Chan Kwan Foon, Anita v. Rich Domain Ltd. and Others

DCCJ017454/2000

DCCJ17454/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 17454 OF 2000

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Coram: Deputy Judge R Yu

Date of Judgment: 25 June 2002

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J U D G M E N T

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1.This is an action by the plaintiff against the defendants for damages and for specific performance. I have to start by analysing the pleading.

2.Paragraph 3 of the amended statement of claim states that the plaintiff had had an oral agreement with the 2nd and 3rd defendant as shareholders of the 1st defendant company or on behalf of the 1st defendant to allot 20 per cent shares capital of the 1st defendant to her. The use of the word "or" seems to suggest that the plaintiff is not sure as to who is her contracting party. If she cannot be sure as to who is her contracting party, I would not be in a position to enforce any contract. The question was brought to her solicitor in the final submission and I asked him if he was going to clarify the matter. Her solicitor, Mr Chan, submitted that the contract was between the plaintiff and the 2nd and the 3rd defendants. He tried to argue that the 1st defendant was also a party to this agreement but I am afraid the plaintiff is bound by the pleading. She cannot now seek to argue that there is an agreement between the 1st and the 2nd and the 3rd defendants.

3.Paragraph 4 of the statement of claim goes on to plead an implied term that the 20 per cent shareholding shall be allotted by the 1st defendant to the plaintiff. It is conceded that there is no collateral oral agreement as pleaded in paragraph 5 of the amended statement of claim. The most liberal interpretation of paragraph 4 is to say that the 2nd and 3rd defendants are under an implied obligation to procure an allotment of 20 per cent shares in the 1st defendant to the plaintiff.

4.If, according to the concession by the plaintiff's solicitor, that there is no agreement claimed between and the plaintiff and the 1st defendant, then there would not be any claim against the 1st defendant.

5.Let us take a look at the prayer against the 1st defendant. It is for, firstly, damages for breach of the agreement. If this agreement is not with the 1st defendant, then there could not be any damages. As for specific performance to allot the shares equally, if the 1st defendant is not the contracting party, then there could not be any enforceable contract and there could not be any order for specific performance against the 1st defendant. As for the accounts of dividends, the same argument applies. So it appears that the claims of the plaintiff against the 1st defendant upon clarification or concession by the plaintiff's solicitor could not be maintained. So what basically left with is the claim against the 2nd and 3rd defendants.

6.To be fair to the plaintiff, in fact there is no evidence introduced by her that the 1st defendant is a party to this "arrangement" between herself and the 2nd and 3rd defendant. There is no suggestion that they were then acting as agents or directors for the 1st defendant in the proposed arrangement made to her. Hence, even on evidence, there is no evidence to suggest that the 1st defendant is a party to this alleged agreement.

7.So what is really left behind is the claim of the plaintiff against the 2nd and 3rd defendants for, firstly, damages for breach of the agreement. The collateral agreement, I understand, is no longer relied upon. Then, further, or alternatively, is for the specific performance of this contract by ordering the 2nd and 3rd defendants to cause or procure the 1st defendant to allot 20 per cent shares to the plaintiff. How this is to be done, if I found there is an agreement, has been raised as a problem and Mr Chan has proposed a very ingenious argument. I shall come to that later. But anyway, that is all the prayers as stated in the statement of claim.

8.I shall now proceed to consider, first of all, the evidence I have. As far as the plaintiff is concerned, she is basically relying on her oral evidence and certain documents that she produced.

9.The plaintiff herself gave evidence and said in 1998 she joined the 1st defendant as a clerical clerk at the invitation of the 2nd and 3rd defendants. It is not disputed that at all material time the 2nd and 3rd defendants were directors of the 1st defendant company. Each of them is holding 50 shares of the company representing half of the issued share capital of the 1st defendant company. The plaintiff knew the 2nd and 3rd defendant as a personal friend. In fact her husband was a very good friend of the 2nd defendant and according to the 2nd defendant, he knew the husband before the plaintiff married her husband. After they got married he also came to know the plaintiff, and these two families were quite close and have a lot of entertainment together.

10.In around April 1998, the 2nd defendant decided to start his own business which subsequently resulted in the establishment of the 1st defendant. It took him some time to prepare for this company and it was formally opened or started business in early September 1998. Around the time of August 1998, the plaintiff had left her former employment and was unemployed. The plaintiff, in her evidence, said the 2nd defendant invited her to join the 1st defendant company and on 2 September 1998 she started her employment with the 1st defendant. On 3 September 1998, she and the 2nd and 3rd defendants had a dinner at Hung Hom Food Plaza. There, the 2nd defendant invited her to invest $30,000 in exchange of 20 per cent shareholding in the 1st defendant company. In this way the defendants hoped that the plaintiff would be more involved in the company. After the investment the 2nd defendant would be a 50 per cent shareholder in the company, the 3rd defendant would be a 30 per cent shareholder and the plaintiff would be a 20 per cent shareholder. The plaintiff said she agreed.

11.The plaintiff said she trusted the 2nd and 3rd defendants; she had not in fact discussed any details of the arrangement. In fact, on her evidence, while she had paid the $30,000 towards the allotment of shares, she had not insisted on either the transfer or allotment of shares until she left the company in year 2000 and took out these proceedings. And it was her evidence that in 1999, when the 1st defendant employed a new employee, the 2nd defendant asked her not to disclose her identity as a shareholder of the company, to which she agreed. One would ask why she is agreeing to that.

12.It is not disputed that on or about 1 October 1998 the plaintiff did deposit $30,000 into the saving account of the 1st defendant company.

13.The plaintiff said the 2nd defendant also invited other people to join the company. That included one Lau Chung-lun. In her evidence, she suggest that the invitation was to procure this Mr Lau to give better pricing to the 1st defendant as he is a manufacturer for the 1st defendant. In her list of documents, the plaintiff produced a draft shareholders' agreement between the 2nd and 3rd defendants with Lau Chung-lun dated sometime in November 1998. But this document was disputed by the defendants. It is to be noted that according to this agreement, it is a shareholders' agreement between the 2nd and 3rd defendants with Mr Lau. The plaintiff was not involved in this arrangement. It was her evidence that she faxed this document out on behalf of the 2nd and 3rd defendants to Mr Lau and when she was cross-examined she said she agreed to the arrangement as long as the shareholding between the plaintiff and the 2nd and 3rd defendants remained as 50:30:20 per cent.

14.According to the plaintiff, Lau Chung-lun did not join the 1st defendant as his relationship with the 1st defendant deteriorated very quickly. But then there was another supplier to this 1st defendant company, Mr Liu Ching-shuang, and I will refer to him as Mr Liu. According to the evidence of the plaintiff, Mr Liu was also a shareholder, or I should call him a hidden shareholder of the 1st defendant. She produced a copy of a saving account which is in the joint names of herself and the 3rd defendant. On this saving book there was a first payment for a sum of HK$28,000. The plaintiff said she went with the 3rd defendant and Mr Liu to the bank to open this joint saving account and when the money was deposited into this account, she said in her evidence that this represented the investment of Mr Liu in the 1st defendant company and she had seen a shareholder agreement with Mr Liu in the form quite similar to the draft agreement faxed to Lau Chung-lun. And according to her evidence, Mr Liu was a 20 per cent shareholder in the company.

15.On this joint account, while it is not disputed that the plaintiff and the 3rd defendant were the account holders, the purpose of maintaining this joint saving account is disputed. Further, the original of the saving book has not been produced by any party. According to the plaintiff, the account was opened at the instruction of the 3rd defendant. She did not know exactly the purpose of the account but she was instructed by the 3rd defendant to keep this account book in her possession until some time in year 2000. The 3rd defendant took it back and did not return it to her anymore. While the book was in her possession, every time when the 3rd defendant wished to make a transaction such as a deposit or withdrawal, she had to come to her for the bank book. As the account had to be operated by the signatories of the two of them, she would sign the necessary voucher for the 3rd defendant. And after each transaction, she would notice that there was some Chinese words written on the bank book which she believed to be record of the purposes of those transaction. It is not disputed that she did not see the 3rd defendant writing down these records and she also said in her evidence that before a transaction, the 3rd defendant did explain to her the purpose but now she could not recall the details. She had to rely on the notes now appearing on the disputed copy of this saving book to refresh her memory.

16.Pausing here, the Chinese writing is disputed by the defendants. Prima facie, this is an account book of the plaintiff and the 3rd defendant and have nothing to do with the 1st defendant. Surely the burden rests on the plaintiff to prove to me that the transactions therein are related to the 1st defendant's shareholding and/or business. Surely I also note that in fact the 3rd defendant agreed some of these transactions have to do with the 1st defendant as a comeback later.

17.The plaintiff relies heavily on one record on this copy saving book. It is noted that in February 1999 there are two withdrawals. The first withdrawal is for $20,000 which the 3rd defendant also agrees is a loan to the 1st defendant. The 1st defendant had some cash flow problem. The second withdrawal for another $20,000 is marked with the Chinese words '***Chinese'. The plaintiff and her solicitor submitted that these words '***Chinese' means distribution of dividends and it is her evidence that she indeed received a dividend of $4,000 out of that $20,000 which prove or support her case that she has a 20 per cent shareholding in the company.

18.On this sum of money, counsel for the defendant cross-examined the plaintiff and said if Mr Liu was also a shareholder of the company, then he should also receive a share in this sum of money. On this, the plaintiff could only say that she was not clear.

19.On these two words of '***Chinese', although there was submission by Mr Chan, I am afraid he agreed with me that '***Chinese' does not necessarily mean dividend, it could also mean bonus, and bonus would be something unrelated to shareholding. It is quite clear to me that these two Chinese words are not sufficient to suggest dividends on a literal meaning and one would wonder why the 1st defendant would declare a dividend before the close of the first financial year, and surely that was the time when it also have cash flow problem.

20.At the beginning of year 2000, the 2nd defendant was not happy with the plaintiff's performance. In that Chinese New Year he therefore only paid her one month as her additional bonus while the 2nd and 3rd defendants and the other employee of the company all had two months' additional pay as their bonus. This is a fact undisputed. And it was around this time when the plaintiff felt that she was being picked upon by the 2nd defendant. It is her oral evidence, she said the 2nd defendant "***Chinese". On cross-examination, when being asked repeatedly by defendant's counsel for some example of how she was being picked upon by the 2nd defendant, she could not even name one single example. She is making a bare assertion against the 2nd defendant without any substance.

21.I should also note at this stage that while the plaintiff said in her oral evidence that the said $28,000 was an investment from Mr Liu, in her written statement, and which she adopted as part of her evidence, she actually said she does not know what this amount of $28,000 meant. This discrepancy has not been clarified.

22.The plaintiff was finally dismissed by the 2nd defendant in or about June 2000. She said on her dismissal, the 2nd defendant wrote on a piece of paper recording two proposals. The first proposal was to pay her four to five months' salary and the second one was to pay her 10 to 15 per cent of the net profit of the company in return for her shareholdings. To that she refused. She had been shown some documents relating to the earnings of the company which the 2nd defendant refused to let her take copies. Accordingly, she wrote down these figures in the same piece of paper where the 2nd defendant wrote out the said first and second proposals. It is unfortunate that this piece of paper which she said had been handed over to her solicitor could not be produced in court. Counsel for the defendant objected to production of its copy. Since this document is a hotly contested document, I do agree that the original must be produced for inspection. It is dangerous for me to rely on a copy. It is sufficient to see on this copy now in court that there is markings which even the plaintiff herself agree do not appear on the original document. I pay no evidential value to this piece of paper.

23.After being dismissed, the plaintiff instructed her solicitor one Messrs William Au & Company to issue a letter of demand to the 1st defendant. It is interesting to note what her solicitor said in the first paragraph of the demand letter: "Our client lent to your company $30,000 in return for an allotment of 20 per cent shares in your company."

24.There had been no explanation why the word "lent" was being used in this letter. Mr Chan submitted that it is obviously a wrong choice of word or maybe a typing mistake, which I could not agree. It is not a letter written by a layman. It is written by a qualified firm of solicitors and he must mean what he wrote. The word "lent" have a special meaning; I could not imagine how a solicitor would choose a word "lent" if that amount of money is not meant to be a loan or something similar to a loan. It is never stated in this letter that it is an investment.

25.It is quite true that there is a mention of the allotted shares and her solicitor demanded for the allotment of shares together with an account of dividends. If an allotment is related to a loan, then that would form something related to a secured loan. That is surely not the plaintiff's case and if it has something to do with security for a loan, then provided that the 1st defendant has repaid the $30,000, the court would not, in the exercising of its equitable jurisdiction, allow her to enforce the allotment. All that is just a comment, because all along the plaintiff's case is, this is an investment, nothing to do with loan. But this letter is very strange and in one way, I must say, weakened the plaintiff's evidence.

26.As I analysed above, most of the documents produced by the plaintiff is not advancing her case. I have also closely observed the demeanour of the plaintiff and, having fully considered each and every aspect together with the way how she answer cross-examination, I found that she is not a reliable witness. Left behind is really the undisputed fact that she have paid $30,000 to the 1st defendant.

27.The 2nd defendant gave evidence and said this $30,000 was in fact a loan by the plaintiff to himself to allow him to lend this money to the 1st defendant and he requested the plaintiff to credit this sum of money directly into the saving account of the 1st defendant.

28.The 2nd defendant denied that he had any oral agreement with the plaintiff in respect of any allotment of shares to her. It is not disputed that there was a dinner on 3 September which is the second day after the plaintiff started working for 1st defendant. The 2nd defendant said during this meeting, the three of them only discussed about their respective duties in the company. And as he anticipate that the 1st defendant company would have cash flow problem, and at that time he had to borrow money from his brother and sister, he also asked for financial assistance from the plaintiff. It is not disputed by the plaintiff that she knew the 2nd defendant borrowed money from his brother and sister for running of the 1st defendant company.

29.The 2nd defendant denied that the plaintiff was a shareholder of the 1st defendant company. He also complained that the plaintiff did not perform satisfactorily. She made mistakes in typing and particularly some silly mistakes in important documents such as invoices and pro forma invoices. As a result, he reduced her bonus for the year 1999 (payable in 2000). He also denied that those handwriting on page 51 of the plaintiff's disagreed trial bundle, the upper part, was his handwriting.

30.The 2nd defendant said he had repaid the $30,000 to the plaintiff by early 1999, or to be more specific, he had arranged the 1st defendant to repay the plaintiff. According to the instruction of the plaintiff, he arranged the deposit of the money into the joint saving account which is the same joint saving account that we have been mentioning about. When cross-examined why this was arranged, he said he did not want to bring a huge sum of money, or cash to be more specific, out of the bank. Mr Chan, solicitor for the plaintiff, put to him that after all the plaintiff had to withdraw the cash, otherwise he would not get the money back; there will be some danger by taking the cash anyway. To that the 2nd defendant could not explain but he categorically denied that the $30,000 was an investment in the 1st defendant company.

31.The 2nd defendant also denied having seen the draft shareholder agreement which the plaintiff produced between the 2nd and 3rd defendants and Mr Lau Chung-lun. He also denied that Mr Liu was a shareholder of the company. On the two withdrawals in February 1999; on the first withdrawal the 2nd defendant agreed it was a loan to the 1st defendant and on the second withdrawal of $20,000 he remembered it was something for family expenses since it was near the Chinese New Year.

32.The 3rd defendant was the wife of the 2nd defendant. She also gave evidence. It is confirmed that she is the bookkeeper of the 1st defendant and is therefore familiar with the account document of the 1st defendant.

33.On this joint saving account, the 3rd defendant said it was meant to be an account between herself and the plaintiff for their personal investment in the stock market. I remember that was denied by the plaintiff on cross-examination. The 3rd defendant, in giving evidence, does not dispute that there was no investment actually made. She could not really explain why no investment was made except in saying that she was then waiting or in search of the right shares to invest in. On the $20,000, she denied that it was a payment of dividend; she said it was only a payment of bonus.

34.On the copy saving book, she denied that she had written down the words now appear on this document. On the first payment of $28,000, the 3rd defendant said it was a payment from her own funding. She deposited 28,000 because it sounded lucky and since this is meant to be an investment account, she would like the first deposit to sound lucky.

35.In her evidence, she agrees that in the subsequent transactions in this saving book, save and except for the $30,000 deposited which is meant to be repayment to the plaintiff, these are monies related to business of the 1st defendant. It is not disputed that at the end of the day the saving balance is around 24,000 which was less than $30,000 belonging to the plaintiff. She admitted that she have withdrawn more than she was entitled.

36.The 3rd defendant also denied that the plaintiff was a shareholder or being invited to be a shareholder of the 1st defendant. She also denied seeing the shareholder agreement which was faxed to Mr Lau and she also denied that Mr Liu was a shareholder of the 1st defendant company.

37.Solicitor for the plaintiff showed to the 3rd defendant a copy of the saving book of the 1st defendant with handwritings. The 3rd defendant said she had checked the bank book; there was no such handwriting. She denied that these handwriting appearing on the copy produced in court were her handwritings. Mr Chan also put to the 3rd defendant that in the end of 1998 the saving account of the company is on the average exceeding $200,000 cash. There seems to be no reason why they needed a loan from the plaintiff for just $30,000. But the 3rd defendant said the pages now produced only show the position up to the end of 1998. She cannot reply without looking at the bank book. It is not disputed that there is no application for discovery of the original bank book and I do not have the privilege of reading that.

38.On the issue of whether there was any contract of sale of shares, as I have analysed above, the plaintiff basically has to rely entirely on her oral evidence. Mr Chan had rightly pointed out that the evidence of the 2nd and 3rd defendants had some areas that they could not explain. Nonetheless, having analysed the evidence of the 2nd and 3rd defendants, I found that they were reliable witnesses. I have considered the discrepancy as pointed out by Mr Chan but, by and large, I found that they are liable. But more important is this: here the burden of proving that there is a contract of sale of shares or allotment of shares rests on the plaintiff.

39.I should also mention that it seems unreasonable to me that the plaintiff agrees not to disclose her identity as a shareholder of the 1st defendant company to an employee. No explanation has been given by the plaintiff why the 2nd defendant requested her not to disclose her identity and she only said she trusted the 2nd defendant entirely. All this points to the situation that there is no formal arrangement as such.

40.As I have found earlier on, the plaintiff has not satisfied me that she is a reliable witness. I have fully considered all the evidence in front of me and I have analysed the evidence of the defendant. I found, in conclusion, that the plaintiff failed on the evidence to prove to me that she had an oral agreement with the 2nd and 3rd defendants for the allotment of shares. In the circumstances the plaintiff's claim must fail.

41.For completeness I should note the following matters which has been argued by the parties. Firstly, the evidence produced by the plaintiff taken to the highest does not really show the terms of the contract. The pleading itself is not clear as to parties to this alleged contract. It all goes to show only a very loose arrangement. It is at the highest on the basis of a payment of $30,000 in return of 20 per cent of the shares in the 1st defendant. Then, without further elaboration, this could very well be a contract to contract, or just negotiation between two intending contracting parties. Taking the plaintiff's case at the highest, it still lacks the certainty, the clarity and the intention of a contractual arrangement. If there is a promise, it is a promise and nothing more than a promise. It is not enforceable unless it is a contract.

42.As the details of the contract for sale or allotment is not explained by the plaintiff in her evidence, there is in fact no possibility for this court to grant her the claim for specific performance. How many shares would be allotted? The arrangement is very strange in that the plaintiff said after the allotment the 2nd defendant should have 50 per cent of the shareholding and the 3rd defendant was to have 30 per cent of the shareholding, and she to have 20 per cent of the shareholding. Mr Chan had a very ingenious proposal that the company could allot 100 shares in addition to the existing 100 shares giving 40 shares plaintiff, 50 shares to the 2nd defendant and 10 shares to the 3rd defendant. This is definitely not pleaded and it is not a matter that has been discussed when they entered into this alleged agreement according to the evidence of the plaintiff. The court in exercising a power of specific performance is only to enforce the terms of the contract. If it is not the discussed or agreed terms of the contract, then, at the highest, if there is a contract, the remedy of the party would only rest for damages. I do not think it is necessary to go into further details but it is sufficient for me to say that the arrangement is not clear and it is not definite.

43.Since I have ruled against the plaintiff on the contract, there would not be any claim for damages. Surely for damages there is no evidence in support of the loss of the plaintiff either. So in that sense I shall dismiss the plaintiff's case against the 1st, the 2nd and the 3rd defendants.

44.Finally, counsel for the defendants did invite me to rule on the repayment of $30,000. This is not claimed by the plaintiff and the defendants did not pray for a declaration that the same had been repaid. I do not intend to make a ruling. If the plaintiff ultimately has to claim recovery of that $30,000 on the basis of money had and received or a loan given to the 1st defendant, that would be a different issue. It is sufficient for me to comment that if this sum of money, according to the defendants, had been paid into the joint account of the plaintiff and the 3rd defendant, she must be perfectly entitled to withdraw that amount to her own benefit. As for any difference, I believe the 3rd defendant has conceded in her evidence that she has to repay the plaintiff. I suppose a sensible solution could be worked out and should be for the plaintiff and the 3rd defendant to close down this account, withdraw all the money and to pay the $30,000 to the plaintiff. I make no finding in this aspect without hearing further submission or knowing the details of that part of the transactions between the plaintiff with the 2nd and/or 3rd defendant and/or the 1st defendant. So that is my ruling in this case.

45.And finally, on the question of costs, unless Mr Chan would make any submission, I intend to make order of costs to follow the event.

46.On the last occasion, about the certificate of counsel, I understand that Mr Chan made no submission. I appreciate that my judgment is very much on the finding of facts because this case at the end turns on evidence, but surely this case did involve a quasi complicated issue on specific performance which I cannot say that the defendant has been overcautious in bringing in the counsel. In the circumstances, I certify this case fit for counsel.

Representation:

Mr Edward Chan, of Messrs Chan, Wong & Lam, for the Plaintiff

Mr A Fung, of Messrs Chan, Leung & Cheung, for the Defendant