HK$8,530,000, our company has received a complaint from Kai Muk Co.  that they have already refunded the said sum in accordance with the method instructed by your company.  Our company clarifies this in writing.

Our company has, on behalf of your company, received in full the said sum in cash on 15 March 2018 from Kai Muk Co..   Our company believes all the misunderstanding arises from the miscommunication caused by the change of the old and new board of directors.

According to the instructions of the former board of directors of your company, Kai Muk Co. was requested to pay in the Mainland the said balance together with interest in the total amount ofHK$8,650,000 (equivalent to RMB7,530,000) to our company, in order to settle part of the debts owed by your company, being the parent company at the time, to our company being the subsidiary.  This should be an internal arrangement between companies, unrelated to the outsider Kai Muk Co.

45.On the same day, Mr Deng wrote on behalf of Lucky Investment to Mr Cheuk[12] in the following terms:

With regard to your company being claimed by [the plaintiff] for the deposit balance in the total amount of HK$8,530,000 as a result of the cancellation of the procurement agreement numbered 201171128AL, our company apologise for the disorderly internal communication within the company.

Our company confirms that on 15 March 2018 our company was a wholly-owned subsidiary of [the plaintiff], and was authorised to represent [the plaintiff] to receive the said sum together with interest in the total amount of HK$8,650,000 (equivalent to RMB7,350,000).

Our company, [Lucky Investments], was at the time under the instruction of [the plaintiff] to receive on its behalf in the Mainland the said sum in the total amount of HK$8,650,000 (equivalent to RMB7,350,000), as the internal arrangement for the set-off of a sum owed by the parent company to the subsidiary; unrelated to your company, and your company does not need to be liable for it, our company will resolve the internal misunderstanding with [the plaintiff].

Thus, our company is willing to bear all losses and damages incurred by your company as a result thereof.”

46.The plaintiff does not accept that any of those documents are genuine.  The plaintiff says that the entire termination was pursuant to a written termination agreement negotiated between Mr Tsai and Mr Cheuk during the middle of March 2018, and dated 16 March 2018[13].  The document was typed by Mr Im, and there is evidence of the draft being exchanged between Mr Tsai and Mr Im via Wechat message.  The significance about this draft is that the document was originally undated, but in the version that was signed by Mr Cheuk, and returned by Mr Tsai to Mr Im by Wechat message on 19 March 2018[14] it was dated 16 March 2018.  The plaintiff says that this shows that the document was agreed by Mr Cheuk the day after the alleged payment having been made by Xueyelin. 

47.It was part of the defendant’s pleaded case that the document was not dated when Mr Cheuk signed it, and the date was added after the event.  It was put to Mr Im that he added the date, although there was no explanation as to how or when he had an opportunity to do that, and how the version that he is alleged to have dated was then transmitted to Mr Tsai so that Mr Tsai could then return a photograph of it to Mr Im via the 19 March Wechat Message.  There is also no explanation as to why that might have happened.  If Mr Im had the original signed by Mr Cheuk, even if undated, there was no need for him to ask Mr Tsai to send him a photograph via Wechat.  I reject the suggestion, and I accept that the defendant’s side dated the document 16 March 2018.

48.The Termination Agreement is in the following relevant terms:

“1. Both Party A and Party B agreed that from the date of execution of the Termination Agreement, both parties shall cease to perform all the contents and terms relating to the Procurement Agreement.

2. With regard to Clause 5(2) of the Procurement Agreement, Party A has paid deposit of RMB7,680,000 (being HK$9,030,000), and Party B has in January 2018 refunded to Party A HK$500,000.  Party B agrees to unconditionally refund the balance of HK$8,530,000 to Party A on or before 31 March 2018…” 

49.In the circumstances, the plaintiff either does not accept that any money was paid by Xueyelin to Lucky Investments or, if it was paid it has no relationship to the debt owed by the defendant to the plaintiff.  Hence it claims for the balance due under the Termination Agreement, which it says has never been paid.

50.The final point of significance to the assessment of the respective cases is that in the announcement of annual results of the plaintiff for the year ended 31 December 2017, which was made on 31 May 2018, there was a report that due to a lack of cooperation by the former board of directors of the plaintiff the new board had been unable to obtain access to the supporting documents of the books and records regarding certain subsidiaries including Lucky Investments.  As a result the new board of directors of the plaintiff decided that they were unable to exercise effective control over, amongst others, Lucky Investments and therefore they de-consolidated those subsidiaries in the financial statements.  It is tolerably clear, and I so find on the balance of probabilities, that Lucky Investments remained in the control of Mr Deng.

51.The defendant uses this to suggest that the plaintiff is unable to rebut the suggestion that the plaintiff owed a debt to Lucky Investments in accordance with the receipt that I have set out in paragraph 44.3 above. 

E.   Analysis

52.I deal first with the undisputed payment of HK$500,000. 

53.There is no dispute between the parties that in January 2018 there was some level of negotiation between Mr Tsai (and/or Mr Deng) and the defendant. 

54.I accept that the HK$500,000 payment was made as a result of that negotiation.  I think it unlikely that the defendant made the payment without prompting, and I accept that there will have been discussions, even if not amounting to a full agreement, concerning the need to make some payments back to the plaintiff.  On the defendant’s case there was a full agreement represented by the letter dated 4 January 2018.  On the plaintiff’s evidence there was discussion, but no full agreement and the payment was made as a result of delays to delivery.  It appears to be the plaintiff’s case that the payment was unilaterally made.

55.Mr Cheuk accepted that by early January 2018 there was a delay in delivery of the goods, despite the fact that the Procurement Agreement did not require delivery to be made until 1 March 2018. This is consistent with his witness statement at paragraph 5 where he says that in early January 2018 there were some problems concerning the supply of aluminium. 

56.Mr Su said that he was told by Mr Im that the payment had been made at the request of Mr Tsai due to a delay in performance.

57.As will be clear from what I say below, I have not accepted the defendant’s case that there was full agreement by reference to the letter dated 4 January 2018.  As a result, whilst I accept that there is no certainty surrounding this payment, I prefer the view that it was made as some form of interim compensation, or interim repayment, because both parties realised that the goods under the Procurement Agreement either were delayed, or were never going to be delivered.  I accept that the parties, in the form of Mr Cheuk and Mr Deng or Mr Tsai, agreed that some money had to be deposited back into the account of the plaintiff, even if there was no full agreement as to the reasons for it, precisely what it represented (compensation or repayment), or what was to happen thereafter. As a result, a deposit was made in the sum of HK$500,000.

58.Turning to the 4 January 2018 letter, I do not accept that this is a genuine document produced contemporaneously to record an agreement reached in early January 2018 between Mr Cheuk and Mr Deng or Mr Tsai.  There are various reasons why I have reached this conclusion:

58.1.  The letter is oddly drafted.  Whilst I accept that drafting is rarely perfect, particularly the drafting of documents purporting to be of the nature of this document, but the court has to make an assessment based on the documents that are presented to it, and difficulties in drafting have the effect of undermining the confidence that can be placed on the document.  The document records an acceptance by the plaintiff of the defendant’s request to terminate the Procurement Agreement due to exchange rate differences and the fluctuations in the price of aluminium.  But it then goes on to say that “If” the defendant agrees to terminate, it should first make payment of HK$500,000 by 30 January 2018.  Those two propositions do not sit comfortably together.

58.2.  I accept the plaintiff’s proposition that exchange rate fluctuations would have little effect on the procurement agreement because the payment could be made under that agreement in either RMB or HK$.  There was no stipulation as to who could dictate the currency, and hence the defendant had a choice to demand payment in whichever currency was most favourable to it, depending upon currency fluctuations.

58.3.  The letter records that payment “can” be settled in RMB in the Mainland.  That would suggest that no agreement on that aspect had been reached by 4 January 2018, and Mr Cheuk accepted in evidence that it had not been.  He confirmed that he made the request to pay in the Mainland, and in cash.  If agreement of this nature was to be reached in January 2018 I would expect that the parties would have reached agreement on all points necessary to effect a resolution of the agreement, and would not leave such important details to further negotiation.

58.4.  The letter records that the sum of HK$8,530,000 would have to be paid “together with interest, if any”.  Again, I do not accept that interest would be left in such an unsettled manner.  If the parties were going to agree to a termination of this sort, in my view they would agree to the precise sum payable, and would not expressly leave the question of interest to be discussed and negotiated later.  Mr Cheuk told me that this referred to interest that would be due if the payments under the termination were made late.  I do not accept that evidence.  The drafting does not support the proposition, in that it suggest that interest was also to be paid by 15 March 2018.

58.5.  For reasons set out below, I do not accept that the payment was made in cash in the manner suggested by Mr Cheuk.  As a result, even though the letter does not record that the payment was to be made in cash, it does record the need to make the payment.  The overall circumstances create very significant doubt as to the veracity of this letter.

58.6.  The letter, and the purported reasons for termination are inconsistent with the Board resolution of the plaintiff dated 1 March 2018[15], which suggests that the new board authorised the negotiation of a settlement agreement because of a lack of confidence in the underlying contracts, and the fact that no due diligence appears to have been done on the defendant at the time of entering into the Procurement Agreement.  Whilst it is correct that the Board probably did not know about the letter of 4 January 2018 at that time (because it was not apparently available to the plaintiff until July 2018), the reasoning of the board is inconsistent with the terms of the letter.  I prefer the board resolution as evidence.

58.7.  I accept the evidence of Mr Im that there are no records within the accounting department of the plaintiff of any debts owed by the plaintiff to Lucky Investments[16]. Hence it is unlikely that a payment to Lucky Investments would be legitimately allowed by Mr Deng, without proper recoding of it within the records of the plaintiff.  I acknowledge the point made by the defendant that the announcement of annual results demonstrates that the plaintiff was unable to obtain books and records of Lucky Investments, but that does not mean (as was suggested by the defendant) that the debt might have existed without the knowledge of the new board of the plaintiff.  Any debt owed by the plaintiff would be recorded not only in the books of Lucky Investments, but also in the books of the plaintiff.  Mr Im had been the financial controller of the plaintiff since April 2017 and I have no reason to doubt his evidence that according to the plaintiff’s financial records, no such debt was owed.

58.8.  It is clear that the company chop of the plaintiff used on the letter is different to the chop used on, for example, the Procurement Agreement. The spacing is different and the fourth Chinese character from the left is different.  Mr Deng, who signed the 4 January 2018 letter would have had access to the plaintiff’s company chop on that date (because he did not resign until 9 February 2018) and there is no obvious reason why the chop should be different.  Overall I accept the proposition that it is likely that the chop used on the 4 January 2018 letter has been fabricated and is not a genuine chop of the plaintiff.

59.In all the circumstances, I do not accept the letter of 4 January 2018 is a genuine recording of an agreement made between the plaintiff and defendant concerning the termination of the Procurement Agreement.

60.I turn then to the alleged cash payment made by Xueyelin to Lucky Investments on 15 March 2018.

61.There is very little detail of this alleged payment set out in either the pleadings, or the witness statement of Mr Cheuk. It was simply asserted that it had occurred.  However, the detail was explored in cross examination of Mr Cheuk.  The following features are significant.

61.1.  Mr Cheuk said that neither he nor Mr Deng were present at the time the money was paid.  Mr Cheuk was in Zhuhai, and Mr Deng sent two unknown and unidentified representatives to collect the cash.  In my view this is highly unlikely to have occurred for this sum of money, particularly when one party was a listed company in Hong Kong and, as Mr Im said, at the time had a cash balance of only around HK$100,000 in Hong Kong (although he also said that the group had cash of around RMB32 million in the Mainland).

61.2.  The cash would fill something in the region of 4 or 5 trolley size suitcases.  There was no explanation or demonstration of where the cash had come from, or what security precautions were taken by anybody when transporting such large amounts of cash in so many suitcases.

61.3.  He said (contrary to an affidavit he had previously sworn in relation to discovery) that there were photographs taken of the hand over, but he did not produce them, and tried to suggest that he did not have copies because it would not have been safe for him to have received them over the internet.  I do not accept that evidence.  He could easily have obtained copies of the photographs even without requiring them to be transmitted across the internet. It clearly would have been important to do so if he was to substantiate the case that this money had in fact been paid.

61.4.  He said that Xueyelin had four cash counting machines, but it was not at all clear how he knew that they were used on this occasion, because he had not been present.  The amount of cash which changed hands would have required approximately 75,000 bank notes.  That is a substantial number of bank notes and payment being made in this manner is surprising to say the least, even allowing for the alleged differences in business practice between Hong Kong and the Mainland.  I am somewhat sceptical that this amount of cash would change hands regularly on the Mainland as alleged by Mr Cheuk.  First it is not at all clear to me how he would know that given his evidence that the turnover of Kai Muk on the Mainland was limited to around RMB2-3 million per annum. Secondly whilst I accept that cash transactions may not be uncommon, RMB7,500,000 is a large amount of money on any basis, and I have considerable doubts that legitimate business is conducted in cash at this level.  However, I have no reliable evidence on this point and so do place any reliance on my scepticism.

61.5.  He did not provide any satisfactory explanation of how the representatives of Xueyelin would have known that the two persons who appeared to collect the cash were indeed representing Mr Deng (or the plaintiff as it should in fact be).  His only answer was that Xueyelin could be satisfied because the appointment had been pre-arranged by telephone.  He said that it was all simply done on trust.  I find this very difficult to believe for a transaction of this size.

61.6.  The two representatives did not sign any paper to acknowledge receipt of the cash.  All that existed was a piece of paper that was apparently signed by Mr Deng acknowledging receipt.  This is astonishing evidence.  I cannot see any reason why a company paying this amount of cash would not require the person to whom it was giving the cash to sign a document recording that they had received the cash.  It is even more astonishing given that the two individuals were both unknown and unidentified.

61.7.  The receipt that Mr Cheuk was referring to was in the bundle of documents^[17]. I was initially told that this document was a photocopy of the original, and the defendant produced the original document for inspection.  After I had inspected what I was told by Counsel for the defendant the original, Mr Cheuk then changed the case and said that the page in the bundle at page 126 was not an original, but was a faxed copy. He told me that the unsigned version of the document was faxed by Xueyelin to Mr Deng, who signed it and then faxed it back.  That was what was shown in the bundle according to his evidence.  He said that once the faxed copy, signed by Mr Deng, was received by Xueyelin they passed over the money.

61.8.  When I pointed out that what had previously been shown to the court as the original of the document in the bundle was unlikely to be a faxed copy because it was in colour and had no indication of it ever having been faxed, he changed his evidence and said that the faxed copy he had spoken of was only a temporary receipt, and the one in the Bundle was a different receipt prepared after the event (and hence apparently an original).  Not only is such evidence unlikely, but it is also inconsistent with the other document which purports to be a receipt, namely that referred to in paragraph 44.3 above.  There is no reason in my view why Mr Deng would sign two original receipts, in different terms, and for different amounts, on the same day. 

61.9.  Mr Cheuk then tried to suggest that the faxed temporary receipt had deteriorated, but ultimately changed his evidence again, and suggested that the temporary receipt was held by Xueyelin.  

62.I am also very conscious that the various documents, all of which were only produced to the plaintiff after the dispute emerged in July 2018 despite their various dates, have different amounts identified within them.  The plaintiff produced a table in its written opening, which I set out below demonstrating the inconsistencies.:

Document	Amount	Description	Date	Bundle Reference
4 January Letter	HK$8,530,000 + interest if any	To be paid in RMB equivalent	4/1/2018	[26/210-212]
Lucky Investments Receipt	RMB7,350,000	(Being Deposit Balance + interest)	15/3/2018	[26/214-215]
Xueyelin Receipts	RMB7,530,000	N/A	15/3/2018	[16/125-126]
Lucky Investments Letter to P	RMB7,530,000	(Being Deposit Balance + interest)	16/7/2018	[26/217-219]
Lucky Investments Letter to D	RMB7,350,000	(Deposit Balance + interest)	16/7/2018	[26/220-222]

63.Mr Cheuk tried to suggest that the differences were due to the payment of interest, but his evidence on this was confused, in that on one occasion he said interest was only to be paid when the deposit was returned late, then he said that the difference arose from compensation, then he suggested it was interest.  I have not been satisfied as to the explanations for the differences.

64.Further the Termination Agreement which I have found was dated by Mr Cheuk on 16 March 2018 makes no mention of this payment having been made, and is drafted entirely in language which suggests that payment is to be made in the future.  That is surprising if payment had in fact been made just the day before.

65.Finally when the defendant’s solicitors first wrote to the plaintiff with their initial response to the claim^[18], they stated that the repayment had been made to Lucky Capital Group Limited, which is a different company to that which is now alleged to have received the money.   If all of the documents which have now been presented were genuine, and existed at the time, then there would be no reason for the solicitors to have identified the wrong company.  I accept that it may have been a mistake by the solicitors, but that has not been suggested by the defendant or her solicitors, and so I can only assume that the letter accurately reflected the instructions given. That differing instructions have been given casts some doubt on the accuracy of either version.

66.On balance therefore I reject the evidence that a repayment of the deposit was made in the manner suggested by the defendant.

67.As a consequence, I do not really need to address the further documents identified and relied upon by the defendant, as identified in paragraph 44 above, but for the sake of completeness:

67.1.  I do not accept that the receipt on the headed paper of Xueyelin^[19] represents a genuine receipt of money paid for the account of the plaintiff.

67.2.  I do not accept that the receipt issued by Lucky Investments dated 15 March 2018^[20] represents a genuine receipt of money paid for the account of the plaintiff.

67.3.  I do not accept that the letter dated 16 July 2018 from Lucky Investments to the plaintiff^[21] accurately records what happened.

67.4.  I do not accept that the letter dated 16 July 2018 from Lucky Investments to Mr Cheuk^[22] accurately records what happened.

68.As to the termination Agreement dated 16 March 2018 I accept that this was a valid agreement entered into between the plaintiff and the defendant with a view to terminating the various obligations under the Procurement Agreement.  I accept the plaintiff’s evidence, consistent with the case pleaded in the Reply paragraph 3, that the Termination Agreement was negotiated between Mr Deng and/or Mr Tsai at the behest of Mr Im, and Mr Cheuk of the defendant.  A copy of the undated draft was circulated via Wecht message, and was returned to Mr Tsai duly executed, and dated, by the defendant.  There was then a meeting at the Best Western Plus Hotel in Sai Ying Pun between Mr Im, Mr Deng and Mr Tsai where the originals were handed over by Mr Tsai and Mr Deng to Mr Im. 

69.I also accept that the defendant has never paid the balance due under the Termination Agreement to the plaintiff, and so that money is due to the plaintiff from the defendant.  The plaintiff is entitled to Judgment.  In the circumstances it is not necessary for me to deal further with the issues which the Parties have raised as being necessary to determine.

F.      Costs

70.The parties have requested that I make a costs order Nisi.

71.In the circumstances, the defendant should pay the costs of the plaintiff to be taxed if not agreed. 

72.If the parties wish a different costs order to be made they should apply in writing within 7 days of the date of this judgment.  The other party will have leave to respond 7 days thereafter, with a right of reply to the first party 5 days thereafter.  All written submissions on costs to be limited to 3 pages.

G.     Disposition

73.There be Judgment entered for the plaintiff in the sum of HK$8,530,000, with interest at HSBC Prime +1% from 31 March 2018 to the date of Judgment, and at the Judgment Rate thereafter.

74.There is a costs order Nisi that the defendant is to pay the plaintiff’s costs to be taxed if not agreed.

Mr Val Chow instructed by Michael Li & Co for the Plaintiff

Mr Vincent Chan instructed by Leon Lai & Co for the Defendant