Yip Kam Wah v. Messrs. Chan Chee Cheng & Co

DCCJ 6024/2002

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 6024 OF 2002

__________

BETWEEN

__________

Coram : Her Honour Judge H.C. Wong in Court

Dates of Hearing : 21^st - 23^rd September 2004

Date of Handing Down Judgment :  8^th November 2004

_______________

JUDGMENT

_______________

Introduction

1.The Plaintiff claims against the Defendant as stakeholder for the sum of $150,000 paid to and received by the Defendant on 28^th and 31^st July 1997 as deposit (‘the said sum’) for the subscription of shares in a company by the name of Pacific Union (HK) Ltd. (‘the said company’).

2.It is the Plaintiff’s claim that the Defendant wrongly released the said sum to one Miss Liu Che Lai (“Miss Liu”) without the consent and knowledge of the Plaintiff.

3.The Defendant is a firm of certified public accountants carrying on a partnership business at 3^rd floor, Shiu Lam Building, 23 Luard Road, Wanchai, Hong Kong.  Mr. Chan Leung On (“Mr. Chan”) was at the material time a partner of the Defendant.

4.The Defence claims that the money deposited by the Plaintiff was released to the said Miss Liu with the full knowledge and consent of the Plaintiff.

Background

5.It is not disputed that the Plaintiff was invited by Miss Liu to invest in a business providing janitorial and maintenance services to the People’s Liberation Army garrison due to be stationed in Hong Kong on and after 1 July 1997 (‘the said business”).  Since June 1997, the Defendant had been advising Miss Liu, a Mr. Wong Cheung and a Mr. Hung on the incorporation of a limited company to operate the said business.  In late July 1997, the Defendant, on the instruction of Miss Liu, Mr. Wong and Mr. Hung purchased a shelf company named Pacific Union (HK) Limited for the purpose of the incorporation of the said business (“the said company”).

6.The Plaintiff, Mr. Yip, and his colleague and friend Mr. Shek Wai Huen (“Mr. Shek”) were told by Miss Liu to attend the Defendant’s office on the afternoon of 28 July 1997 and to pay to the Defendant a deposit for the subscription of one share each of the said company.  At the office of the Defendant, both Mr. Yip and Mr. Shek handed their respective $50,000 cashier orders payable to the Defendant to Mr. Chan.  On 31 July 1997, Mr. Yip paid a further $100,000 by a second cashier order to the Defendant.

7.It was Mr. Yip’s belief that the Defendant would keep the money deposited with him pending the completion of the procedure for the incorporation of the said company.

8.Upon enquiries made at the Defendant’s office, he later discovered that no shares have been allotted and the money he deposited with the Defendant had been released to Miss Liu.  He was further told that Miss Liu had taken the money to mainland China and it was confiscated there.  Mr. Yip reported the matter to the Police Department and the ICAC.  After the ICAC investigation completed, he commenced these proceeding against the Defendant.

The Plaintiff’s case

9.Mr. Yip claimed that during the afternoon meeting at the Defendant’s office on 28 July 1997, his consent to release the deposit money to Miss Liu was never sought, neither was he told of the release on that day.  He claimed that the meeting lasted only 30-40 minutes.  Mr. Yip’s evidence on the said meeting was corroborated by Mr. Shek’s evidence.

10.Furthermore, he claimed that on the 31 October 1997, he took the second cashier order to the Defendant’s office, he did not see Mr. Chan or his assistant Miss Tsang or Miss Liu there.  A female staff at the Defendant’s office took the cashier order and gave him a receipt before he left.

11.Mr. Yip and Mr. Shek admitted that they knew Miss Liu from their previous employment with the British Army.  Miss Liu was a laundry contractor at the army base where they both worked before 30 June 1997.  Miss Liu had approached them about investing in her soon-to-be set up business and offered both of them a job as a manager or supervisor in the business of supplying maintenance services of the PLA base in Hong Kong at a monthly salary of $20,000.  Mr. Yip and Mr. Shek were impressed by Miss Liu’s business proposal and her connection to the PLA.

12.It was the evidence of both Mr. Yip and Mr. Shek that they had accepted Mr. Chan’s explanations on the procedure of the incorporation of Pacific Union (HK) Limited and the share allotment proposed.  Mr. Shek recalled Mr. Chan told them that their investment in the said company was a sound investment.

The Defendant’s case

13.Mr. Chan claimed Miss Liu was introduced to him by his friend Mr. Wong Cheung in June 1997.  They sought his advice on the incorporation of a limited company in Hong Kong to operate the business of supplying janitorial and maintenance services to the PLA garrison in Hong Kong after 1 July 1997.

14.He was then introduced to a Mr. Hung from China who, according to Mr. Wong and Miss Liu, would hold 51% of the total issued shares.  On 26 July 1997, Mr. Hung and his wife came to the Defendant’s office in Wanchai and selected a shelf company named Pacific Union (HK) Limited.  He was instructed by Miss Liu to purchase the said shelf company but not to proceed with the acquisition and transfer of the shares until other investors were identified.

15.On the afternoon of 28 July 1997, Mr. Wong, Miss Liu, Mr. Yip, Mr. Shek and a Miss Lee Yuk Ping came to the Defendant’s office.  The meeting was on the purchase of shares in the said company.  Mr. Yip and Mr. Shek gave Mr. Chan their cashier orders while Miss Lee took the Defendant’s Hang Seng bank account number and executed a deposit of $300,000 into the Defendant’s bank account at a branch of the Hang Seng Bank close by.  These payments were intended as subscriptions of shares in the said company.  He was told by Mr. Yip that his intended investment was $150,000 and that he would deliver the balance of $100,000 a few days later.

16.Mr. Chan claimed that at the 28 July 1997 meeting, Miss Liu requested the investors to release the $400,000 collected as an advance to cover setting up expenses of the business such as the renting of business premises.  He claimed that the investors agreed to Miss Liu’s request.  He further claimed the investors’ had asked for their advancements to Miss Liu to be paid through the Defendant’s office account in order that there would be a record of the advancement.  He claimed that receipts of the payments by the investors were issued by his office and given to them (p. 34 of bundle) followed by a cash cheque of $400,000 issued by the Defendant to Miss Liu.  This was done in the presence of Mr. Yip, Mr. Shek and Miss Lee.  A receipt of the $400,000 was issued and signed by Miss Liu also in the presence of the investors (p.38 of bundle).  He claimed he had explained to the investors that he was merely acting as a middle-man in the transaction and they had full knowledge the money was advanced to Miss Liu.

17.Mr. Chan further claimed that at the same meeting, Miss Liu requested the issue of two further receipts backdated to 23 July 1997 on the deposit of $400,000 paid by the investors and the advance to Miss Liu and Mr. Wong of the same $400,000.  He agreed and did so in the presence and full knowledge of the investors.  He claimed the meeting lasted 3-4 hours and the investors left with Miss Liu and Mr. Wong at the end of the meeting.

18.On 31 July 1997, he claimed he met Mr. Yip and Miss Liu together at his office and Mr. Yip gave him a cashier order of $100,000 being the balance of deposit of his investment in the said company.  He issued a receipt to Mr. Yip on the Defendant’s behalf (p.43) and at the same time issued a cheque in favour of Miss Liu in the sum of $98,500.  He had deducted $1,500 handling charge by his firm from the $100,000.  Again, the cheque of $98,500 was handed over to Miss Liu in the presence and knowledge of Mr. Yip.  He claimed Mr. Yip and Miss Liu left his office together on that occasion.

19.Mr. Chan further claimed that he was told by Mr. Wong in August 1997 that the money advanced to Miss Liu had been confiscated by the Chinese customs in mainland China.  Thereafter, he received no further instructions concerning the said company, therefore no shares were issued and no assets transferred to it.

20.Produced under Section 47 and 49 of the Evidence Ordinance and Order 8 of the Rules of District Court in the bundle of documents are 4 further documents relevant to the Defence’s case.  They are :

a)    P.44– a letter from the Defendant dated 12 August 1997 certifying that it received instructions from shareholders in the following share-holdings :

(i)	Mr. Hung Cheung Ting and Miss Liu Lai Yue	51
(ii)	Miss Liu Chi Lai	17
(iii)	Mr. Wong Cheung	17
(iv)	5 minor shareholders of 1 share each	5
		-----
		90

b)    P.45 – a faxed minutes of meeting of shareholders on 21 August 1997 in Chinese from Mr. Wong to Mr. Chan of the Defendant.

c)    P. 46 – an invoice to Mr. Wong Cheung for the purchase of the shelf company Pacific Union (HK) Limited at $5,000 dated 10 December 1997.

d)    P. 47-54 – Mr. Chan’s statement to the ICAC on 31 July 1998.

Findings

21.The issue in the present case is whether the Defendant was authorised by Mr. Yip to release to Miss Liu the money deposited with the Defendant for the subscription of shares in the said company.

22.Mr. Lam, counsel for the Defence, was quite right to observe that the Plaintiff’s evidence and Mr. Chan’s evidence were diametrically opposite to each other.  The question before me is :- Were the advancements made with the consent and full knowledge of Mr. Yip in his presence on those two occasions?

23.I find the Plaintiff Mr. Yip and his former colleague Mr. Shek to be honest witnesses, they were simple and unsophisticated.  As locally employed staff, they had just been made redundant on the departure of the British Army garrison.  Both received a considerable sum of redundancy payment, and both were looking for employment.  Consequently, they were attracted to the business proposal of Miss Liu.

24.Prior to 28 July 1997, the Plaintiff was told to prepare a cashier order for the investment into the business they were told would be incorporated by the Defendants, a certified public accountant firm.  That was why, Mr. Yip brought with him a cashier order from his bank payable to the Defendant.  He was cautious not wishing to pay the money in one go, he paid an initial deposit of $50,000 at the 28 July 1997 meeting with the Defendant’s Mr. Chan.

25.The meeting on 28 July 1997 between Mr. Chan and the other investors at the Defendant’s office were clearly sufficiently impressive for Mr. Yip decided to pay the balance of $100,000 to the Defendant four days later on 31 July 1997.  On both occasions, he was issued a receipt by the Defendant which specified the purpose of the payment as deposit for the 1% shareholdings in the said company (PD39 and 43).

26.Mr. Yip insisted he was never asked to consent to or sign any document indicating his agreement to release the deposit of part payment of his share to Miss Liu.  Mr. Chan claimed the consent to release the payment was made at the meeting on 28 July 1997.

27.It is the evidence of both Mr. Yip and Mr. Shek that at the 28 July 1997 meeting, they were brought into the conference room where Miss Liu and Mr. Chan were; there were also present in the room one or two other ladies.  Mr. Chan introduced himself and informed them that the business would be incorporated and that at the time Pacific Union (HK) Ltd. was a shelf company.  They were told their investments would be by way of subscription of shares in the said company.  They were then asked to give Mr. Chan their addresses, phone numbers, copies of their identity cards were taken for further documentation before the cashier orders were collected.  After they were given receipts, they left the Defendant’s office.

28.After careful consideration of Mr. Yip and Mr. Shek’s evidence in Court, I find their evidence were straightforward and direct.  Mr. Shek, in particular, was an independent witness, he frankly admitted he did not wish to pursue the matter further in spite of the invitation of Mr. Yip.  His evidence on the 28 July 1997 meeting was straightforward and clear.  He was positive that Mr. Yip and he left the Defendant’s office after the 45 minutes meeting, that Miss Liu did not make a request for the release of the money at the meeting and he had never acknowledged or consented to it.  I am satisfied on a balance of probability that that was what happened at the 28 July 1997 meeting.

29.I find Mr. Chan’s evidence on Mr. Yip’s, Mr. Shek’s and Miss Lee’s knowledge and consent of the release of the $400,000 to Miss Liu to be incredible.  As a professional accountant, he had a duty to warn the ‘investors’ that the money they deposited with him would be the capital of the said company and that such capital would be reflected in the accounts of the company incorporated.  If Miss Liu requested an advancement of the capital, as a prudent professional accountant, he should have prepared proper documents of consent to the advancement recording the consent of the investors.  Further, it defies common sense for Miss Liu to borrow the money in order to pay for the rental and deposit for the tenancy of a business office before the incorporation of the said company.  Any tenancy of the office under normal circumstances would be in the name of the said company to be executed after the incorporation.

30.Furthermore, Mr. Chan, as a professional accountant, should know better than to issue two sets of receipts for the same payment and backdating the second set.  His assistant Miss Tsang’s evidence on the issuance of the second set of receipts was very different from the evidence of Mr. Chan.  She recalled that the second set of receipts were requested by Miss Liu after the meeting finished outside the conference room on 28 July 1997.  It is clearly contrary to Mr. Chan’s claim that they were issued at the request of Miss Liu during the meeting inside the conference room.  Her evidence further removed the possibility of knowledge and consent from Mr. Yip and Mr. Shek inside the conference room, or that the second set of receipts were signed by Miss Liu in the presence of Mr. Yip and Mr. Shek.

31.Mr. Chan’s evidence in Court on Mr. Yip’s handing over of the second cashier order on 31 July 1997 is contrary to the documentary evidence of the receipt for $100,000 to Mr. Yip.  Mr. Chan admitted in Court under cross examination that this receipt was signed by one of his partners; in his witness statement, he claimed he met Mr. Yip on 31 July 1997 and had issued the receipt to Mr. Yip personally.  Mr. Chan admitted in Court that his partner had signed the said receipt in his absence when confronted with the signature on the said receipt.  If that was the case, Mr. Chan could not have met Mr. Yip and Miss Liu together in his office on 31 July 1997 and it is unlikely that he had issued the $98,500 cheque to Miss Liu in Mr. Yip’s presence as he claimed.  It follows that Mr. Yip could not have consented to Miss Liu’s request to release this sum of $100,00 to her or witnessed the release on 31 July 1997 by the Defendant.

32.For the aforesaid reasons, I find the evidence of Mr. Chan completely self-serving and devoid of merits.  The contradictions in his evidence cast serious doubts on the rest of his evidence and his credibility in general.  I am bound therefore to reject his evidence.  I accept the evidence of Mr. Yip and Mr. Shek that the release of the $400,000 collected from Mr. Yip, Mr. Shek and Miss Lee were done in the absence of Mr. Yip and Mr. Shek.  That their consent was never sought, Mr. Yip had no knowledge of the release of his deposit to Miss Liu until a much later date.

33.The 12 August 1997 letter written by the Defendant and the minutes of meeting of shareholders sent to Mr. Chan by Mr. Wong supported the undisputed evidence that the Defendant had instructions and was authorised to incorporate the said company and the Plaintiff would be allotted 1 share.  This reinforced the fact that the Plaintiff’s $150,000 was paid to the Defendant for the subscription of one share to be allotted to him.  Further, it is reasonable for the Plaintiff to believe that he had entrusted the Defendant with the money which would form the asset of the company after incorporation. Before the completion of documentations in the incorporation of the said company, it is reasonable for the Plaintiff to believe the money would be kept in the custody of the Defendant and it would not be released to anyone without the consent of the Plaintiff.

34.According to Chapter 6 of Pennington’s Company Law:

“Shares are simply bundles of contractual and statutory rights which the shareholder has against the company.  He acquires these rights by paying or agreeing to pay for the shares he takes or by contributing or agreeing to contribute assets which the company agrees shall be treated as having a certain value.”

Consequently, before the incorporation of the said company, the Defendant received the contribution for subscription pending incorporation as a stakeholder pending execution of a contract.

35.Further, the Defendant was in the position of a stakeholder as defined in Chitty on Contracts vol. 1, 29^th ed. Para. 29-197 :

“29-197    Stakeholders: deposit till a claim is ascertained.  A stakeholder is an agent who is entitled, during the continuance of his authority from a party to some arrangement, to make payment, in accordance with that authority, of the money lodged with him by that party.  Thus, if A deposits money in the hands of a stakeholder, until the extent of a claim which B has upon A can be ascertained, the stakeholder cannot, before the claim is ascertained, legally pay the amount to B upon his indemnity without the consent of A; if the stakeholder does so, A may maintain an action for money had and received against him without reference to B’s claim.  Where a stake was deposited with the defendant to abide the result of a sculling race, but there was no proper start and no race as contemplated, it was held that the claimant could recover his stake.”

36.The Defendant’s role pending the incorporation of the said company and allotment of shares was that of a stakeholder.  In reaching this conclusion I have regard of the judgment of Pennycuick V.C. in the case of Potters v. Loppert [1973] 1 Ch. 399 at page 410-414 where he referred to the dictum of Sacks L.J. in Burt v. Claude Cousins & Co. Ltd. [1971] 2 Q.B. 426, 449 :-

“For the purpose of coming to a conclusion on the status or capacity in which the deposit is received, it has not seemed to me necessary on this occasion to consider the precise nature of the claim the purchaser has against the estate agent if he demands his deposit back in the pre-contract period though I am still disposed to the views that were expressed in Goding v. Frazer [1967] 1 W.L.R. 286.  It matters not whether that claim sounds in the old common count for money had and received (and is so whether in contract or quasi-contract), or whether it lies against the estate agent in some other form in which there would be pleaded a contract or a trust.  A claim manifestly does lie against the estate agent whatever the answer to the question as to status or capacity.  It is apt to note that in Bullen & Leake, 3^rd ed. (1868), at p. 44, in reference to money had and received, the following passage is to be found : ‘This is the most comprehensive of all the common counts.  It is applicable wherever the defendant has received money which in justice and equity belongs to the plaintiff, under circumstances which render the receipt of it a receipt by the defendant to the use of the plaintiff.’  Suffice it accordingly to say that whatever the status or capacity, in my judgment a claim would correctly lie for money had and received.  That conclusion does not militate against the co-existence of an equitable remedy (cf. Quistclose Investments Ltd. V. Rolls Razor Ltd. (In Liquidation) [1968] Ch. 540, 544, 568 and 569) – if, as may well be the case, the deposit money is impressed with a trust.”

and further down at p. 411F-412C in the case of Potters :

“In Barrington v. Lee [1972] 1 Q.B. 326 the Court of Appeal had once again to consider the position of pre-contract deposits, this time paid to two estate agents expressly as stakeholders, one of whom became insolvent.  Here, again, no contract was concluded, and the issue lay between the intending purchaser and the intending vendor.  In this case Lord Denning M.R. reaffirmed his minority view in Burt v. Claude Cousins & Co. Ltd. [1971] 2 Q.B. 426 and Edmund Davies and Stephenson L.JJ., with obvious reluctance, reaffirmed the majority view in that case, but distinguished it on its facts.

The judgments are important in the present connection for their insistence that the liability of a stakeholder receiving a pre-contract deposit lies in contract or quasi-contract.

Lord Denning M.R. said [1972] 1 Q.B. 326, 337:

“To my mind, the claim to the return of the deposit lies in contract and nothing else.  When the purchaser pays a deposit to an estate agent, in the course of negotiations before any contract is concluded, there is clearly an implied promise by someone to repay it if the negotiations break down.  But who is that someone?  Who makes the promise to repay it?  The estate agent or the vendor?  If the estate agent receives the deposit ‘as stakeholder,’ then it is the estate agent who makes the promise to repay : and he alone can be sued for it.”

Edmund Davies L.J. said, at p. 343:

“In such cases as the present, the basis of liability of either estate agent or prospective vendor to return a deposit paid can, as I see it, only be on the basis of money had and received to the use of the depositor.”

at p. 413 D-E, Pennycuick V.C. further held that :

“I turn now to the law in relation to pre-contract deposits.  When such a deposit is paid to someone, expressed to be a stakeholder, the duties of the latter are as I have already stated.  Unless and until a contract is concluded, the prospective purchaser can require the return of the deposit at any time, and upon conclusion of the contract the deposit assumes the position of an ordinary contract deposit.”

37.In the present case, I am satisfied that the position of the Defendant is that of a stakeholder pending execution and completion of the incorporation of the said company.  The money was paid to the Defendant and held by the Defendant as deposit for the purchase of a share in the said company, when the incorporation of the said company for the said business failed to materialise, the Defendant has a duty to return the money to the depositor i.e. the Plaintiff.  It is akin to the position of an estate agent who held a deposit for the intended purchase of a property, if the sale did not take place, the agent should return the deposit to the intended purchaser as held by Sir John Pennyciuck V.C. in Porters v. Loppert.

Conclusion

38.For the aforesaid reasons, I find the Defendant liable to the Plaintiff for the return of the sum of HK$150,000.

39.Interest on the said judgment sum of $150,000 from the date of writ to the date of judgment at half judgment rate, and thereafter at judgment rate until full payment.

40.Costs nisi – costs to follow the event.  Costs to the Plaintiff to be taxed if not agreed.  The Plaintiff’s own costs to be taxed in accordance with Legal Aid Regulations.