Lam Hon Chi v. Chan Shing Chi

HCA008050/1984

Partnership - claim by one partner against other partner for debt due on dissolution - major factual disputes only resolved by finding on credibility - difficulties and dangers of finding on credibility where all evidence given in dialects which can only be understood by the Court after interpretation - usefulness of documentary evidence involving third parties in assisting Court to make findings on credibility - Held: On facts plaintiff not established partnership indebtedness of defendant; judgment for defendant - Section 26 Partnership Ordinance, Cap. 38.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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Coram: Deputy High Court Judge Cruden

Date of Hearing: 25 to 29 November 1985

Date of Delivering Judgment: 13 December 1985

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JUDGMENT

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1. The plaintiff and the defendant carried on business as partners being the proprietors of the Terry Games Centre at 500 Shanghai Street, Kowloon for a period of about 2 years down to 29th February 1984. On that date the lease of the business premises expired and by that date the business was terminated. The plaintiff claims that the losses sustained by the partnership amounted to $474,307.20 and by virtue of Section 26 of the Partnership Ordinance, Cap. 38 the partners are liable to bear the losses in equal proportions. The plaintiff further claims that he has personally met the losses incurred and now claims from the defendant in reimbursement the sum of $237,153.60 being one half of the losses sustained.

2. The defendant pleads that upon the partnership being dissolved the plaintiff owed him $160,000 and this sum together with a non-partnership debt of $30,000 also due to the defendant, was the subject of High Court Action No. 5426 of 1984 in which judgment was given for that sum in favour of the present defendant. In that prior action the defendant had sued as plaintiff on a dishonoured cheque for $ 190,000 dated 31st December 1983. No defence being filed in that action judgment was entered in favour of the present defendant on 1st October 1984 for the $190,000 claimed. The defendant has also counterclaimed in the present action, in the event of it being held that the partnership was not dissolved, for accounts to be taken.

3. The background to this dispute is that until 1980 the defendant had lived in China during which time his godmother died in Hong Kong leaving an estate of several million dollars. The defendant was apparently either a direct or indirect beneficiary and came to Hong Kong in January 1980 to receive his inheritance. According to the defendant on arrival he received from the daughter of his godmother the sum of $200,000 by way of gift and $300,000 by way of loan. The defendant is a young man and had gone to school with a nephew of the plaintiff. Through this association the defendant called on the plaintiff at his home late in 1981 to discuss with the plaintiff possible investments for the relatively large sum of money he now possessed.

4. The plaintiff suggested that they enter into partnership to carry on the business of a video games centre. The defendant agreed but was concerned about the risk involved. According to the plaintiff on 3rd January 1982, the parties signed a written agreement which provided that the defendant would pay the whole of the partnership capital of $200,000 while the plaintiff would be responsible for obtaining the video games licence for the premises. A written partnership agreement incorporating those terms was produced but the defendant denied that he signed the agreement. This written document further provided that out of the profits of the business the defendant would first recover the sum of $200,000 paid by him after which profits would be divided equally. The agreement also provided that if no licence could be obtained the plaintiff would be responsible for any loss. I will return to this purported agreement later.

5. The parties when they gave evidence, agreed that at the commencement of the partnership the plaintiff delivered to the defendant his personal cheque for $200,000 post-dated to 8th July 1982. Both parties are also agreed that the original purpose of this cheque was to provide the defendant with security for his $200,000 during the period efforts were made to obtain a licence for the premises from Urban District Council. Early in 1982 the premises at 500 Shanghai Street were obtained but the tenancy was granted solely to the plaintiff as tenant. The partnership was registered under the Business Registration Regulations on 2nd March 1982 with the plaintiff and defendant recorded as the two partners. The partnership business was stated to have commenced on 28th February 1982 which appears to have been the date the tenancy commenced. At this early stage more than 20 video games machines were purchased for $140,000 out of cash provided from the defendant's $200,000.

6. The business was commenced without a licence. Application was made in the joint names of the partners for a licence but was refused. After 10 days business was suspended pending the resolution of the licence position. A further application for a licence was made but this time in the name of Lam Chim Kai, the plaintiff's son. This application was granted in July 1982 when the business resumed. In the interim, rent and other outgoings had, of course, to be met but with no income being received. The fact that no income was received for more than 3 months during this period was no doubt one factor which lead to the large loss suffered by the time the business ceased in 1984.

7. During the period after the business was suspended there were a number of financial transactions between the partners and third parties which to some extent are evidenced by documents. However, the plaintiff and defendant in evidence gave conflicting explanation as to the nature of the transactions those documents represented. The differences between them on most of these issues can only be resolved by findings on credibility. Before proceeding to that stage it may be helpful to summarise some of the conflicting explanations.

8. The plaintiff stated that when the business was suspended there was a credit of $20,000 in the partnership account which was divided equally between the partners. The plaintiff states that contemporaneously he also paid over his $10,000 share to the defendant and gave him a cheque for $190,000 post-dated to 31st December 1983 to replace the prior cheque for $200,000. The plaintiff's explanation of these transactions was that as the defendant had received a capital repayment of $10,000 the guarantee of $200,000 earlier given by the plaintiff was reduced to $190,000 and hence the new cheque for the latter sum was merely new security for that reduced contingent liability. The reason given by the plaintiff for the long period of post-dating was that they were still unsuccessfully trying to obtain a licence. Once the licence was granted in July 1982 and the business recommenced, the plaintiff considered that his contingent liability ceased but he had been unable to recover the cheque. The plaintiff denied that he agreed to indemnify the defendant for all losses.

9. Once the business resumed the plaintiff stated he was responsible for the management of the premises while the defendant looked after the books. In fact it appears that the partners generally attended on alternative days. When the plaintiff attended he was often assisted by Mr. Ng Hon Chi while when the defendant attended he was usually assisted by Mr. Hau Shun Yan and at times by Mr. Chan Chung Kwan. The takings were recorded daily in books of account which were produced most of which were prepared by the defendant. The cash takings were in part used to pay current wages and other outgoings with the balance being periodically banked into the partnership bank account. Apart from some of the money used to purchase a Cashier Order in payment of arrears of rent, the plaintiff complained that the defendant refused to contribute any capital after payment of the initial $ 200,000.

10. The plaintiff asserted he had then to contribute $274,307.20 to meet total outgoings of $474,307.20. The plaintiff stated that he had to borrow substantial sums of money to meet these outgoings. These included a loan of $93,000 from Wayfoong Credit Ltd. secured on the games machines which had since been repaid. The plaintiff claimed he used this loan to help repay even earlier loans from friends. These were loans which remained undocumented and were required to provide funds for a payment of $120,000 to the partnership at an early stage in 1982. The plaintiff alleged that to find this sum he borrowed $90,000 from a neighbour Wong Chun-kok; $20,000 from another neighbour known simply as The loud Voice Woman; and $10,000 from a neighbour Chiu Kwong. The latter two loans were arranged by his wife. A11 were interest free and had now been repaid. No receipts or other documents were produced. None of the lenders were called as witnesses. The $120,000, according to the plaintiff, was not contributed as share capital but merely as a temporary loan to the partnership which had not been repaid. There is no record of the $120,000 having been paid into the partnership account nor is such payment pleaded.

11. The defendant when he gave evidence denied that he had signed the alleged partnership agreement dated 3rd January 1982. He agreed that the signature was similar to his own signature but stated that he had never seen the document until the present proceedings commenced. According to the defendant at the beginning of 1982 the parties had orally agreed to enter into partnership, with the defendant contributing $200,000 and the plaintiff $100,000. The initial profits were to be applied it repaying capital after which profits were to be shared equally. He confirmed he paid $200,000 but stated the plaintiff never paid his share of $100,000.

12. After $140,000 had been spent on purchasing machines, just over $100,000 was required in payment of rent deposit and the first rent instalments. The defendant stated that he had anticipated that the balance of $60,000 from his contribution and the $100,000 to be supplied by the plaintiff, would have been more than enough to provide the sum due to the landlord. According to the defendant it was at this stage that the plaintiff indicated that he had no money and could not pay up his share. $2,000 had been paid by way of initial deposit when the plaintiff first indicated to the landlord that the premises were suitable. The defendant stated that to overcome the problem in relation to balance the defendant on 15th February 1982 accompanied him to Mei Tung Branch of the Hong Kong and Shanghai Banking Corporation. At the Bank the defendant stated he terminated a Time Deposit of $100,000 in his name and obtained a Cashier Order in favour of the landlord's solicitors for $98,000. He stated that he gave the balance of $2,000 to the plaintiff to be paid into the partnership account so that his total further payment was for a round sum.

13. When earlier the plaintiff had given evidence on this transaction his evidence varied. First, he stated that the Cashier Order was purchased by the partnership from funds provided out of the original $200,000 paid by the defendant. In cross-examination he went into greater detail. He stated that he had held the $98,000 in cash at his home and on 15th February 1982 took that sum in cash and called at the defendant's home en route to obtaining the Cashier's Order. The plaintiff continued that he then went with the defendant to a nearby Bank and gave the $98,000 cash to the defendant for the purchase of the Cashier Order. The plaintiff stated that he then took the Cashier Order to the landlord's solicitors and made payment. Under cross-examination the plaintiff was emphatic that the Cashier Order visa issued in exchange for the cash which he had brought from his home.

14. The direct conflict of evidence on the Cashier Order was merely one instance of the parties completely opposing positions.  In this case there was fortunately some independent documentary evidence to assist in reconstructing what happened. Letters by consent were produced from the Bank certifying that Cashier Order No. 656429 for $98,000 was issued on 15th February 1982 from funds provided by the defendant's Time Deposit Account 711-757864-145. The landlord's solicitors receipt in favour of the plaintiff for the deposit and rent due of $100,888.10 recorded that $98,000 of that sum was provided by Cashier Order No. 656429.

15. The defendant alleged that his total cash contribution to the partnership was $320,000 made up of the original $200,000, the realised time deposit of $100,000 and a further $20,000 paid for decoration expenses. The defendant produced an account prepared in November 1982 which showing total outgoings of $320,000. This sum, it was alleged, showed how the $320,000 contributed by the defendant had been applied. The defendant stated that the plaintiff had down to that stage, made no cash contribution but on completion of those accounts agreed to pay $160,000 to the defendant to settle his half share. According to the defendant the cheque he received from the plaintiff for $190,000 was not as security but in payment of that $160,000 plus repayment of a loan of $30,000 earlier made by the defendant to enable the plaintiff's daughter to purchase a share in the cosmetic business in which she was employed. The reason for the cheque being post-dated, according to the defendant, was that the plaintiff said he had no funds.

16. A further problem arose in August 1982 when the landlord commenced proceedings to recover possession and arrears of rent. The total amount then outstanding was $103,833. It was undisputed that the parties borrowed $90,000 from the defendant's uncle, Mr. Lam Diu, towards finding sufficient monies for the ultimate payment of the sum paid into Court. A promissory note was produced by the defendant signed by him and the plaintiff in respect of this loan. I also record that the original payment of $200,000 by the defendant and the majority of the other dealings described by the defendant were supported by documentary evidence. However, I recognise that the alleged loan of $30,000, which was the first transaction in order of time, was not supported by any documents. The defendant simply claimed he made that payment in cash and obtained no receipt or other document. I further record that I have taken into account the. plaintiff's submission that if the defendant, in disputing the plaintiff's evidence why the $190,000 cheque was given, was going to attempt to support his contrary allegation, it was necessary for him to provide some explanation for the balance of $30,000. The defendant's explanation that the $30,000 balance represented repayment of this loan was, according to the plaintiff, a fabrication.

17. The defendant's explanation for the final breakdown of the relationship between the parties, was that in early 1983 the plaintiff again asked for more money for the partnership. The defendant replied that he had no money left. According to the defendant the plaintiff then told him that as the tenancy was in the plaintiff's name and the licence was in the plaintiff's son's name, the defendant had no interest in the business. The defendant stated that he was told to keep away from the business and if he returned he would be beaten up. The defendant stated that was why he stopped attending. The plaintiff denied all these allegations.

18. However, clearly both parties were before the end of 1982 concerned about the financial position of the business. It was undisputed that on 3rd January 1983 the defendant made a written offer to sell his interest in the business for $83,000. The defendant's explanation of this sum was that at the time it was all that the plaintiff stated he could afford. The $83,000 was made up as a one-half share of the unpaid loan from Mr. Lam Diu; $30,000 being repayment of the loan to the daughter; and $8,000 cash. This offer was never accepted by the plaintiff. It was common ground that relationships further worsened. On 9th January 1984 the plaintiff published a notice in the 'Wah Kiu Yat Po' asking the defendant to communicate with him to deal with the closing of the business. The defendant unilaterally advertised the business for sale in the Oriental Daily News on 21st January 1983.

19. There were also a number of other relevant but less important matters which the parties disputed and like the more important issues some of these are not simple to resolve. Returning to the major areas of dispute, the best documented matter relates to the Cashier Order. The alternatives which face the Court are either that the defendant's version is correct or that he applied the $98,000 cash for some other purpose. The independent documents from the Bank are consistent with the defendant's version. The plaintiff's version would involve the defendant at that early stage taking involved steps to ensure that he would later have prima facie powerful written evidence to support an untrue allegation if the matter were ever litigated.. I reject that possibility as fanciful.

20. In reaching that conclusion I am also assisted by the impression the witnesses made on the Court. All the witnesses gave their evidence in Chinese dialects. I remind myself that it is often not only difficult but also dangerous for a Court, dependent on interpretation of such evidence, to make clear cut findings on credibility. However, when I review the manner in which the evidence was given in the light of all the surrounding circumstances I am left with several enduring impressions. The defendant, a young man who works as a hawker, came into a large sum of money without previous business experience. On the evidence his use of that money has ended up disastrously. In the witness box he appeared to be a naive young man who gave his evidence quietly and consistently. The plaintiff was a much older man and at least in years stood in a father and son relationship to the defendant. The plaintiff was a voluble witness, who became excited in the witness box and on several material matters gave conflicting evidence. In the absence of any documentary evidence I would in any event have preferred the evidence of the defendant to the plaintiff where their evidence conflicted. Fortunately, the documentary evidence provides considerable assistance in making any such finding.

21. However, I recognise there was other important documentary evidence apart from the Cashier Order and related documents. The purported partnership agreement was produced and I had the benefit of not only the parties opposing evidence whether it was signed by the defendant but the attesting witness Mr. Ng Hoi Fong was called by the plaintiff. Mr. Ng in evidence-in-chief made the bare assertion that the document was signed by both the plaintiff and the defendant. In cross-examination it was put to him that his evidence was untrue but he rejected that suggestion. In re-examination the issue was not advanced much further except that Mr. Ng for the first time stated that there were two copies of the document but he could not remember whether the contents were both mitten by both parties. I found this document and the allegation and counter allegations as to its execution one of the most difficult aspects of the whole case. On the evidence my finding is that the plaintiff has failed to establish that it is more probable than not that it was executed by the defendant.

22. Another major dispute related to the alleged loan of $30,000 by the defendant to one of the plaintiff's daughters. The plaintiff and his wife Madam Ng Sik Chung both denied that any loan had been made through them or in their presence or to their knowledge. The plaintiff's two daughters resident in Hong Kong were called. Madam Lam Sau Wah, a married daughter, denied being involved in any loan transaction. Madam Lam Sau Chun, another daughter, who is a salesgirl in a cosmetic firm and who on the defendant's evidence would have been the recipient, also gave evidence. She denied receiving or being involved in any loan transaction with the defendant. The only wholly convincing witness of this group was Madam lam Wah who was in any event not a person claimed by the defendant to have been involved in the loan transaction. When I consider the whole of the evidence on the alleged $30,000 loan I find it more probable than not that the loan was made.

23. The plaintiff also called Mr. Yau Chung Hin, Office Manager of Richard S. K. Chan & Co. whose staff had prepared accounts for the business. A statement of receipts and payments were produced which supported the plaintiff's claim for $237,153.60. However, the weight to be given to these accounts turns on the plaintiff's own credibility. The accounts were not audited. Many of the entries were unvouched. Mr. Yau conceded that his firm had relied on the plaintiff's own oral instructions that he had personally met the deficit the accounts revealed. In those circumstances the accounts do not by themselves materially advance the plaintiff's claim being dependent on his own credibility

24. As to the plaintiff's credibility, which is central to his whole claim, I accept that his case, except for the $120,000 temporary advance, has developed in accordance with his pleadings while the defence case has at times veered from the pleadings. In this particular action I do not find those variations affect the general thrust of the evidence. On what has developed as the crucial issue, namely credibility, I prefer the evidence of the defendant to the plaintiff where their evidence conflicted. Together with my other findings, that is sufficient to dispose of the plaintiff's claim. I do not need to go on to make findings on the several alternative defences pleaded. As I understood the defence, if I arrived at this conclusion, it was not desired that I should go on to consider the counterclaim. On the facts that is the proper course to adopt and I accordingly do so.

25. In the result there will be judgment for the defendant on the claim. The counterclaim is dismissed. The defendant is entitled to his costs to be taxed, if not agreed, in accordance with the Legal Aid Regulations.

Representation:

Mr. James Lee instructed by David K.W. Tsang & Co. for the plaintiff

Mr. Rodney Pritchard instructed by Liang, Ng, Lie & Lai for the defendant (D.L.A.)