Yip Wai-hong v. Lee See-woo

CACV000017/1985

IN THE COURT OF APPEAL

BETWEEN

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Coram: Hon. Roberts, C.J., McMullin, V.-P. & Silke, J.A.

Date of hearing: 2nd & 3rd May, 1985.

Date of judgment: 30th May, 1985.

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JUDGMENT

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McMullin, V.-P. :

1. This is an appeal from the decision of a Deputy Judge who on the 10th January, 1985, dismissed the plaintiff's claim for $1,270,000 allegedly due to him on the footing of an agreement between himself and the defendant concerning the sale of shares and allowed the defendant's counterclaim to be reimbursed for the sum of $736,000 allegedly paid by him under that agreement.

2. The plaintiff, YIP Wai-hong, and the defendant, LEE See-woo, are businessman who became acquainted with each other while separately engaged in business in Nigeria.

3. In 1979 the plaintiff and three Nigerian citizens formed a private company known as alliance Rolling Mills (Nigeria) Limited ("Alliance"). This company was incorporated under the laws of that country in December of that year. The business of the company was to be concerned with the manufacture of steel and iron products and associated purposes and the Memorandum of Association notes that the authorised capital of the company is one million Nigerian Neira divided into a million shares of 1 Neira each. The Neira is the Nigerian unit of currency which, at about the time, of the events with which we are concerned, was, it would appear, equivalent to about 8 Hong Kong Dollars.

4. The defendant who, according to the plaintiff, had been associated with the launching of this project from the outset, formally joined the company in April 1981 and became, with the other four founder members, a member of the Board of Directors, the plaintiff being the first chairman of the Board.

5. It was agreed that the directors would be entitled to two hundred thousand shares each. There was some dispute upon the evidence as to how this entitlement was to be realised. One passage in the evidence of the plaintiff which might support the suggestion that the shares were to be allocated irrespective of payment therefor. At other places in his evidence he indicated that the directors would only receive their shares upon payment either in cash or by way of services of one kind or another to the company. The provision of land for the factory and of oil and electricity supplies for its operation was mentioned as being amongst the services which the three Nigerian directors supplied for this purposes plaintiff's evidence also encompassed as a third alternative the possibility that payment for the shares was to be cash.

6. In the end the judge found that shares were to be allocated to a director only on payment by him in cash and that the services supplied by the director gave him only what the judge called an "entree" to the company.

7. We know very little of the fortunes of this company's business after its incorporation. It would appear that the three Nigerian directors took little active part in the running of the business which was, to a considerable extent, left in the hands of their Chinese associates. It was the plaintiff's case that he was responsible for machinery and production while the defendant - who possesses a legal qualification - was to be the general business manager. This distribution of responsibility does not seem to be disputed.

8. A major part of the dispute in the case concerns the terms upon which these shares were to be, and in the end actually were, allotted to the several shareholders. It is regrettable that the trial judge was given very little assistance on this matter in the way of evidence deriving from the company's own records. Although it is said that the defendant was in charge of the books of the company, no register or other record of share allocation or share dealing was before the court of trial which was left, in large measure, to rely upon the conflicting oral testimony of the plaintiff and the defendant coupled with a record of the minutes of a meeting of the directors held on the 31st October, 1981 in Lagos upon which the judge laid emphasis and to which I will later refer.

9. In April 1981 the plaintiff decided to quit the business and he offered to transfer to the defendant all "his" shares in the company. No shares at that date had yet been allotted.

10. It is common ground that at that time the company was in receipt of a report, made at the instance of the defendant, by a firm of chartered accountants, and presumably supported by the documentary evidence supplied to them by the defendant, in which it was certified that the share capital had been paid up to the extent of 730,000 shares. This report was not itself placed before the trial court and it is conceded by the plaintiff that it did not disclose the sums contributed by each director to this share capital. The trial was conducted on the basis that, despite the pleadings, what the plaintiff was purporting to sell was his entitlement to shares.

11. On the 8th of June 1981 a written agreement in the following terms was signed by both parties:

12. It will be seen that these sums totalling HK$2,000,000.00 purport to be in payment not only for the plaintiff's share entitlement in Alliance but also for an entitlement which he claimed to have to 30,000 shares in another private company called Fasat Limited of which Mr. Southey, one of his Nigerian colleagues on the Board of Alliance, was a director.

13. By the close of the evidence Fasat remained a wholly shadowy entity. The plaintiff's claim to shares in that company - said to be held "in trust" for him by Mr. Southey because it was a company in which, by law, foreigners were not allowed to hold shares - was a claim so questionable in itself and so unsubstantiated by evidence that the trial judge, justifiably, disregarded it altogether. I put it in that way because, although this alleged Fasat entitlement had been pleaded throughout as part of the plaintiff's case, it is clear that neither the defendant nor the plaintiff attached any material significance to it, the defendant positively stating that he regarded it as valueless. It was clear throughout the conduct of the case that the dispute between the parties, insofar as it related to shares was concentrated wholly upon the question of the shares in Alliance.

14. Mr. Mok did indeed rely upon the judge's positive rejection of this part of the Plaintiff's claim in support of an argument based on the idea that what he termed a "package deal" was disclosed upon the agreement between the parties and that ifthis part of the plaintiff's claim failed - and it was not contended that it should succeed - then the appeal must fail altogether since the contract was an integral one and could not now be severed, these claims never having been severally pleaded.

15. In view of the manner in which the case was conducted upon both sides and the way in which it was argued before the trial judge, we do not think that this is an argument, whatever its technical merits, to which we should accede. The matter must be disposed of upon appeal, as it was by the trial judge, upon the evidential merits of the opposing accounts given of the deal by the parties both of whom were content to concentrate upon their rights as alleged in relation to the Alliance shares.

16. Upon signing the above agreement the plaintiff, on the same day, executed an instrument in accordance with article 31 of the company's articles in which he purported to transfer his shares in Alliance to the defendant.

17. A third document was made out upon the same day. This is a letter addressed to the Chairman of the Board notifying the latter of the plaintiff's resignation from the company. The evidence does not disclose whether this letter was actually dispatched to the Chairman or whether it was ever received by him and neither the plaintiff nor the defendant seems to have been very forthcoming about the intended transfer of shares when dealing with their co-directors. Both of them said that they did mention the transfer of shares but the agreed price and indeed the terms of the written agreement generally do not appear to have been drawn to the other directors' attention at any time.

18. The plaintiff left Nigeria in mid-June 1981. By the end of that month he had not received either of the promised postdated cheques from the defendant and, following a number of phone calls to the defendant in Nigeria, the two of them met by agreement in Hong Kong on the 18th August, 1981. The defendant gave the plaintiff two postdated cheques. One was for $230,000.00 postdated to the 30th August and another for $500,000 postdated to the 15th September.

19. The plaintiff said that he accepted these more or less under protest, the offer being, according to him, on a "take it or leave it" basis. These cheques were subsequently honoured though not at first presentation. The plaintiff had however not abandoned his claim to full payment under the terms of the written agreement; and in September 1981 he went once more to Nigeria to press the matter with the defendant. According to him he was not permitted to see any of the company's records for the purpose of ascertaining whether the share transfer had been carried out and, despite requests, the defendant declined to pay him anything more.

20. The defendant's account of this matter was that he had paid $730,000 in August in part fulfilment of his promise to pay the first one million dollars. He had withheld $270,000 which he subsequently paid, through the agency of his father in Taiwan, on behalf of and at the request of the plaintiff, to the wife of a man called CHAN Mou-chung who was owed money by the plaintiff. According to the defendant the plaintiff asked him to do this when they met in August. This was denied by the plaintiff.

21. The defendant went on to say that he had come to believe in August that the plaintiff might not have paid for his shares in the company and that he was thereafter unwilling to issue the second postdated cheque for $1,000,000.

22. According to the defendant there was a meeting of the Board in September at which the plaintiff did not attend. This meeting was presided over by Mr. Southey, one of the Nigerian directors, as Chairman. In the course of it shares were, for the first time, allotted in accordance with payment shown to have been made against them by the plaintiff and three of the original shareholders and to Mr. Anfuso who, on this testimony, had by then joined the Board.

23. At the September meeting proof was offered of payment sufficient to cover 730,000 shares. His own proved contribution was in respect of 340,000 of those shares. On this reckoning it was therefore evident that the plaintiff could not have paid for any shares or share entitlement to any extent whatsoever.

24. We come now to what was clearly regarded by the trial judge as the most important part of the evidence. This relates to a meeting of the Board which, as it is agreed, was held on the 31st October, 1981. The plaintiff attended at this meeting and he challenged the allocation of 340,000 shares to the defendant. This challenge is supported by the minutes of that meeting wherein it is noted that the plaintiff contended that the 340,000 shares were "jointly owned" by himself and Mr. Lee. The plaintiff says that the note is inaccurate but that it does reflect the fact of his challenge which, according to him, was to the effect that 200,000 of those shares should have been recorded as having been transferred to him before being allotted to the defendant.

25. The defendant agrees that his shareholding was challenged on that day but he said that the upshot was that he was asked to surrender his share certificate and the plaintiff was asked to produce proof of payment for the 200,000 shares to which he had laid claim. The defendant went on to say that at a subsequent meeting which was held for this purpose in November, the plaintiff, though notified, did not attend and the defendant's share certificate was returned to him. Thereafter he pressed the plaintiff to return the money he had paid for the shares together with the sum allegedly paid to Mr. Chan's wife in Taiwan on the plaintiff's behalf. The plaintiff, he says, merely asked to be given more time. This does not seem to have been put to the plaintiff, and substance of his case is obviously in conflict with it.

26. The plaintiff having returned to Hong Kong without attending the November meeting, caused a writ with a generally endorsed statement of claim to be filed on the 28th December.  In this he claimed 1,270,000 - the balance allegedly due from the promised $2,000,000 - plus interest at 17.25% per annum. Judgment by default of defence was obtained. This was eventually set aside by consent, but it remained a factor relevant to the credit of the defendant - as the judge found - since the defendant admitted that he knew in January 1982 that a writ had been served by post at his father's address. He maintained that he did not respond to it on the basis that he believed that he vas entitled to ignore it as improperly served.

27. Whatever may be said of that, once the default judgment had been set aside both parties settled down to the business of pleading, both of them by then having finally withdrawn from business in Nigeria. The defendant, it would appear, had disposed of whatever shares he held in the company to Mr. Anfuso and quit the region in the middle of 1982. He put in a defence and counterclaim to the claim as originally stated on the 21st December, 1982. In this he denied liability to pay the balance on the basis of total failure of consideration in that the plaintiff had failed to transfer the shares to him. He counterclaimed for the return of the $730,000.

28. The next 11 months were occupied by consequential pleadings, applications for further and better particulars and responses thereto and an interchange of letters between solicitors involving, amongst other matters, a request for a search in Lagos of the relevant company records. It may be noted that the result of this latter endeavour was the discovery of the fact that the original file kept for this company in the official registry had disappeared and a temporary file had been opened which contained only two documents neither of which was relevant to any of the issues in the case.

29. The pleadings reached their final form with an amended statement of claim filed on the 6th December, 1983 and the amended defence and counterclaim filed on the 7th February, 1984. In his counterclaim the defendant, for the first time, puts the plaintiff the strict proof of his beneficial ownership of the shares in Alliance and Fasat. He repeats the allegation that the plaintiff had failed to cause the companies to transfer the shares to him. Also, for the first time, the additional claim is made to reimbursement for $270,000 allegedly paid on behalf of the plaintiff to CHAN Mou-chung. The re-amended reply and defence of the plaintiff with which the pleadings close denies that there was any agreement to cause the companies to transfer the shares to the defendant.

30. Although in the earliest as well as the latest version of his statement of claim the plaintiff puts his case on the basis that the instrument to transfer on which he relies related to shares actually held by him in Alliance, the ultimate Reply elicited by the defendant's latest defence and counterclaim alleges for the first time that, although no shares had actually been issued to him at the time of the agreement, it was recognized between the parties that he was entitled to 200,000 in Alliance (the pleadings in relation to the Fasat shares may be disregarded).

31. However obliquely approached throughout this lengthy period of pleading, it seems clear from the manner in which the case was conducted at the trial that the parties were in contest over what they both acknowledged to be a question of entitlement to shares and that, although both the agreement and the form of transfer executed on the 8th June, 1981 are loosely and inaccurately worded, it is to such an entitlement that these documents refer. An additional inaccuracy in the latter document - the reference to payment of 200,000 Neira rather than payment of HK$2,000,000 for the Alliance shares - is likewise treated by them as peripheral to the real issue between them which comes down, to the proposition, on the plaintiff's side, that he has not been paid the full agreed pride for shares which, in his belief, were taken up by the defendant pursuant to the agreement even although at the date of that agreement there had not been any actual allotment of shares to any body. This is met on the defendant's side by the counter-proposition that no shares in Alliance were ever allocated to the plaintiff because he had never realised his entitlement by showing proof of payment therefor. Coupled with this is the contention that the 340,000 shares which were the subject of the agreement between himself and the plaintiff were paid for by him and did not include the 200,000 shares which were the subject of the agreement between himself and the plaintiff.

32. One must have considerable sympathy with the trial judge who was not only obliged to consider and construe the imprecise and somewhat misleading terms of the fundamental documents in the light of pleadings which, though prolonged and copious, never fully or adequately displayed the true nature of the dispute, but was also impeded in his endeavour to come to a just resolution of that dispute by some thoroughly unsatisfactory evidence from the only two witnesses in the case - the plaintiff and the defendant.

33. In the end, and understandably, he found it difficult to place much reliance upon the testimony of either party. There however may be some substance in Mr. Eddis's contention that the judge may not have held quite the same opinion about the credibility of both these witnesses. Having satisfied himself that the root of the matter was, whether there was proof of payment for the shares or the entitlement thereto by the plaintiff, he found his evidence too vague and inconsistent in certain respects to feel satisfied that the plaintiff had, as he put it, "paid in any measure for 200,000 shares in Alliance."

34. His misgivings, in relation to the defendant's evidence, would seem to be more directly concerned with the possibility that the latter was not being truthful.

35. Counsel for the plaintiff argued that ownership of the shares was not in issue on the pleadings and hence payment therefor was not something which he had been obliged to show. Although the plaintiff undoubtedly made one or two equivocal replies in cross-examination (see especially his answers to questions in the lower third of page 118 and the upper third of page 119 of the appeal bundle) the greater part of his testimony is clearly concerned with showing that he had in fact given value for the shares.

36. In view of this it was reasonable that the judge should concentrate upon the question of payment and ownership. Counsel for the plaintiff in the alternative sought to demonstrate that the judge was patently wrong to say that the plaintiff had given no proof other than his own "bald" assertion that he had indeed paid for his entitlement.

37. Imperfect as they may have been the pleadings of the plaintiff from the outset obliged him to show that for the payment agreed upon he was in possession of something which he had a right to transfer. It cannot therefore be right to say, as paragraph (a) of the first ground of appeal says, that "no issue had been joined as to entitlement by the plaintiff to possess shares being based on whether or not payment had been made for them partially, wholly or at all".

38. Mr. Eddis has taken issue with the judge's observation that the only proof of payment for the shares was the plaintiff's own assertion. He directed our attention to a number of passages in the evidence of the defendant which taken together would certainly seem to support the interpretation that the defendant was aware at the time the agreement was formed in June that the plaintiff had paid in sufficient money to cover the shares which were the subject matter of the agreement.

39. This was countered by Mr. Mok in referring us to other passages in the defendant's evidence in which the defendant says that while he conceded that the plaintiff had paid in sums to cover these shares, in the defendant's belief this had been done with moneys given to him by the other directors who in turn, under the system prevailing in relation to proof of payment, were then given their copies of pay-in-slips used by the plaintiff in making such payments to the bank.

40. In the end, and notwithstanding his reservations about the evidence of the defendant, the judge found in his favour and dismissed the plaintiff's claim because he found solid support for the defendant's contention in what he regarded as "the only useful document which has been produced in this case" viz: The minutes of the meeting of the Board on the 31st October, 1981. The relevant part of the minutes reads as follows:

"3.03         Share Allotment :

The 340,000 ordinary share alloted to Mr. S. W. Lee was contested and disputed by Mr. W. H. Yip as being jointly owned.

It was resolved to defer the allotment of the Share issue till another Board Meeting to enable Mr. Yip produce evidence of his contribution towards the buying of the share issued to Mr. Lee."

41. Concerning this the judge says - and it may fairly be considered the core of his decision - :-

"The minutes of the October meeting are consistent with two things. First, that the original agreement amongst the directors that each should have 200,000 shares was still in force. Secondly, that the directors had already been advised by the defendant of the number of shares transferred to him by the plaintiff so that 340,000 shares had been issued to the defendant, partly because the defendant had produced evidence of payment in his own right and partly because of the transfer by the plaintiff. Thus it would be wholly reasonable for the Board to have adopted the attitude which it did at the October meeting, namely to seek evidence from the plaintiff that he had paid for 200,000 shares so that these could be included in the defendant's allotment of 340,000 shares."

42. A difficulty arises here if the proof offered by the defendant of his entitlement to 200,000 out of the 340,000 shares to which he laid claim consisted solely of his production to the Board in September of the agreement with the plaintiff (itself not supported by any evidence of payment by the latter), it does seem strange that he should nevertheless have been given - as it seems he was given - a share certificate relating to all 340,000 shares; and stranger still that the certificate should have been restored to him in November when - the question of payment for the 200,000 shares having been raised at the October meeting - the plaintiff failed to supply that very proof the want of which was the cause of the certificate having been withdrawn from the defendant at the previous meeting.

43. This is a feature of the evidence which, unexplained as it is, might well suggest that everyone concerned was satisfied that the defendant was entitled to 340,000 shares of which only 140,000 - on the judges finding - were proved to have been paid for by the defendant himself.

44. The defendant said that eventually he had disposed of all his shares to Mr. Anfuso, but the evidence does not disclose the number so disposed of nor the price paid for them. Since we are here dealing with the basic question which confronted the court of trial: did the defendant get what he had agreed to pay for (viz: an entitlement to 200,000 shares), the possibility certainly suggests itself that he may well have disposed in the end of the 340,000 shares which he claimed to be his with the consent, tacit or explicit, of his fellow directors and which, as the judge found, included the shares which were the subject of the agreement with the plaintiff.

45. No point was, however, taken on this aspect of the evidence on the hearing of the appeal and whatever misgiving might be entertained upon that score we are satisfied that the trial judge was entitled, having discounted the defendant's evidence that he himself had paid for the 340,000 shares, to base his decision upon the failure of the plaintiff to advance proof of payment by him for the disputed 200,000 although afforded an opportunity to do so.

46. This covers the argument on the question of payment which is broadly speaking the matter covered by grounds 2, 3, 7, 8 and 9 of the grounds of appeal.

47. Grounds 4, 5 and 6 were concerned with the contention that the defendant's case necessarily imputed fraud or misrepresentation to the plaintiff and that, since such had not been specifically pleaded, the appeal must, all other considerations apart, be allowed. In this regard Mr. Eddis referred us to the relevant portions of Orders 18 and 20 of the Rules of the Supreme Court and passages from the text of the White Book dealing with this rule.

48. Mr. Mok's answer to this contention is sufficient to dispose of it. In view of the nature of the defence pleaded the plaintiff was obliged to prove a right to ownership of the shares which he purported to transfer. The defendant's denial that he had received the benefit of that entitlement did no more than oblige the plaintiff to show proof of that right. The defendant was not to be compelled to plead fraud or misrepresentation, solely because fraud or misrepresentation was a possible explanation of the plaintiff's alleged failure to transfer his entitlement. That was not something which he was concerned to prove and the pleading as it stood did not necessarily imply anything of the kind.

49. Nothing was addressed to us concerning the defendant's claim to reimbursement of $270,000 allegedly paid by him on the plaintiff's behalf through the mediacy of his father to the wife of CHAN Mou-chung. The judge, found against the defendant on the evidence and nothing more need be said of that claim.

50. For these reasons we are satisfied that the appeal must be dismissed. The judgment given in favour of the defendant on his counterclaim in the sum of $730,000 is confirmed.

Representation:

Mr. Francis Eddis (Michael, Cheuk & Co.) for Plaintiff/ Appellant.

Mr. Y. C. Mok (Sit, Fung & Kwong) for Defendant/Respondent.