Wong Fuk Wah George and Another v. Chu Fung Chee George and Another

HCA003181/1992

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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Coram: The Hon Mrs Justice Le Pichon in Court

Dates of Trial: 5-7 February 1996

Date of Handing Down Judgment: 12 March 1996

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JUDGMENT

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1. The 1st Plaintiff ("Mr Wong") seeks rescission of an agreement ("the First Agreement") that he entered into with the 1st Defendant ("Mr Chu") in about March 1991 to buy Mr Chu's share in Watlink Limited ("Watlink"), a company owned and controlled by Mr Chu for $650,000 on the ground that he was induced to enter into that Agreement by misrepresentations made by Mr Chu. At all material times, the issued capital of Watlink consisted of two shares, one in the name of Mr Chu and the other in the name of Watcom System Services Limited ("Watcom"), a company that was also owned and controlled by Mr Chu.

2. The 2nd Plaintiff ("Showyield") is a company owned and controlled by Mr Wong. In or about June 1991, Showyield acquired the remaining share in Watlink ("the Second Agreement"). It is Showyield's case that it entered into the Second Agreement with Mr Chu rather than Watcom but in any event, it seeks to rescind the Second Agreement on the ground that it had been induced by misrepresentations made by Mr Chu or alternatively by Watcom acting through Mr Chu. The consideration for the Second Agreement was $1.15 million but only $650,000 had been paid to Mr Chu.

Mr Chu's companies

3. In March 1991, Mr Chu's interest in Watcom, Watlink and Watnet Management Consultancy Limited ("Watnet") was as follows:

The Codata Agreement

4. It emerged in the course of Mr Chu's evidence that in February 1991, he met with the bankers for Codata Limited ("Codata"), a company engaged in the video rental business and its owner Edward Yu Hon Choi. Codata, it seems, was in financial difficulties and its bankers were urging it to come up with a solution. As there was no reason for Mr Chu to be present at such a meeting, his presence can probably only be explained on the basis that he was a potential purchaser of Codata or its assets. In any event, he learned at that meeting that the assets of Codata were valued by the bankers at over $3 million but that Codata's business was running at a loss. It was in these circumstances that Mr Chu subsequently entered into negotiations with Codata and Mr Yu culminating in the Codata Agreement.

5. On 23 March 1991, Watnet entered into an agreement with Codata to acquire its assets for $1.3 million. The Agreement referred to a pledge of some of the assets to First Pacific Bank which was to be discharged by Codata at its cost. Mr Yu, a director and major shareholder of Codata guaranteed that all assets transferred would be free from any pledge, security against and any further liabilities. He also guaranteed that the 50 vending machines were in good and usable form; that the 4,589 video tapes were also in reasonably consumable condition; that there was no breakage or damage of software and hardware of the machines. Mr Yu also agreed to hand over, upon completion, a complete member list, active and inactive, and all remaining 12,000 plastic membership cards, the source code of the software and the location and contact persons and telephone numbers of the 30 rental machine sites then currently in business and all titles and copies of the video tapes. Codata undertook to pay all outstanding amounts of rent rates, insurance, management fees of all sites currently occupied by it up to the date of completion.

6. There was, as part of the Codata Agreement, an asset transfer list setting out all the assets owned by Codata that were to be transferred. Codata further agreed to compensate Watnet for costs and damage incurred in the event of any failure to deliver the assets to the Purchaser within one week after the signing of the Codata Agreement. All costs of transfer and delivery of the assets sold were to be borne by Codata.

The First Agreement

7. It is common ground that Mr Wong and Mr Chu have known each other since the mid-1980s and by March 1991 had become close friends. According to Mr Wong, in telephone conversations that occurred between 25 and 27 March 1991, Mr Chu told him that:

8. Mr Wong said that he received a faxed copy of the Codata Agreement from Mr Chu on 27 March. Prior to entering into the First Agreement, Mr Wong had understood from Mr Chu that the business being acquired was an on-going business that had been conducted by Codata. When Mr Wong asked how Mr Chu could be sure that there was nothing wrong with the deal, Mr Chu responded that Mr Yu, the owner of Codata was a member of the family owning Wo Kee Hong and "could not possibly run away". Mr Wong was told that it was for that reason that Mr Yu was able to get finance from First Pacific for Codata. Mr Chu also explained that the business required minimum staffing and had limited space requirements. Mr Wong went in as a partner on that basis but it was not until after he had seen the Codata Agreement that Mr Wong orally agreed with Mr Chu to acquire Mr Chu's share in Watlink. Mr Wong's evidence was that but for what he had been told by Mr Chu which he believed to be true and correct, he would not have entered into that Agreement. In particular, he would not have entered into the First Agreement if Mr Chu could not cause title to and physical possession of all the assets to be transferred to Watlink free from all claims and liabilities.

9. On 2 April 1991, Mr Wong paid Mr Chu $650,000 for Mr Chu's share in Watlink. It was Mr Wong's understanding that under the First Agreement, he and Mr Chu would each own 50% of Watlink which would carry on the video rental business previously carried on by Codata and that it would be managed by Mr Chu. Mr Wong did not know at the time that the remaining share in Watlink was not registered in Mr Chu's name. He believed that as Mr Chu had told him that he would be retaining the share, that Mr Chu had obtained title to it.

10. There is a consent dated 20 April 1991 by Mr Wong to act as director of Watlink. The share in Watlink was transferred to Mr Wong on 22 April 1991. Mr Wong said that in late April 1991, he was informed by Mr Chu that the transfer of the share to him would be registered; that all the assets were then owned by Watnet; that physical possession free from all claims and liabilities would be obtained from Codata and would be transferred to Watnet and then to Watlink. Codata was released from its pledge by First Pacific by a Release dated 8 May 1991.

11. Mr Chu denied that he made any representations or warranties as alleged by Mr Wong. Mr Chu used Watnet as the vehicle for acquiring Codata's assets and business on a going-concern basis. He said he spoke to Mr Wong about the pending acquisition, that Mr Wong expressed interest and went with him on several occasions to inspect a number of machines at various locations. Mr Chu recalled showing Mr Wong the Codata Agreement and told him that it was his intention to run the business under Watlink rather than Watnet. Mr Chu said that Mr Wong expressed great interest and asked to become an equal partner and that it was in those circumstances that Mr Wong was offered 50% of the business at half of the original acquisition price. Mr Chu also asserted that Mr Wong knew that he had no experience in running the business and that he had no time to fully check the assets that were purchased under the Codata Agreement.

12. Mr Chu said that the First Agreement was in essence a partnership agreement to run the business together and he was fully aware that Mr Wong would have plenty of opportunity thereafter to manage and check the assets as well as the business. He said that he never made any representations as asserted by Mr Wong because if the assets were defective or that the title to those assets could not be acquired, he would be suffering loss to the same extent as Mr Wong. There was no written transfer of the assets of the video rental business from Watnet to Watlink. Mr Chu did not consider any written transfer necessary because he said he had "total control" over Watnet through Watcom.

23 March to 8 July 1991

13. It is Mr Chu's case that Mr Wong participated in the management of the business as from 23 March 1991, the date of the Codata Agreement. As to the date when Mr Wong is alleged to have agreed to become a partner with Mr Chu by agreeing to purchase the share in Watlink for $650,000, Mr Chu was unable to state a specific date. Plainly, Mr Wong could only be shown the Codata Agreement after it had been executed by the parties. How long thereafter is not evident from Mr Chu's evidence. It is also difficult to believe that Mr Wong could have participated in the management of the business as from 23 March when he had not yet reached any agreement with Mr Chu. Mr Chu accepted in cross-examination that there was no documentary evidence to show that Mr Wong had been participating in the management of the business since 23 March nor was there any document from which such an inference could be drawn.

14. Mr Chu accepted that Mr Wong was absent in Europe for much of April and May. Although Mr Wong cannot now recall whether or not he returned to Hong Kong in the interim on or about 20 April, Mr Wong left Hong Kong shortly after payment was effected on 2 April and returned in late May. Clearly, even if Mr Wong did return to Hong Kong in the interim, his protracted absence would have made it difficult, if not impossible, for him to have been involved in the management of the business.

15. Mr Wong said that apart from attending a few meetings, he was not in any way involved in the business during this period. It was suggested that Mr Wong had placed various business associates namely Chan Ho Ying, T.S. Li and Maria Cheng as well as three teenage relatives in the business, the implication being that he thereby acquired knowledge of what there was to know about the business. He explained that he had put Mr Li in contact with Mr Chu in the hope that Mr Li might come up with some suitable sites at public housing estates and that he had put Miss Cheng in touch with Mr Chu as the former was looking for a different kind of employment and Mr Chu was running an employment placement agency. Mr Chu acknowledged that the arrangement with Mr Li, Miss Cheng and Mr Chan was no more than that if any of them could identify good sites, any commission income from those particular sites would be shared. Of the three, only Mr Li introduced one or two sites but that these did not work out. None of Mr Li, Miss Cheng and Mr Chan was an employee of the business. None received any remuneration. Nor did the teenagers who were there to help out for a few weeks in the summer.

16. I am satisfied that during the period in question, Mr Wong was not involved in the management of the business as alleged by Mr Chu. There is simply no evidence to establish that involvement or from which his involvement could be inferred.

The Second Agreement

17. The parties differ as to the terms of the Second Agreement as well as the parties to it. Showyield's case is that it entered into the Second Agreement with Mr Chu who agreed to sell to Showyield the remaining share in Watlink and to cause Watnet to deliver all the assets to Showyield for $1.15 million. According to Showyield, the Second Agreement was partly oral and partly written. The oral parts are contained in negotiations conducted in June 1991 between Mr Wong acting on his own behalf and on behalf of Showyield and Mr Chu. In the course of the negotiations, Mr Wong agreed to transfer his share in Watlink which he had purchased from Mr Chu to Showyield.

18. The written parts of the Second Agreement are evidenced by a document entitled "Share Transfer Terms of Transfer" which was undated but it is common ground that it was signed on 8 July 1991. It referred to an earlier discussion and the payment of $50,000. It provided for (1) the resignation of Mr Chu and Watcom as directors of Watlink; (2) the first payment of $600,000 to be made on or before 8 July 1991 to Mr Chu; (3) two post-dated cheques of $250,000 each to be payable on or before 31 December 1991 and 30 June 1992 to Mr Chu; (4) all on-going liability to be borne by the incoming shareholder after completion; (5) "all assets [to be] deliverable upon signing of the Instrument of Transfer, delivery costs [to] be borne by the transferee"; (6) force majeure and (7) time to be of the essence.

19. According to Mr Wong, prior to entering into the Second Agreement, Mr Chu told him that the assets were owned and controlled by Watnet; that, however, they could not be delivered to Watlink because Watlink did not have its own premises and that, inter alia:

These representations were allegedly made in the course of a telephone conversation between Mr Wong and Mr Chu during office hours between 10 and 14 June 1991. It was Mr Wong's evidence that took Mr Chu's words at face value because he trusted Mr Chu. Mr Chu told him that the business was going well; that there were no problems; even the remote locations were profitable; the return was good and new locations had been identified.

20. On 19 June 1991, Mr Wong received a list from Mr Chu showing that the assets had a net value of $3,010,970 as at 31 May 1991. On 24 June 1991, Mr Wong wrote to Mr Chu enclosing a cheque of $50,000 "as a non-refundable deposit for the purchase of your 50% share of [Video Express]". Video Express was the name under which Watlink carried out its video rental business.

21. Mr Wong's evidence was that Showyield would not have entered into the Second Agreement but for the representations made by Mr Chu and in particular, those contained in (b) and (c) above. On or about 17 July 1991, Showyield, through Mr Wong, paid Mr Chu the sum of $30,000 which he had understood was to be for the delivery costs for the assets payable by Showyield under Clause 5 of the Terms of the Transfer.

Credibility

22. In a nutshell, the defence comes to this: as to the First Agreement no representations were made at all by Mr Chu. The Codata Agreement was adopted by both Mr Wong and Mr Chu. It was simply supplemented by the transfer of the share in Watlink to Mr Wong and there were no collateral terms. As to the Second Agreement, the written Terms of Transfer represented the entirety of the agreement and again, there were no collateral oral terms.

23. The matters thus turns on the credibility of the principal witnesses in this case.

(a) Mr Chu

24. As the following will illustrate, I found Mr Chu to be an unsatisfactory witness and his evidence wholly unreliable:

(i) share transfer documents

25. In relation to Mr Chu's share in Watlink which was sold to Mr Wong, he had caused to be prepared Bought and Sold Notes and an Instrument of Transfer which he signed on or about 22 April 1991. The consideration was stated to be $10,000 and the Notes and Instrument of Transfer were stamped for duty on that basis. In his written statement, Mr Chu sought to explain this away as an administrative error. He said that they were prepared by his secretary, a Miss Ma, whom he believed to have filled it in wrongly because she had followed the share priced stated in the Memorandum of Association of Watlink thinking that that was the "consideration". Mr Chu stated that when he signed the Bought and Sold Note and the Instrument of Transfer, he failed to notice the mistake about the consideration. He further stated that he was perfectly prepared to rectify the mistake and to pay for the outstanding stamp duty on the transfer of the share provided that Mr Wong paid him half of the duty payable.

26. In cross-examination, Mr Chu's evidence changed significantly. He said that although he did spot that the consideration was stated to be $10,000, he was told and persuaded by Miss Ma that he had to put $10,000 down as the consideration even though the real consideration was $650,000. He deferred to her on this apparently because of her previous experience working in an accounting firm and professed not to have appreciated the fiscal significance of understating the consideration at that time because he had not yet embarked on his PCLL course nor was he then a member of the Bar. He then attempted to retract these admissions and revert to what he had said in his statement.

27. I pause to observe that Mr Chu though legally qualified and a member of the Bar since 1994 never sought to rectify the error after becoming aware of the fiscal implications: he never once put to Mr Wong the need to correct the error. Moreover, the same "mistake" occurred in relation to the transfer of the share to Showyield in July 1991. I regret to say that I find Mr Chu's integrity and ethical standards to be open to serious question.

(ii) transfer of assets from Codata under the Codata Agreement

28. Mr Chu's evidence was that he took delivery of the assets in the sense that Watnet had legal title for them but he decided to leave the machines in situ, including those that were in storage. 5 out of the 30 machines that were rented out were at New Kwai Fong Gardens, i.e. under a Licence Agreement with the MTRC. Yet Mr Chu acknowledged that MTRC was not aware of the change of ownership from Codata to Watlink. Tsuen Tak Gardens is another example. The licensor was unaware of the sale by Codata. That could only have arisen because Mr Chu never bothered to inform the licensors of the change of ownership. It is quite remarkable that Mr Chu made no attempt to notify licensors of the change in ownership or to ascertain the status of the on-going licenses if Mr Chu had really "taken delivery" of the Codata assets. What is even more remarkable is the fact that as late as 13 May 1991, seven weeks after the Codata Agreement, Mr Yu of Codata was writing to MTRC indicating an intention to terminate the Licence Agreement regarding the machines at New Kwai Fong Gardens.

29. All this suggests that notwithstanding the Codata Agreement, everything continued as before. These matters raise serious doubts as to which (if any) of the Codata assets were transferred to and became vested in Watnet, much less Watlink at the end of March 1991 when delivery was to have taken place under the Codata Agreement.

(iii) transfer of assets from Watnet to Watlink

30. Mr Chu asserted that no written transfer of the assets of the video rental business from Watnet to Watlink was necessary due to the total control that he had over Watnet through Watcom. As far as he was concerned, all the assets had been notionally transferred from Watnet to Watlink when he intended the transfer to take place, that is when he told Mr Wong that the business would be run by Watlink instead of Watnet.

31. However, it was not the case that Mr Chu had or exercised total control over Watnet through Watcom. At the relevant time, the control was not exercised through Watcom although Watcom's one third holding of the issued share capital in Watnet enabled Mr Chu to exercise majority control over Watnet when coupled with his own holding of another third of the issued share capital.

32. Notwithstanding his evidence, it was certainly not the case that Watnet ceased to feature after this notional transfer. As late as June 1991, a godown warrant for storing 116 packages comprising 18 cartons of machine body, 54 packages of display spinners, 20 packages of base units and 24 cartons of tapes were issued to and stored in the name of Watnet. A draft letter to the management of Savanna Gardens relating to one of the machines written by solicitors retained by Watnet, referred to Watnet as the "owner" of the machine situated at Savanna Gardens. There are no board minutes evidencing the alleged transfer. This is significant because, as noted above, Mr Chu did not own Watnet. Although he controlled Watnet, there were minority interests and he could not deal with Watnet's assets as if he were the sole owner.

(iv) payment for Codata assets

33. There is a total absence of documentary evidence that $1.3 million was paid to Codata by Watnet pursuant to the Codata Agreement. Mr Chu's attempt to explain this away by saying that he simply forgot to make a photocopy of the cheque was far from satisfactory. The payment, if it was made, must surely be reflected in a bank statement. None was produced.

34. This fact is particularly disturbing when coupled with Mr Yu's apparent involvement as late as mid May 1991 and, at the very least, raises the possibility that Codata might not have been paid for all the machines. This "gap" in the evidence fills me with unease.

(v) encumbrances over Codata's assets

35. As at 1 June, the outstanding licence fees which Codata owed MTRC was in excess of $16,000. Several weeks later but prior to 9 August 1991, Mr Chu on behalf of Video Express entered into a Settlement Agreement with MTRC relating to the outstanding licence fees and refund to card holders. Mr Chu could not recollect whether the licence fee was $500 or $1,000 per month for each machine. Even if it was at the $1,000 rate he had to acknowledge (albeit reluctantly) that by so doing, he had discharged a debt at least part of which was properly payable by Codata. In fact, having regard to Mr Yu's letter of 13 May 1991 (see (ii) above), the entire amount could be said to be Codata's.

36. Tsuen Tak Gardens is another example. As at 31 August 1991 the outstanding contribution of Codata in respect of licence fees for the machines at Tsuen Tak Gardens was $11,000. This again appears to have been discharged by Mr Chu and part of the outstanding sum was unquestionably attributable to a period prior to the completion of the sale from Codata.

37. Although Mr Chu admitted in cross-examination that he was told of a liability relating to Tsuen Tak Gardens by Mr Yu in March, it would not appear that he did anything about notifying the licensor of the change in ownership nor ensuring that Mr Yu kept his part of the bargain. Instead, Mr Chu tried to insist that the debts were those of Video Express when the only reasonable inference from the evidence was that Mr Chu did discharge some debts that were properly those of Codata.

(vi) memory lapses

38. On many of the more important issues, his only response was that he could not recall. Thus, for example, he was unable to say when he first knew about the encumbrances over the machines; whether he told Mr Wong about them; whether copies of the correspondence with MTRC had been given to Mr Wong; whether he had discharged the $11,000 outstanding in respect of licence fees at Tsuen Tak Gardens; whether the draft letter of 20 July 1991 addressed to the management company at Savanna Gardens relating to the machine there was ever sent.

(vii) the draft settlement agreement

39. In settlement negotiations with Mr Wong, a draft proposal dated 21 January 1992 was prepared by Mr Chu. It contained a provision that Watnet would undertake to commence proceedings claiming damages of $2.3 million against Codata and Mr Yu for breach of the Codata Agreement. Plainly that proposal would not have been made if there was no basis at law for the claim. Mr Chu's explanation that he did not believe that Watnet had a case but that it was inserted for the purpose of persuading the Plaintiffs to pay the balance of $500,000 is not believable as the litigation was to be funded by Watnet, i.e. by Mr Chu and his co-shareholders, and not Watlink or Mr Wong.

(viii) discovery

40. Several documents were produced for the first time at the hearing, having been included in the Defendants' bundle of documents, e.g. the Codata release, the correspondence with MTRC and Video Express visiting cards. These should have been disclosed on 15 January 1993 when Mr Chu made an affirmation in support of the Defendants' list of documents. I find it disturbing that Mr Chu did not do so. If those documents only came to light after the list had been filed, he should have filed a supplemental list but he did not do so. No explanation has been given and I find it disturbing since Mr Chu is himself a member of the Bar.

(ix) the $30,000 payment

41. On or about 17 July 1991, Mr Chu received $30,000 from Showyield. Mr Wong's evidence was that the payment was to defray the delivery costs which pursuant to clause 5 of the Terms of Transfer were payable by the transferee. Mr Chu's explanation for the payment was that it was for rent and expenses of Watlink for the period between the First and Second Agreements and at the hearing, the Defendants' bundles included unaudited and undated accounts for Watlink for April to June 1991.

42. The reliability of these accounts is questionable. They are unaudited accounts. If the accounts are an accurate reflection of the business, plainly Codata's business could hardly be described as a going concern. Moreover, Mr Chu admitted he had never raised the subject of rent with Mr Wong. His explanation for the $30,000 payment is simply not credible.

(b) Mr Wong

43. Mr Wong's evidence was consistent with his statement and the documentary evidence before the Court. He did not prevaricate: rather, he was forthright and direct. I find him to be a reliable witness. I have no reservations regarding his truthfulness, which is not the case with Mr Chu.

Was Mr Chu acting as Watcom's agent?

44. Other than the fact that unbeknown to Mr Wong, the share in Watlink was then registered in Watcom's name, Watcom was effectively Mr Chu's alter ego. Mr Chu relies on the Terms of Transfer as evidencing the Second Agreement. But the Transfer itself was signed by Mr Chu and was not expressed to be entered into by him for and on behalf of Watcom. The payment terms provided for all relevant payments to be made payable to Mr Chu rather than Watcom. On 23 December 1991, Vincent T.K. Cheung, Yap & Co. wrote to the Plaintiffs' solicitors on behalf of their client Mr Chu rather than Watcom. They also asserted that the balance of the consideration was payable to their client Mr Chu. Similarly, on 14 October 1994. Tong Chan & Co. who were then acting for Mr Chu demanded payment on his behalf and not as agent for Watcom of the outstanding sum of $500,000.

45. In January 1992, after settlement negotiations between Mr Chu and the Plaintiffs, Mr Chu set out the terms and conditions upon which he was prepared to settle the dispute. It is nowhere suggested in the Settlement Agreement that Watcom was the contracting party with the 2nd Plaintiff relating to the sale of its share in Watlink. In the circumstances, I find that Mr Chu entered into the Second Agreement as contracting party and not as agent for Watcom as he alleges.

Events subsequent to the Second Agreement

46. After the Second Agreement was made, Showyield tried to take delivery of the assets from various sites but was told by a number of former clients of Codata that the assets, especially the machines and tapes, were held as security by them due to Codata's failure to pay rental for the sites and/or to refund the remaining value of stored value tickets sold by it. On 15 August 1991, Mr Chu was informed that Showyield was only able to take delivery of 18 new machines, 1 demonstration machine and related software system, 5 used machines and 1000 tapes. Showyield was prepared to allow an extension of another 21 days from the date of the letter for delivery of the outstanding assets.

47. On 17 September 1991, he sent Mr Wong a list by facsimile transmission showing, inter alia, particulars of locations of the machines. The list is not easy to decipher but appeared to show that a total of 17 machines could be collected from various sites. Details were given of the sites, the contact persons and the telephone numbers. There followed a list of machines already collected and there was an item described as "in dispute" totalling 3 machines. But it is difficult to tell from the list whether the list was exhaustive in the sense of covering all 50 machines plus the demonstration model. As appears from the evidence of Kwok King Yin, the driver engaged to collect the machines whose evidence I accept, he was unable to do so in many cases because of arrears of rental payment and outstanding refunds.

48. Relying on the truth of Mr Chu's representations, Showyield had entered into a lease of shop premises in Wanchai on or about 1 August, and incurred expenses relating thereto. Refurbishment costs of $580,120 were expended and the lease had to be terminated prematurely. A sum of $765,800 was expended by way of rent and compensation. Showyield also entered into Licence Agreements with the Kowloon Canton Railway Corporation ("KCRC") to carry on the video rental business. The Licence Agreements relating to the Hung Hom and Taipo shops were terminated by mutual consent in January 1993. In November 1992, the KCRC agreed to a change of user in the Licence Agreement relating to the Shatin shop. Showyield has paid KCRC $935,412 by way of licence fees and compensation for the premature termination of the Licence Agreements. It had also expended refurbishment costs in the sum of $742,640.

49. By 6 December 1991, Showyield was only able to obtain physical possession of 12 used machines, 18 new machines, 1 demonstration unit and 1,256 video tapes. It had not been able to obtain physical possession of 18 used machines, 3 software systems, 2 new machines and 3,342 tapes. Several of the 12 used machines were, however, defective and incapable of use. The defects could not be remedied without the necessary spare parts and the manufacturer, a UK company, had ceased business. As regards the 18 new machines, it is Showyield's case that these were also incapable of use. A Mr Tracton who had been introduced by Mr Chu to Showyield to work as a system analyst to design a more superior version of the software for the machines was unable to upgrade or modify the software to enable the machines to link up with each other so as to provide a comprehensive service. Although in cross-examination, Mr Chu attempted to differentiate between upgrading the system and linking up the machines, suggesting that he had nothing to do with the latter and distancing himself from any involvement in the contract with Mr Tracton, I do not accept his evidence because I have not found him a truthful or reliable witness. Moreover, Mr Wong was never challenged on this aspect of his evidence.

50. At the end of October 1991, Mr Tracton gave up the task he was assigned and another computer programmer and an experienced technician were engaged to work on the software and hardware of the machines. They too were unsuccessful and the project had to be abandoned after costs of $613,395 had been incurred as at 1 May 1992. Showyield expended $232,700 in procuring tapes, necessary computer and other related equipment to facilitate the operation of the video rental business.

51. On 6 December 1991, the Plaintiffs, through their solicitors, accepted Mr Chu's repudiation of the Second Agreement and sought the return of the $650,000 paid to Mr Chu.

Findings of fact

52. As regards the First Agreement, the representations reflected those contained in the Codata Agreement for the benefit of Watnet. Mr Chu was not thereby assuming any additional burden. He was merely (indirectly) making available to Mr Wong what he, through Watnet, was entitled to under the Codata Agreement.

53. It is disingenuous to suggest that Mr Wong had adopted the Codata Agreement when the "adoption" could not provide him with any comfort or benefit since the Codata Agreement was entered into by Watnet and not Watlink. Equally disingenuous is Mr Chu's explanation that if the Codata assets proved defective or that title to them could not be acquired, he (Mr Chu) would be suffering to the same extent as Mr Wong. It ignores the real difference which is that the guarantees under the Codata Agreement would enure for the benefit of Mr Chu should he choose to cause Watnet to sue on them but not for the benefit of Mr Wong.

54. Accordingly, I find that Mr Chu did make the representations to Mr Wong as alleged by Mr Wong; that Mr Wong was induced to enter into the First Agreement by those representations; and that the representations were untrue.

55. So far as the Second Agreement is concerned, I also accept Mr Wong's account. In cross-examination, Mr Chu acknowledged that Codata sold its assets to Watnet because its business was running at a loss. This fact was never conveyed to Mr Wong. Rather, the emphasis was put on Mr Yu's financial clout given his connection with Wo Kee Hong. The business was represented to be a simple business, operated by fully automated vending machines. The most important aspect was to find good sites for them. Although it was Mr Chu's case that Mr Wong was actively involved in running the business as from 23 March, the date of the Codata Agreement, and therefore knew all there was to know about the business between that day and the date of the Second Agreement, I have already found that that is not supported by the evidence. Rather, on the evidence, I find that the overall management and day to day running of the business was left to Mr Chu during the period between the First and Second Agreements.

56. Mr Chu has shown himself to be of less than exacting standards in his business dealings even where there are fiscal implications. Apart from his failure to correct what had been an underdeclaration for stamp duty purposes, it would also appear that he had failed to cause Watnet to file accounts which would attract profits tax. He has shown himself to be of little moral fibre; he would have had little compunction in palming off a worthless business even to a close friend.

57. I have no hesitation in accepting Mr Wong's evidence that he was induced into entering into the Second Agreement by the representations made by Mr Chu, including Mr Chu's valuation of the assets of over $3 million which was faxed to Mr Wong on 19 June 1991, several days before the deposit was paid.

58. The substance of the transaction was to enable Showyield, through the acquisition of the Watlink shares, to acquire the assets of the business for the purpose of carrying on business. Such assets were to be transferred free from all claims and liabilities, free from defect and capable of use. It is clear beyond a peradventure from the evidence that this was not the case. As noted above in relation to the draft settlement agreement, even Mr Chu recognised that the assets were worthless.

Remedies

(a) Rescission

59. Since I have found that Mr Wong and Showyield were induced to enter into the First and Second Agreements respectively by the representations of Mr Chu which have turned out to be untrue, they are entitled to rescind their respective Agreements if the status quo ante can be restored. Counsel for Mr Chu submitted that rescission is not an available remedy because the agreements related to the purchase of shares in Watlink whose business is no longer in existence.

60. Taking the matter in stages, the subject-matter of the First Agreement was one share in Watlink. There is obviously no bar to rescinding the First Agreement. So far as the Second Agreement is concerned, the subject-matter was not only the transfer of the remaining share in Watlink but it is plain from the Terms of Transfer that the assets of the business were being acquired by Showyield. Clause 5 of the Terms contemplated physical delivery of the assets. Such of the assets as have been taken into possession by the Plaintiffs are in storage and can be returned. In the circumstances, I do not accept the submission that the parties cannot be restored to the status quo ante.

61. Counsel for the Defendants also submitted that the Plaintiffs are not entitled to rescind because of delay in that the writ was not issued until 8 May 1992, some 13 months after the First Agreement and 9 months after the Second Agreement. But on the facts the Plaintiffs did not discover the falsity of the representations until some time after the Second Agreement: attempts to take possession of the assets continued until 25 October 1991. Some 6 weeks later, on 6 December 1991, they accepted the Defendants' repudiation and sought rescission. There was no delay of the kind that would bar the Plaintiffs from seeking rescission.

(b) Damages

62. The net effect of the First and Second Agreements was that the Plaintiffs were induced to buy the issued capital of Watlink, a company that has turned out to be worthless. The company did not have the assets it was represented to have, without which its underlying business could not be conducted.

63. Acting on the truth of the representations of Mr Chu, Showyield not only entered into the Second Agreement, it also incurred various expenses and suffered loss and damage. I am satisfied on the evidence that the loss sustained was as follows:

Order

I will make the following order:

As to costs, I make an order nisi in favour of the Plaintiffs.

Representation:

Mr Anthony Ismail, inst'd by M/s Fairbairn Catley Low & Kong, for the Plaintiffs

Mr Gordon W. Fisher, inst'd by M/s Rimmer & Co, for the Defendants