Smart Rich Holdings Ltd v. Rudolph Services Ltd
Read the full judgment text of DCCJ 4480/2004 on BabelCite. This District Court judgment.
1. The Defendant was the former owner of car parking spaces nos.3-8 at Ground Floor, Golden Flower Industrial Building, nos.30/38 Lam Tin Street, Kwai Chung (the “ Property ”). In 2003, the Defendant sold the Property to the Plaintiff for HK$800,000.00 (the “ Price ”) as evidenced by a memorandum of sale (the “ Memorandum ”) and an assignment (the “ Assignment ”) signed by Mr Leung Wai Yu Rudolph (“ Leung ”) for the Defendant and Mr Chan Siu Wai Blackmore (“ Chan ”) for the Plaintiff on/about 14
Cited by 4 cases
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DCCJ4480/2004 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION CIVIL ACTION NO. 4480 OF 2004 ____________ BETWEEN
____________ Before: Her Honour District Judge Marlene Ng in Court Dates of Hearing: 8th, 9th, 29th, 30th and 31st August, 2005 Date of Handing Down Judgment: 6th January, 2006 _______________ J U D G M E N T _______________ Introduction 1.The Defendant was the former owner of car parking spaces nos.3-8 at Ground Floor, Golden Flower Industrial Building, nos.30/38 Lam Tin Street, Kwai Chung (the “Property”). In 2003, the Defendant sold the Property to the Plaintiff for HK$800,000.00 (the “Price”) as evidenced by a memorandum of sale (the “Memorandum”) and an assignment (the “Assignment”) signed by Mr Leung Wai Yu Rudolph (“Leung”) for the Defendant and Mr Chan Siu Wai Blackmore (“Chan”) for the Plaintiff on/about 14th and 20th October 2003 respectively. 2.The Memorandum provided inter alia as follows :
3.The Assignment provided inter alia as follows :
4.The Plaintiff paid the Paid Sum to the Defendant upon the completion of the sale and purchase of the Property on 20th October 2003 (the “Completion”). 5.By a tenancy agreement dated 20th October 2003 (the “Tenancy Agreement”), the Plaintiff as landlord let the Property to the Defendant as tenant for a term of 2 years from 1st November 2003 to 31st October 2005 at a monthly rental of HK$8,000.00 (exclusive of government rent, rates and management fees) payable in advance on the 1st day of each and every calendar month (the “Tenancy”). The Defendant failed to pay rent/mesne profits from 1st July 2004 to 19th January 2005. The Plaintiff had since recovered possession of the Property. It was agreed at the trial the Defendant owed the Plaintiff HK$53,067.00 for outstanding rent/mesne profits. Defendant’s counterclaim 6.The Defendant claimed the Plaintiff failed to pay the Disputed Sum to the Defendant in breach of the Memorandum and Assignment. 7.The Plaintiff denied such assertion, saying that the Disputed Sum had been paid by set-off pursuant to an agreement made between Chan and Leung in/about late August to mid-September 2003 (the “Swap Agreement”) as follows :
Pursuant to the Swap Agreement, the Defendant and the Plaintiff (Chan’s nominee) executed the Memorandum. The Disputed Sum was duly settled by set-off. Upon Completion, the Plaintiff paid the Paid Sum and the parties executed the Assignment and the Tenancy Agreement. Subsequently Chan executed a blank bought and sold note (the “B/S Note”) and an instrument of transfer (the “Transfer Instrument”) in respect of the Shares (collectively called the “Transfer Documents”). The Shares were eventually transferred to a Mr Wang Wai Leung (“Wang”) on 31st October 2003. 8.The central issue is whether the Disputed Sum remains outstanding. The sub-issues are as follows : (a) whether Chan and Leung made the Swap Agreement; (b) whether the Disputed Sum was set-off against the Price; (c) whether Chan executed the Transfer Documents in blank at Leung’s request; and (d) whether the Shares were transferred to Leung’s nominee. The present case turns on findings of fact and on the credibility of the witnesses. Overview of the witnesses 9.Chan and Leung gave evidence. They adopted their witness statements as well as their supplemental witness statements served on the 2nd day of the trial as part of their evidence-in-chief. The Defendant subpoenaed Ms Lai Fung Chun Winkey (“Lai”), the responsible person of Wellchi Consultants Limited (“Wellchi”, Smart Profit’s company secretary since its incorporation) to give evidence. 10.I agree with Mr Chan, counsel for the Plaintiff, that Chan’s evidence was consistent and coherent. Chan gave evidence in a straightforward manner and his version of the events was supported by contemporaneous documents. Any inconsistencies in his evidence were minor and did not affect his overall veracity. I find Chan credible and honest. The same cannot be said of Leung whom I find to be unsteady and untruthful. His version of events was inherently implausible in many respects. His evidence was riddled with inconsistencies and punctuated with significant pauses during cross-examination, which pauses I agree with Mr Chan were not indicative of efforts at recollection but were attempts to formulate responses thought to be helpful to the Defendant’s case. Leung’s evidence gave a distinct impression he was making up the Defendant’s case as he went along. Dramatis personae 11.To set the scene for understanding the dealings amongst the various players, it was necessary to have an appreciation of their personal and business inter-relationships. 12.The Plaintiff was Chan’s property holding company and Chan was its director, shareholder and beneficial owner. He had 19 years of experience as a director and/or shareholder. 13.Smart Profit carried on a silverware business and had a factory in the PRC (the “Smart Profit Factory”). In/about early 2003 when Chan knew Mr Leung Tat Ming Eddy (“Eddy Leung”) for about a month, Chan invested in Smart Profit and became its director/shareholder until October 2003. Smart Profit had 90,000 paid up ordinary shares of HK$1.00 each. Each of its directors/shareholders (ie Eddy Leung, Chan and Mr Lau Ka Bun) held 30,000 shares. According to Smart Profit’s annual return dated 20th January 2004, Chan’s Shares were transferred to Wang on 31st October 2003 and Wang replaced Chan as director until he resigned on 24th February 2005. 14.Leung was a director and 99% shareholder of the Defendant. He effectively ran the company. According to the Defendant’s annual return dated 20th April 2005, he became the sole director/shareholder. Leung established the Defendant more than 10 years ago to provide consultancy services to his other company from which the Defendant would receive remuneration and service charges. 15.It is plain from the evidence that the Plaintiff and the Defendant were respectively Chan’s and Leung’s corporate vehicles and that they were the beneficial owners of these companies with implicit authority to enter into transactions on behalf of such companies. Indeed, Chan and Leung in their evidence referred to the individuals and companies (ie Chan and the Plaintiff as well as Leung and the Defendant) interchangeably. I accept this was how they approached the dealings in 2003 and 2004. 16.Leung and Chan became friends during negotiations over the sale and purchase of the Property in March 2003 which fell through (see below). Mr Lam Yau Lung (“Lam”), Leung’s close friend whom Chan also knew, introduced Chan to Eddy Leung in February/March 2003. Chan had business contact with Eddy Leung after they started to do business together in Smart Profit. He had dinner from time to time with Eddy Leung and Leung, but he did not know Eddy Leung well. 17.Leung denied that Eddy Leung was his good friend or that he was involved in Smart Profit, but admitted he visited the Smart Profit Factory on 2nd September 2003 when he advised on the affairs of the badly managed factory at a meeting with Chan and Eddy Leung. Leung said he understood from such visit that Smart Profit was engaged in silverware business. I find Leung’s evidence unreliable. He could hardly have given management advice during such visit if he had not known beforehand the nature of Smart Profit’s business. It was evident Leung was trying to distance himself from Smart Profit, but the above plainly showed that even before the sale of the Property he was more involved in Smart Profit’s business affairs than he cared to let the court know. 18.Eddy Leung was a director/shareholder of Smart Profit and Regal Industrial (Hong Kong) Ltd (“Regal”). Regal carried on a hardware business and had a PRC factory (the “Regal Factory”). There is some dispute as to whether the Smart Profit Factory leased part of the premises of the Regal Factory (Chan’s evidence) or whether the 2 factories were just close by within the same small industrial estate (Leung’s evidence). Although Leung claimed he had no business dealings with Eddy Leung, Leung visited the Regal Factory in early 2003 and again on 2nd September 2003 (on the same occasion he visited the Smart Profit Factory). Chan said (and I accept) that Leung attended the Meeting (see below) as Regal’s representative in mid- to late August 2003. I also accept on balance that Leung’s good friend, Lam, was a “hidden partner” of Regal. There was no dispute that Regal had cash flow problems and it was evident from the 3/9/01 Fax (see below) that Leung was anxious to lend money to Regal. In my view, Leung’s denial of any business relationship with Eddy Leung was unreliable and I find on balance that they were more closely connected commercially than Leung would like the court to think. 19.Lai was a chartered accountant and member of the Hong Kong Society of Accountants. She and her partner had their own accountancy practice known as Lai & Lai CPA (“LLCPA”) and their company secretarial company (ie Wellchi, which had about 100 corporate clients including Smart Profit). Forson Precision Company Limited (“Forson”) was LLCPA’s auditing client. Lai came to know Wang as Forson’s director. She was aware that Eddy Leung and Wang were friends because Eddy Leung previously provided book-keeping services to Wang. She also thought Leung and Eddy Leung were friends but did not know whether they had any business dealings. 20.Lai revealed during cross-examination that Eddy Leung had been referring clients to LLCPA for 6 years. He was not a qualified accountant but, with LLCPA’s permission, he had name cards that described him as LLCPA’s “accountant”. Lai claimed that by the time of the trial, Eddy Leung was no longer LLCPA’s “accountant”, but LLCPA did not stop him from using his LLCPA name cards and Lai did not know whether he still used them. 21.Despite being subpoenaed, I find that Lai is not an entirely independent witness. I note that Forson (and hence Wang) was Lai’s client and Wang was the very transferee named in the Transfer Documents. It is also significant that LLCPA lived on job referrals and Eddy Leung had been a source for such referrals for 6 years. Indeed, Lai admitted that LLCPA allowed Eddy Leung to use his LLCPA name cards to facilitate the introduction of clients to LLCPA. I am not persuaded that the commercial relationship between Eddy Leung and LLCPA had ceased. This was supported by the fact that LLCPA never prohibited Eddy Leung from further using his LLCPA name cards and Lai acknowledged the possibility that Eddy Leung might still be using them. Indeed, Lai said LLCPA still had some clients for whom Eddy Leung previously rendered bookkeeping services. 22.Mr Chan criticised Lai for holding out Eddy Leung as an “accountant” when he was not a qualified one and for insisting that Eddy Leung’s LLCPA name cards would not mislead any reasonable person into thinking that Eddy Leung was a qualified accountant. But I am unable to place substantial weight on such criticism since section 29(3) of the Professional Accountants Ordinance Cap.50 provided inter alia that nothing in the ordinance shall prevent a person from describing himself as an accountant. 23.Nevertheless, the above highlights Eddy Leung’s pivotal role, which Mr Chan aptly described as a deal broker. Eddy Leung knew Lam, Leung and Wang and had his finger in almost every pie. The above background and the dealings referred to below also showed that the business interests of Eddy Leung, Lam, Leung and Wang, whether individual or corporate, were inextricably intertwined. I find on balance there was closer commercial connection amongst these parties than Leung wished the court to think. Chan’s investments in Smart Profit 24.In/about mid-February 2003, Eddy Leung invited Chan to invest in Smart Profit (then yet to be acquired from Wellchi). On 18th February 2003, at Eddy Leung’s request, Chan deposited HK$200,000.00 in Regal’s bank account on the understanding that it would be transferred to Smart Profit in due course. On 5th and 12th March 2003 respectively, at Eddy Leung’s request, Chan deposited 2 sums of HK$100,000.00 each in Regal’s bank account for Smart Profit. On 6th June 2003, at Eddy Leung’s further request, Chan deposited HK$50,000.00 into Smart Profit’s bank account. Smart Profit’s balance sheets as at 30th June and 31st July 2003 reflected Chan’s capital account as HK$300,000.00 and current account as HK$150,000.00. Chan was allotted the Shares in Smart Profit. Leung’s initial attempt to sell the Property to Chan 25.In/about February 2003, the Defendant decided to sell the Property. There is some dispute as to who approached Chan on the sale of the Property (either it was Lam according to Leung or it was Eddy Leung according to Chan), but nothing turned on this. Chan was given particulars of and inspected the Property. Leung claimed Chan expressed interest in the Property, but Chan said he was not interested. However, there is no dispute Chan refused to purchase the Property. I accept Chan’s evidence that he considered the asking price of HK$800,000.00 excessive since it was about HK$250,000.00 above the consideration at which the Property was acquired in 2001, but property prices decreased between 2001 and 2003 even before the SARS outbreak. Other offers for the Property 26.In order to sell the Property, Leung claimed he placed newspaper advertisements and engaged estate agents, which efforts resulted in 1-2 offers of HK$700,000.00 to HK$750,000.00 between March and June 2003 (the “Offers”). Leung further claimed he rejected the Offers because (a) they were below HK$800,000.00 (ie the lowest selling price Leung had in mind for the Property, which he considered to be worth HK$1.2 million) and (b) the Defendant could still survive financially without a sale of the Property. Leung said the Defendant’s financial situation deteriorated drastically after June 2003 when its business turnover fell by 70%. With severe financial pressure to pay operating expenses, loans and taxes, Leung was at that stage only concerned with the Defendant’s survival and would have accepted the Offer for HK$750,000.00 had it not lapsed. 27.Mr Chan suspected Leung conjured up the Offers (for which there was no documentary support) on the go when he gave evidence. I too have some unease. The Defendant purchased the Property for HK$553,000.00 in 2001. I accept Chan’s evidence that property prices dropped between 2001 and 2003. Against such background, the Offers appeared unlikely. Further, Leung did not explain why he thought the Property was worth HK$1.2 million. 28.As early as February 2003, Leung already wanted to sell the Property. I agree with Mr Chan there was nothing to suggest the Defendant’s dire financial circumstances occurred abruptly and Leung admitted to financial deterioration over a period from March to June 2003. In my view, it should be obvious to a businessman like Leung over such period that the Defendant’s financial situation was culminating to a critical point. With (a) Chan’s rejection of the asking price of HK$800,000.00 in March 2003, (b) falling property prices which turned for the worse with the SARS outbreak, (c) no offer exceeding HK$750,000.00 up to June 2003 despite the efforts to market the Property and (d) the severely deteriorating financial situation of the Defendant, I find Leung’s alleged refusal to take up the alleged Offer of outright cash payment of HK$750,000.00 (just HK$50,000.00 short of the lowest selling price Leung had in mind) commercially illogical. 29.I reject Leung’s evidence in this respect, which I find to be particularly unreliable when considered against Leung’s subsequent acceptance of the Swap Agreement and the 3/9/03 Fax (see below). But even if the Offers and Leung’s rejection thereof were true, they only served to highlight the implausibility of the Defendant’s case discussed below. Meeting amongst Chan, Leung and Eddy Leung and the subsequent negotiations 30.Leung said that in August/September 2003, the Defendant’s dire financial situation caused him to approach Chan again for sale of the Property. Leung said it was a matter of the Defendant’s survival, but he could not satisfactorily explain why he did not approach the parties who made the Offers and only approached Chan who previously rejected his asking price. In my view, Leung’s singular focus on Chan suggested his interests in the sale of the Property went beyond seeking cash to resolve the Defendant’s financial difficulties. 31.Leung went on to say he attended a meeting with Chan and Eddy Leung to discuss the sale of the Property. He said in his supplemental witness statement it took place on/about 2nd September 2003 and he confirmed in evidence he had a strong impression because the no.9 typhoon signal was hoisted that day when he and Chan visited the Smart Profit Factory. But Leung also accepted in evidence that such meeting took place in August 2003. I find Leung’s evidence unreliable and prefer Chan’s evidence that the meeting attended by him, Leung and Eddy Leung took place at the Smart Profit Factory in mid- to late August 2003 (the “Meeting”). 32.Leung claimed Chan and Eddy Leung told him there would be some new shareholders/investors who would inject new funds into Smart Profit and the Plaintiff was prepared to purchase the Property for the Price. “[It] was mutually understood” that the Price would be paid by 2 instalments, namely, the 1st instalment of HK$350,000.00 to be paid forthwith or upon Completion and the 2nd instalment of HK$450,000.00 to be paid “when [Chan] received the money from Smart Profit”. No specific date was mentioned for the payment of the 2nd instalment, but it was understood to be after Completion. At the same meeting, Leung offered to rent the Property for sub-letting purpose, which proposal Chan found agreeable. 33.On balance, I am unable to accept Leung’s evidence above. There is no dispute that the Price was the agreed consideration for the sale and purchase of the Property and that it was split into 2 parts, ie the Disputed and Paid Sums, for payment. According to the Plaintiff’s case, such split was natural because HK$450,000.00 exactly matched the documented amount of Chan’s investments in Smart Profit which he sought to withdraw by way of the Swap Agreement in order to retire from the company. 34.But if Chan’s investments in Smart Profit were unrelated to the Price, the split into the Disputed and Paid Sums would have been arbitrary. Leung at first said the Disputed Sum would be paid “when [Chan] received the money from Smart Profit”. Yet he had no clue when Chan would receive money from Smart Profit, only that it would be after Completion. Leung also admitted Chan did not explain and he did not know how the injection of new funds would cause Chan to receive money from Smart Profit when Smart Profit was not the intended purchaser of the Property and had no obligation to pay over any of its new funds to Leung. I find it strange and quite unbelievable that when the Defendant’s financial survival was at stake and the deferred payment of the Disputed Sum was more than half of the Price, Leung believed Chan would pay the Disputed Sum “soon” merely on his faith in Chan’s character. It would have been in Leung’s commercial interest to be assured there was a reasonable basis/mechanism for Chan to lay his hands on the new funds as quickly as possible. Further, unlike the Plaintiff or Chan who could rely on the contemporaneous Memorandum and Assignment which expressly provided that the Disputed Sum had been paid, Leung did not ask for any IOU from Chan or make any documentary record in respect of the outstanding Disputed Sum. 35.On further cross-examination, Leung said Chan told him the new investors in Smart Profit would bring HK$450,000.00 to him, but there was no explanation why the new funds were equivalent to the Disputed Sum. Even more perplexing was Leung’s evidence (on being shown the 13/10/03 Letter referred to below) that it was mentioned during the meeting with Eddy Leung and Chan that certain machinery of Smart Profit would be sold. It was difficult to understand, even on the Defendant’s case, why Smart Profit’s sale of machinery (which price, according to Leung, was also coincidentally HK$450,000.00) would feature as a topic at all at the meeting, particularly as Leung claimed the meeting was focused on the sale and purchase of the Property. I reject Leung’s evidence in this respect. Indeed, Leung admitted under cross-examination that Eddy Leung told him at the meeting he needed money and they discussed the financial position facing Eddy Leung. I find on balance the Meeting canvassed wider issues than the sale and purchase of the Property, which accorded with Chan’s evidence of the Meeting (see below). 36.Leung claimed he did not find Chan’s offer attractive because the Defendant needed the money badly, but said there was no point in asking for full cash payment of the Price given that Chan refused to purchase the Property in March 2003 and this time he was only prepared to make deferred payment of the Disputed Sum. In my view, it is odd even on the Defendant’s case that Leung chose only to approach Leung and not the parties who had made the previous Offers of outright cash payment of HK$700,000.00 or HK$750,000.00, which terms would give more upfront cash than Chan’s offer at the meeting. 37.In the circumstances, I reject Leung’s evidence in relation to the meeting and prefer Chan’s evidence. Chan said he, Eddy Leung and Leung (Regal’s representative and Eddy Leung’s business associate) attended the Meeting to discuss Chan’s intention to retire and withdraw his investments from Smart Profit. The Meeting did not focus on the sale and purchase of the Property. Strictly speaking, Leung had no formal relationship with Smart Profit, but Chan said (and I accept) Leung often took part in the activities of the Regal Factory and in Smart Profit’s meetings. In my view, there was connection, albeit not precisely clear, between Leung’s commercial affairs and those of Smart Profit. 38.At the Meeting, Chan indicated he wanted to retire from Smart Profit by recouping his investments and transferring the Shares. Both Eddy Leung and Leung urged him to stay on. Chan was unhappy with the inefficient and lackadaisical general working practice of the Smart Profit Factory, which was not inconsistent with Leung’s admission that Chan told him Smart Profit lost HK$300,000.00 in the first few months of operation. I accept that Chan insisted on retiring from Smart Profit, which decision was finally accepted by Eddy Leung and Leung. As there was not much capital and cash flow in Smart Profit and money had to be retained for stock and raw materials, Chan said (and I accept) that Leung gave him 2 options : (a) Chan could recoup his investments of HK$450,000.00 by receiving 10 monthly instalments of HK$45,000.00 each or (b) Chan could purchase the Property at a price to be negotiated to be paid partly in cash (the mechanism of which was to be worked out at a later stage) and partly by set-off against his investments of HK$450,000.00 in Smart Profit. Chan preferred (b), which I find unsurprising since this option allowed for an immediate clean break. During the Meeting, there was no discussion of the details of the transaction and no mention of the Plaintiff and the Defendant. I agree with Mr Chan that Leung’s option (b) was only a sketch proposal to be fleshed out by further negotiations. 39.I accept on balance that a few days after the Meeting Leung proposed to Chan that the Property be sold for HK$900,000.00 and he also confirmed the Property was held in the Defendant’s name. Chan rejected such asking price. Eventually Chan and Leung agreed to the Price but the terms of payment were not yet fully agreed. Chan told Leung he would use the Plaintiff to hold the Property. I find it unlikely (as Leung asserted) that the parties would have dealt with each other in terms of the Plaintiff or the Defendant prior to this stage. I believe Leung and Chan discussed the matter, as Chan said, in straightforward terms, ie Chan’s purchase of Leung’s Property. It is plain from the tenor of the evidence that the Plaintiff and the Defendant were merely corporate vehicles for Chan and Leung to respectively acquire or hold the Property. 40.Chan said and I accept he could have paid the full Price without any difficulty. I agree with Mr Chan this supported Chan’s evidence that he only entered into the Swap Agreement as an integral part of the arrangements for him to retire from Smart Profit with something to hand that represented his investments. Defendant’s fax of 3rd September 2003 (“3/9/03 Fax”) and the Swap Agreement 41.On 3rd September 2003, Leung made a counter-offer to Chan by the 3/9/03 Fax as follows :
RUDY敬啟” 42.Although Leung said in his witness statement it was on/about 14th October 2003 that the Defendant agreed to sell the Property to the Plaintiff for the Price, it was plain from the above fax (and Leung also agreed when he gave evidence) that by 3rd September 2003 both parties had already agreed to the Price as the consideration. 43.Leung said he was confident Chan would pay the deferred Disputed Sum “soon” after Completion, but since the Defendant needed money badly, Leung made the counter-offer in the 3/9/03 Fax to obviate the need for deferred payment of the Disputed Sum. In my view, the 3/9/03 Fax again served to highlight the implausibility of Leung not revisiting the Offers and to underline the fact that the discussion with Chan went further than a mere sale and purchase of the Property. 44.In an attempt to distance himself from Eddy Leung’s business affairs, Leung initially said he was unaware whether Regal had any cash flow problem, but when confronted with the 3/9/03 Fax, he admitted he knew. I am not persuaded by Leung’s strained explanation that he did not know Eddy Leung took part in the business but sometime between March and September 2003 Eddy Leung disclosed some information to him. Although Leung insisted both Regal and the Defendant had cash flow problems, he said “五金廠”(ie the Regal Factory) was particularly mentioned in the 3/9/03 Fax because Eddy Leung indicated he needed money and Leung claimed he intended to lend HK$130,000.00 to Regal to help Eddy Leung. 45.Leung at first said his counter-offer required upfront cash payment of HK$500,000.00 comprising HK$350,000.00 to be payable by Chan and HK$150,000.00 to be drawn from Smart Profit’s surplus cash, and deferred payment of HK$300,000.00 until the new shareholders injected new funds into Smart Profit. He said he sent the 3/9/03 Fax to Chan because he was afraid Chan might forget the details of the counter-offer. 46.But such description did not sit well with Leung’s explanation of the counter-offer set out in the 3/9/03 Fax. He clarified that according to the 3/9/03 Fax Chan was to make cash payment of HK$350,000.00 to enable the Defendant to repay the outstanding mortgage loan owed to the Bank and HK$150,000.00 was be paid from Smart Profit’s surplus cash. But for the remaining balance of HK$300,000.00, the 3/9/03 Fax proposed that HK$170,000.00 be set-off against a debt of the same sum owed by Lam to Chan (the “Debt”) so that Leung would take up the responsibility for collecting the Debt from Lam. Leung’s evidence on the treatment of the remaining HK$130,000.00 in the 3/9/03 Fax was confusing. At one stage Leung said he would lend such sum to Regal upon receipt of the full Price from Chan or his company in order to resolve Regal’s cash flow problem, such loan to be repaid to Leung or the Defendant at a later date. At another stage he said Chan did not have to pay the remaining balance of HK$130,000.00, ie the Defendant would receive less than the full Price for the sale of the Property. 47.Leung’s evidence on the treatment of the sums of HK$170,000.00 and HK$130,000.00 in the 3/9/03 Fax did not conform to his earlier evidence on the treatment of the sum of HK$300,000.00 for the alleged counter-offer. He also could not satisfactorily explain how the proposal of “至於利俊其餘$300,000分2期於11，12月退回給您” would work. 48.It is difficult to fathom why, even on the Defendant’s case, Leung made a counter-offer that was not particularly helpful to him or the Defendant. If he waived receipt of the sum of HK$130,000.00 from Chan, there would have been no money to lend to Regal unless the surplus cash from Smart Profit of HK$150,000.00 was utilised. But if such course of action were adopted, the counter-offer would not be able to generate substantial extra cash beyond Chan’s original offer since the cash payment of HK$350,000.00 would have to be used to repay the Bank loan. It seemed that the counter-offer was more helpful to Eddy Leung/Regal than to the Defendant. Leung tried to explain this away by saying that although the Defendant was at that stage in financial difficulties, it was not desperate for cash injection beyond an urgent need to settle the indebtedness due to the Bank. But such explanation did not sit well with Leung’s earlier evidence that the Defendant’s financial survival was at stake and it was short of funds even on operating costs and could not make ends meet. 49.I find Leung’s evidence in this respect unconvincing. Mr Luk, solicitor for the Defendant, conceded in final submissions that Leung could not perfectly explain the counter-offer in the 3/9/03 Fax, but he emphasised that the counter-offer came to nothing because Chan rejected it. Whilst it was true the counter-proposal was rejected, I note that the 3/9/03 Fax originated from Leung and it showed he had in mind payment arrangements that inextricably linked Chan’s acquisition of the Property with Chan’s investments in Smart Profit. It was difficult to envisage how monies from Smart Profit could be used for Chan’s personal acquisition of the Property (albeit through a corporate vehicle) or how monies could be refunded or treated as refunded by Smart Profit to Chan (see the 3/9/03 Fax) unless such monies came from Chan’s capital and current accounts with Smart Profit (ie his investments). As Mr Chan submitted, Leung could not satisfactorily explain why Smart Profit and Regal were part of the essential background of the negotiations. 50.Chan frankly admitted Lam owed him the Debt. Chan understood Leung’s counter-proposal in the 3/9/03 Fax to mean that (a) HK$170,000.00 would be set-off against the Debt, (b) Chan would obtain HK$150,000.00 from his account with Smart Profit and did not have to pay such sum to Leung, (c) Chan was to pay HK$350,000.00 to settle Leung’s/the Defendant’s indebtedness due to the Bank and (d) Chan was to issue a cheque for HK$130,000.00 for the Regal Factory’s cash flow. I also find Chan was unable to give a full explanation of the 3/9/03 Fax but it did not affect his veracity. It should be remembered that the 3/9/03 Fax emanated from Leung and there was no evidence that the counter-proposal was explained to and discussed with Chan. In fact, Chan said (and I accept) he rejected the counter-proposal on the same day and told Leung he would only agree to set-off the Disputed Sum against the withdrawal of his investments in Smart Profit and he would pay the Paid Sum. He further told Leung he would not have agreed to purchase the Property if he had not wanted to retire from Smart Profit. 51.I find on balance that in September 2003, Chan and Leung entered into the Swap Agreement as described in paragraph 7 above. I agree with Mr Chan that Smart Profit played a central role in how the payment of the Price was to be effected and that Chan’s intention to retire from Smart Profit and to withdraw his investments formed the cornerstone of the whole deal. Preparation of the transaction documents 52.It was Leung who approached and gave instructions to Messrs Chu & Lau (“C&L”) in September 2003 to prepare the necessary legal documents for the conveyancing transaction. Although Leung claimed C&L acted for both parties, their legal fees were borne by the Defendant. C&L prepared the draft Memorandum, draft acknowledgment (the “Acknowledgment”) and the draft undertaking by the Defendant to inter alia vacate encumbrances against the Property (the “Undertaking”). The Acknowledgment in draft provided as follows :
53.On 15th September 2003, C&L faxed the draft Memorandum to Chan. A clerk from C&L told him to sign it if he found the terms agreeable. Chan added by his own hand a clause (M) which provided that “[the] property is sold free from encumbrances” and he signed the draft Memorandum with the Plaintiff’s company stamp. He was eventually told that the proposed clause (M) was unnecessary. 54.On 13th October 2003 Leung wrote a letter to Chan (the “13/10/03 Letter”) as follows : “……
55.Leung explained that the 13/10/03 Letter meant Smart Profit had a batch of machinery due to be sold for HK$450,000.00 (which sum was different from the new funds of HK$450,000.00 to be injected into Smart Profit by the new investors), but it would not be able to receive such sum any time soon. Leung claimed he sent the 13/10/03 Letter to Chan with copy to Eddy Leung as proof that the Disputed Sum was still outstanding. 56.I reject Leung’s evidence in this respect. Although Leung’s supplemental witness statement was served on the 2nd day of the trial, there was no reference to any intended sale of machinery by Smart Profit. Leung did not explain why the price of the machinery exactly matched the Disputed Sum, Chan’s investments in Smart Profit and (as alleged by Leung but which I do not accept) the new funds to be injected into Smart Profit. In the end, Leung agreed that the sale of machinery had nothing to do with the sale and purchase of the Property, and he could not really explain how the price for machinery due to be sold could evidence the agreement for the sale and purchase of the Property. He was constrained to say he had his own record that Chan owed the Disputed Sum although he did not give any particulars. 57.Even more perplexing was Leung’s explanation as to the arrangement for “所賣車位其中$450,000作為利俊賣出Asset之收入”. Leung said a credit entry would be made in Smart Profit’s accounts upon the injection of new funds into Smart Profit and a further credit entry would be made at a later stage when Smart Profit sold the machinery. Leung claimed he sent the 13/10/03 Fax to remind Chan and Eddy Leung as directors of Smart Profit to make the credit entries in Smart Profit’s accounts to ensure he would receive the Disputed Sum. But Leung could not remember how such credit entries would result in payment to him. Even more interestingly, Leung did not explain why he was so conversant with the business affairs of Smart Profit (ie Smart Profit’s sale of machinery and the price thereof). In my view, even the Defendant’s own case (which I do not accept) showed that the sale and purchase of the Property was inextricably linked to the affairs of Smart Profit. 58.I prefer Chan’s evidence in respect of the 13/10/03 Letter, which Chan said was a confirmation of the terms as agreed and a notification to Eddy Leung that part of the Price would come from the sale of Smart Profit’s asset, namely, Chan’s capital and current accounts with Smart Profit and the Shares, to Leung or his nominee, and Chan would thereby recover his investments of HK$450,000.00 in Smart Profit. In my view, although the 13/10/03 Letter was not worded as elegantly or precisely as one might wish, Chan’s understanding of its contents was the only logical and sensible interpretation in all the circumstances. 14th October 2003 59.On 14th October 2003, Leung and Chan respectively signed on behalf of the Defendant and the Plaintiff the Memorandum at C&L’s office as a record of the agreement between the parties in respect of the sale and purchase of the Property. On the same day, Leung on behalf of the Defendant signed the Undertaking and Chan gave C&L a cheque in the sum of HK$350,000.00 for which C&L issued a receipt marked as “being balance of purchase price”. 60.Leung was aware that Clause G(i) provided that the Disputed Sum had been paid when he signed the Memorandum. He claimed that although it was factually incorrect, he still signed the Memorandum because he believed the Plaintiff would pay the Price soon. 61.I reject such evidence which I find to be wholly incredible. Leung and the Defendant had access to solicitors prior to execution of the Memorandum. C&L were chosen by Leung and the Defendant paid their legal fees. In fact, it was Leung who gave instructions to C&L to prepare the relevant documents. There is no evidence that C&L misunderstood Leung’s instructions or committed a mistake. The drafts prepared by C&L, including the Memorandum and the Acknowledgment, plainly stated that the Disputed Sum had been paid. The way these documents were drafted also showed that the 1st and 2nd instalments of the Price were respectively the Disputed and Paid Sums and not vice versa as Leung alleged. C&L’s receipt also acknowledged the Paid Sum as the balance of the Price and not as the 1st instalment. Even though the Acknowledgment was eventually not signed (and neither party canvassed the reason therefor in evidence), it clearly showed that C&L’s instructions from Leung were that the Disputed Sum had been paid. 62.I also find it incredible that Leung being aware of the purport of Clause G(i) did not point out or indicate to Chan the error or did not suggest to C&L that such clause be amended, especially when the Disputed Sum comprised over half of the Price and the tenor of Leung’s evidence was that he wanted to be sure he would receive the Disputed Sum. I further note Clause (L) provided that the Memorandum was preceded by an unwritten sale agreement made between the same parties and “on the same terms”. Interestingly, Leung never challenged such provision. 63.I prefer Chan’s evidence that pursuant to the Swap Agreement, Clause G(i) was factually correct. Mr Luk criticised Chan for not reducing the Swap Agreement into writing. Chan frankly accepted it would of course protect the parties more fully if the Swap Agreement had been reduced into writing, but he saw nothing wrong with the actual arrangements because businessmen could also effectively rely on verbal commercial agreements. He said the parties would not have signed the Memorandum and he would not have purchased the Property without the pre-existing Swap Agreement. I agree. In any event, the provisions in Clauses (G) and (L) clearly and adequately protected Chan’s interests and also fairly recorded the parties’ mutual position by affirming the pre-existing agreement and acknowledging that the Disputed Sum had been paid. I do not consider there was any obligation on Chan’s part to record in writing all the minute details of the Swap Agreement to protect Leung. It was a matter for Leung to look after his own interests and to minimise his risks by reducing the Swap Agreement into writing, which he could do himself (similar to the Tenancy Agreement prepared by him) or through C&L. 64.I also reject the suggestion that the Memorandum in failing to refer to the Swap Agreement indicated its fallacy. C&L were only instructed to handle the conveyancing transaction in respect of the Property. They were not even involved in preparing the Tenancy Agreement. There was no reason for them to delve into the details of the Swap Agreement but, as was proper, they recorded in Clause (G) of the Memorandum the constitution of the consideration for the sale and purchase of the Property. 65.I therefore find on balance that the Disputed Sum (as stated clearly in Clause G(i)) had been paid by set-off against the value of Chan’s Shares and investments of HK$450,000.00 in Smart Profit pursuant to the Swap Agreement. 20th October 2003 66.On 20th October 2003, Chan and Leung signed the Assignment and the Tenancy Agreement on behalf of the Plaintiff and the Defendant respectively. The Paid Sum was paid via C&L to the Defendant. 67.Leung knew Clause 1 stated that full payment of the Price had been made when he signed the Assignment, but he did not raise any query. I reject his claim that Clause 1 was factually incorrect. I find Leung’s assertion that between September and 20th October 2003 he told C&L he had not received the Disputed Sum wholly unbelievable. There was no plausible reason why C&L would allow the Completion to be put through on the basis of full payment having been made if Leung had told them he had not received the Disputed Sum. I bear in mind that Leung signed the Memorandum and Assignment (which stated that the Disputed Sum had been paid) after receiving and taking into account legal advice from C&L. 68.On the other hand, Chan said (and I accept) the Assignment reflected the factual truth. The set-off envisaged under the Swap Agreement took place as soon as such verbal agreement was made. But it was agreed by Chan and Leung that the formality of the execution of the Transfer Documents would take place after Completion, which timing Chan insisted for his own protection. It was not correct to say that the transaction was only completed by the execution of the Transfer Documents. Even if it did, I find (see below) that Chan had complied with the Transfer envisaged under the Swap Agreement. As Mr Chan submitted, there was no attempt to extract any IOU or counter-acknowledgment from Chan or the Plaintiff and no effort by Leung to make any internal record that the Disputed Sum was still outstanding. I find Leung’s assertion that the Disputed Sum was unpaid inherently improbable. The receipt issued by Chan 69.On 20th October 2003, Chan gave the following receipt (the “Receipt”) to Leung:
70.Leung said he never requested the Receipt. His identity card number as stated in the Receipt was correct, but he did not know how Chan knew this. After Leung signed the Assignment and the Tenancy Agreement on 20th October 2003, Chan immediately gave him several documents. Leung claimed he did not have much impression as to whether Chan explained their nature, but he did not read them. He placed them in a folder in his office cabinet, which was where he found the Receipt, the Property’s rental deposit receipt and the rent receipt for November 2003 when the Defendant’s solicitors asked him to look for documents for the purpose of the present proceedings. When he showed the Receipt to the Defendant’s solicitors, he told them he regarded it as an IOU, but he did not tell them he never requested for the Receipt. 71.I reject Leung’s evidence. It is absurd to suggest that the Receipt was an IOU when it stated in simple language that Chan acknowledged receipt of HK$450,000.00 from Leung as payment for Chan’s investments in Smart Profit. Indeed, when confronted with such plain fact under cross-examination, Leung declined or was unable to offer a view. 72.I accept on balance Chan’s evidence that after the parties signed the Memorandum on 14th October 2003, Leung made arrangements with Chan for the Completion to take place on 20th October 2003. Leung asked Chan to prepare a receipt for the rental deposit and another for the Disputed Sum, and specifically requested that his identity card number be put on the latter receipt to facilitate his calculation of the funds with Eddy Leung. I agree with Mr Chan it is unbelievable that Chan would hand over the various receipts, including the Receipt, without any explanation or that Leung would refrain from asking about or reading the documents if no explanation was given. After all, 20th October 2003 was the occasion when the formal documents of the conveyancing and tenancy transactions were executed. 73.More importantly, Leung admitted that after 20th October 2003 there was nothing to prevent him from looking at the Receipt. Chan could not have reasonably expected Leung not to read the Receipt and Leung could not offer any plausible reason why Chan would give the Receipt to Leung after the Assignment was executed when its contents, according to the Defendant’s case, were untrue and would logically lead to objection and outcry if read by Leung. But in reality, there was no objection and outcry. In my view, this was because the parties made the Swap Agreement and the Disputed Sum was settled pursuant to the set-off envisaged thereunder. Transfer Documents 74.The Defendant’s case in this respect came from the evidence of Leung and Lai. Lai said that in October 2003, Eddy Leung gave instructions to her to prepare the Transfer Documents and told her Chan wanted to retire or withdraw from Smart Profit. The parties did not dispute that it was Eddy Leung, a director/shareholder of Smart Profit, who ferried the Transfer Documents. 75.Lai claimed she personally prepared the Transfer Documents by typing the names of the transferor (ie Chan) and transferee (ie Wang), the consideration and the other particulars as provided by Eddy Leung. Lai further claimed she was sure of this because Smart Profit was her client and at that time the documents were “either typed by her or by her partner”. But when asked what made her remember the Transfer, Lai only repeated she remembered typing the Transfer Documents and giving them to Eddy Leung. 76.On balance, I am not persuaded Lai’s evidence in this respect is reliable. Lai prepared the Transfer Documents more than 1½ years before the trial. According to her, there was no record other than the Transfer Documents. She was unable to say anything significant about the transaction that would trigger specific memory of the Transfer out of the many similar documents she said she prepared in 2003. It is telling that Lai said she recollected her involvement from the fact that share transfer documents would either be prepared by her or her partner. I am not convinced on balance that Lai remembered (as she alleged) most of the names of the transferors/transferees and when/where they executed the transfer documents in respect of the share transfer transactions she handled, bearing in mind that she was a responsible person not just of Wellchi but also of LLCPA. Looking at the totality of the evidence, I do not find Lai’s assertions reliable on the balance of probabilities. 77.Lai further accepted that the preparation and execution of share transfer documents were a client led process. It varied from case to case as to the identities of the parties, the places where they would sign the documents (ie whether the documents were to be collected, to be delivered to the client’s office for signature or to be signed at Wellchi’s office) and the number/nature of the required documents. In my view, this adds weight to the concern that Lai could not have clearly remembered, as she suggested, the precise details and circumstances of the preparation of the Transfer Documents. 78.Looking at the totality of the evidence and even bearing in mind Lai was not a business associate of either party, I find on balance Lai’s evidence that she always adhered to her practice (and specifically so in this case) of never allowing bought and sold notes as well as instruments of transfer to be signed in blank and of preparing fresh documents if amendments were required unreliable. Her evidence gave a hint that it was possible for others (including Eddy Leung) to prepare bought and sold notes as well as instruments of transfer. Lai accepted that if Eddy Leung knew how to prepare bought and sold notes and instruments of transfer, he could have prepared the Transfer Documents. It appears from the company search records that Eddy Leung signed most corporate forms of Smart Profit. With his experience as an “accountant” and his exposure as director/shareholder of Smart Profit and Regal, I consider that the preparation of the Transfer Documents was not beyond his capability. 79.Mr Luk emphasised that Lai had not been instructed to and did not prepare any declaration of trust to reflect Leung’s alleged beneficial ownership of the Shares and she was not told Wang was a nominee holder of the Shares. But Lai agreed she would only have as much information on the beneficial ownership of shares as furnished by the client. She would not initiate enquiries and she would process the transfer as a normal transaction unless she was expressly informed or instructed to prepare a declaration of trust. She also accepted the parties could themselves arrange for nominee holding of shares by less formal means. So if the Shares were to be held for the benefit of Leung, it was possible that Lai might not be informed and consequently the Transfer Documents would not necessarily be inconsistent with the Swap Agreement. Further, in the scenario contemplated by Chan in his evidence where Leung on-sold the Shares and Chan’s investments in Smart Profit to another, Leung’s nominee would have been a legal and beneficial owner of the Shares. 80.The stamp duty for the Transfer was assessed either on the consideration stated in the Transfer Documents or on the net asset value (the “NAV”) of the Shares, whichever was higher. Smart Profit’s management accounts depicted a loss for the period from January to September 2003 with the balance sheet showing a sum of HK$82,506.00 for the 90,000 paid up shares. Thus, the stated consideration of HK$30,000.00 in the Transfer Documents exceeded the NAV of the Shares, so stamp duty was assessed on the stated consideration at HK$30.00. 81.Mr Luk suggested it was illogical and unreasonable for Leung to acquire the Shares for HK$450,000.00 when they at best were worth only the stated consideration of HK$30,000.00. However, Lai accepted that in her experience it was not unusual for parties to independently agree on the worth of the transferred shares and to state a low or nominal amount as consideration for the formal transfer of shares since there was commercial advantage in adopting such a course. Apart from Lai’s evidence, which on this aspect I find reasonable, it should be remembered that under the swap arrangement, Leung or his nominee did not just receive the share certificates of the Shares but also took over Chan’s capital and current accounts with Smart Profit (ie debt due from Smart Profit to Chan) for the set-off of HK$450,000.00. As Chan said, it depends whether anyone would wish to take up the Shares when Smart Profit operated at a loss, but subjective motives, be they the investor’s perceptions of the market, commercial projections or even personal reasons, do not concern this court. 82.Leung claimed he did not receive the Transfer Documents, did not know Wang and did not nominate anyone to procure the Transfer. He claimed the Defendant’s solicitors told him in December 2004 that the Shares were transferred to Wang on/about 31st October 2003. When the Plaintiff’s Reply and Defence to Counterclaim was served on 15th October 2004, Leung was told that Chan pleaded that the Shares were transferred to Leung’s nominee, but Leung did not carry out any investigation until the Defendant’s solicitors told him of Wang’s identity in December 2004. 83.The veracity of Leung’s evidence could be tested by what steps he took thereafter and the evidence, as Mr Chan submitted, struck an unconvincing note. In Leung’s supplemental witness statement served on the 2nd day of the trial, he said that in/about March 2005 he telephoned Lai to seek her assistance to locate Wang. She returned call a few days later to say that Wang was unwilling to testify in court. But Lai in her evidence said Leung approached her probably at the end of 2004 and telephoned her 2-3 times. 84.On the matter of the Transfer, the only time when the evidence of Leung and Lai crossed was when Leung said he approached her for assistance. But there was an inexplicable 3 months’ difference in their evidence as to when Leung approached Lai. I find it detracts from the veracity of both Lai’s and Leung’s evidence on which I cannot place reliable weight. 85.Lai claimed Leung asked her for information about Wang because there might be legal proceedings. She refused because she did not have permission from Wang. Mr Chan criticised Lai’s evidence to the effect that she did not ask about the background of the matter and that she did not understand what legal proceedings Leung was talking about despite 2-3 telephone conversations with Leung. He submitted that as an educated professional versed in corporate secretarial matters, it should not have been difficult for Lai to understand Leung’s explanations about the straightforward issues relating to the Transfer. I do not think that Lai should be criticised for wishing not to become embroiled in litigation not of her own making. 86.Leung’s evidence as to how he searched for Wang serves to highlight its inherent unreliability. The writ of subpoena issued against Wang in July 2005 could not be served at Wang’s residential address or Smart Profit’s address shown in the company search records. According to Leung’s supplemental witness statement served on the 2nd day of the trial, the Defendant’s solicitors informed him on/about 19th July 2005 that their clerk was told by (a) the management office of the building where Smart Profit’s registered office was situated it had no record of either Wang or Smart Profit and (b) the management office of the building where Wang’s residential address was situated said the unit had been vacant for about 3 years. The Defendant’s solicitors conducted a directorship search against Wang and discovered he was a director of Forson. So on/about 27th July 2005, Leung telephoned the company secretary of Forson and was told that Wang was out of town. He left a message for Wang to return call, which Wang did on 31st July 2005. When Leung asked him to testify in court in respect of the Transfer, Wang said he would revert, but when Leung telephoned Wang again on 1st August 2005, Wang was unwilling to testify in court or give his address. So the Defendant’s solicitors subpoenaed Lai to testify in respect of the Transfer. 87.But when Leung gave evidence in the box, he said he personally went to Wang’s residential address and was told by the management office Wang lived there a long time ago and would only return to the building to collect letters every now and then. Leung then surfed the web and conducted a directorship search. He discovered Wang had a company whose registered office was in Tsuen Wan. He personally went there and was told by 2-3 watchmen at the management office that Wang seldom went there as he was often in Mainland China. They further told him Wang would come to the office once in a while to issue cheques. 88.This last point is telling. It is at best strange how building management office staff would know that Wang returned the office specifically for the purpose of issuing cheques. In my view, this shows that Leung knew more about Wang and his commercial operations than he would let us believe. Further, the distinctly different versions given by Leung as to the efforts taken to look for Wang made the whole suggestion that Wang was unknown to Leung quite unreliable. If Leung were as keen in looking for Wang as he said in evidence, he was unable to explain why since December 2004 he never attempted to ask Eddy Leung who was Wang’s co-director to carry a message to Wang or to provide Wang’s contact details. 89.I prefer Chan’s evidence on the balance of probabilities. Under the Swap Agreement, the Shares were to be transferred after Completion, so shortly after 20th October 2003, Leung telephoned Chan to say he had asked Eddy Leung to bring the Transfer Documents to Chan to sign in order to complete the process of Chan’s withdrawal or retirement from Smart Profit. A few days later, Eddy Leung brought the Transfer Documents to Chan’s office in Tsuen Wan. Chan signed them in blank (without the names of the transferor and the transferee, the address of the company, the number of shares, the consideration, etc) on the understanding that the Shares would be transferred to Leung or his nominee. After signing, Chan returned the signed Transfer Documents to Eddy Leung. 90.At first, Leung said the name of the company (ie Smart Profit) was not typed on the Transfer Documents. But he later said he was unsure whether Smart Profit’s name was stated on the heading of the B/S Note when he signed it and he would amend his earlier evidence to such extent. But he was sure that Smart Profit’s name was not on the Transfer Instrument when he signed it. Mr Luk criticised such evidence as shifting and unreliable, particularly as the existence of Smart Profit’s name on the B/S Note and Leung’s telephone call to Chan were not mentioned in Chan’s supplemental witness statement served on the 2nd day of the trial. 91.I have carefully considered such submissions but do not consider they detract from Chan’s overall veracity. Chan was upfront with his error in relation to Smart Profit’s name in the B/S Note and he frankly accepted he made a mistake. Having regard to the way that Eddy Leung featured throughout the dealings and that Leung all along adopted a pro-active approach (such as making proposals, writing letters, instructing solicitors, etc), I am not surprised that Leung took the initiative to telephone Chan to make arrangements for the formal Transfer and that Eddy Leung acted as middleman for his new co-shareholder. After all, there must be more incentive on the part of the party acquiring the Shares to take action than on the party divesting them. 92.Mr Luk submitted that it was unreal and irresponsible for Chan not to retain copies of the blank Transfer Documents he signed, not to ask for a receipt for the Shares and not to be concerned with who was the eventual transferee of the Shares. However, I am of the view that Chan’s conduct was not unreasonable in the particular circumstances. I accept that Leung telephoned Chan to give advance notice that Eddy Leung would bring the Transfer Documents to him for signature, which Eddy Leung did. Eddy Leung was to Chan’s and Leung’s knowledge aware of the Swap Agreement and he was also a director and shareholder of Smart Profit. Eddy Leung told Chan that the Transfer Documents were blank because the identity of Leung’s nominee was not yet confirmed and he was in discussions with Leung as to the Shares. In my view, both Leung and Chan were clear that Eddy Leung’s role in ferrying the blank Transfer Documents for Chan’s signature was to let Chan perform his part of the bargain under the Swap Agreement. 93.As Mr Chan submitted, if Eddy Leung were dishonest and arranged to complete the Transfer Documents in favour of an unrelated party without authorisation, both Chan and Leung would know (and Eddy Leung would know that they knew) he would be the culprit. Further, Chan would have expected demand and outcry from Leung if Leung did not receive the Transfer Documents within a reasonable time after Completion. The risk of any misdeed being committed quietly without discovery was insignificant. 94.Chan said he was also assured by the Receipt which Leung asked him to issue with Leung’s identity card number stated therein to facilitate Leung’s calculation of the funds with Eddy Leung. Chan considered the Receipt sufficiently protected his position. In the circumstances and with the Property already conveyed to him, Chan was unconcerned with the ultimate identity of the transferee. After all, it was Leung and not Chan who would be having dealings with Leung’s nominee. After Chan signed the Transfer Documents in October 2003, he ceased to be a shareholder/director of Smart Profit. I find that, looking at the matter in the round, it is not imprudent or illogical for Chan to sign the blank Transfer Documents in the particular circumstances. 95.Mr Luk submitted that the Swap Agreement was inherently implausible because it failed to distinguish between the individual (ie Leung) and the company (ie the Defendant). He argued that since the Defendant (not Leung) was entitled to the Disputed Sum, Leung was not justified in receiving the Shares without the Defendant’s authorisation. Mr Luk disavowed taking this point as a formal defence argument, but raised this as part of his attack on Chan’s credibility. 96.I have concluded above that the commercial reality at the material time was that Chan did not draw a distinction between Leung and his corporate vehicle, namely, the Defendant. The evidence plainly showed that Leung was the beneficial owner of the Defendant and that he had implicit authority, if any authority were required, to act on its behalf. The Swap Agreement was made between Chan and Leung and as contracting party they were to cause the Property to be conveyed through their corporate vehicles. There is no inconsistency in the Swap Agreement contemplating a Transfer of the Shares from Chan to Leung’s nominee and a conveyance of the Property from the Defendant to the Plaintiff. 97.On the above analysis and considering the entirety of the evidence, I find on balance that pursuant to the Swap Agreement, Chan did execute the blank Transfer Documents at Leung’s request, that Eddy Leung was Leung’s agent and messenger in ferrying the blank Transfer Documents to Chan for signature and that Wang also executed them as Leung’s nominee. The Shares were transferred to Wang as Leung’s nominee and Chan therefore satisfied all his obligations under the Swap Agreement. 98.In the circumstances, there is no need to deal with Mr Chan’s submission that so long as the Price was fully paid, even if Chan failed to transfer the Shares to Leung or his nominee, the Defendant cannot maintain his present counterclaim for the Disputed Sum and it was up to Leung to enforce the Transfer. Such argument is attractive on its face, but it is unnecessary for me to come to a view on the same in light of the above findings. The Tenancy 99.The subsequent events also support the conclusions I have reached above. With the Plaintiff’s consent, the Defendant sub-let the Property (except car parking space no.8 which the Defendant retained for its own use) to various sub-tenants. The Defendant paid rent for the period from 1st November 2003 to 30th June 2004. Since the Defendant remained in financial difficulties throughout this period, it was unable to pay rent punctually. At Leung’s request, the cheque for the rental deposit and the rent for November 2003 could not be presented for payment until 10th November 2003. The rent for December 2003 was paid on 31st December 2003 and the rent for January 2004 was paid by 2 instalments of HK$4,000.00 each on 19th February and 1st March 2004 respectively. The rent for February, March, April, May and June 2004 were paid on 24th March, 20th April, 6th May, 3rd June and 21st June 2004 respectively. 100.Leung agreed that Chan’s staff, Ms Ting (“Ting”), telephoned him many times to chase for payment of the rent. At first, Leung tried to excuse such late payments by saying that the Defendant’s sub-tenants were late in paying rent to the Defendant. It was also feebly suggested that the Defendant collected rent from the sub-tenants on behalf of Chan or his company. I reject these reasons. In the end Leung accepted that the Defendant was obliged to pay rent to the Plaintiff irrespective of whether the sub-tenants paid rent to the Defendant. 101.Despite the aforesaid financial difficulties, Leung never claimed the Disputed Sum was outstanding or demanded payment of such sum. Leung was unable to satisfactorily explain why Chan/Ting would persistently chase him for rent if Chan or the Plaintiff owed him an even larger sum (ie the Disputed Sum) and why he did not put forward the outstanding Disputed Sum in answer to the persistent demands for rent. Leung tried to brush this aside by saying that (a) it was a personal arrangement between Chan and him for deferred payment of the Disputed Sum, (b) it was easier for him to bear in mind the amount of the indebtedness due to him if he did not make progressive set-off of the monthly rent due under the Tenancy against the Disputed Sum and (c) the rent collected by the Defendant from the sub-tenants did not belong to the Defendant which had an obligation to pay over such rent to the Plaintiff. 102.The weak explanations put forward by Leung do not bear scrutiny even on consideration of the Defendant’s own case. Reason (b) may well be a relevant consideration in an ordinary transaction, but here the Defendant was in financial trouble and could not meet its obligations under the Tenancy Agreement. It is commercially illogical for Leung or the Defendant to suffer unpleasant demands from Ting or to scramble for monies to pay rent when Chan or the Chan/the Plaintiff owed them an even greater debt. As regards reason (a), the fact there was a personal arrangement between Chan and Leung as regards the payment of the Disputed Sum is not inconsistent with the Defendant’s case, namely, that the Disputed Sum would be paid when Chan (not the Plaintiff) received monies from Smart Profit. In my view, the silence and inaction on the part of Leung or the Defendant in the aftermath of the Completion corroborated the fact that Leung knew the Disputed Sum had been paid. Defendant’s letters of 11th March and 12th June 2004 (“11/3/04 and 12/6/04 Letters”) 103.On 11th March 2004, Leung/the Defendant issued the 11/3/04 Letter to Chan and Ting as follows :
104.On 12th June 2004, Leung/the Defendant issued the 12/6/04 Letter to Chan as follows :
105.The provisional agreement for sale and purchase (the “PASP”) attached to the 12/6/04 Letter provided as follows :
……
106.Leung claimed he reckoned by December 2004 when the Defendant’s solicitors told him the Shares had been transferred to Wang that Chan had received the new funds but failed to pay the Disputed Sum to him. He said this was supported by his demands in the 11/3/04 and 12/6/04 Letters for repossessing the Property. I reject such suggestion. 107.Leung gave evidence that by about 11th March 2004 he became conscious that the Plaintiff would not pay the Disputed Sum to the Defendant, but since the Property was a profitable investment, he proposed to Chan by the 11/3/04 Letter to repossess the Property. On a plain reading of the 11/3/04 Letter, it is impossible to find any reference for repossessing the Property. The first paragraph of such letter was clearly a request for Chan’s indulgence in respect of the Defendant’s late payment of rent. As regards the second paragraph, the tentative proposal to “接回” the Property must be read in light of the step taken by Leung to seek bank valuation of the Property. In my view, the 11/3/04 Letter is at best indicative of Leung’s intention to repurchase the Property, and this is borne out by the 12/6/04 Letter. 108.In the end, Leung accepted that the PASP enclosed with the 12/6/04 Letter proposed a repurchase and not repossession of the Property. According to the 12/6/04 Letter and the PASP, the asking price was HK$970,000.00. It was not supported by any valuation and none was disclosed in these proceedings. 109.What is interesting is that whilst clause 2 of the PASP expressly set out the 3 milestone payments of HK$50,000.00, HK$57,000.00 and HK$873,000.00 for the price of HK$970,000.00, neither the 12/6/04 Letter nor the PASP mentioned the alleged outstanding Disputed Sum. Leung tried to explain that by the time of the proposed completion of the sale and repurchase of the Property on 30th December 2004, he would ask Chan to acknowledge receipt of HK$450,000.00 in a similar manner to Clause G(i) and C&L would handle the formal documentation for him. In my view, if there is any truth to the suggestion that Leung intended to repossess the Property as a result of the unpaid Disputed Sum, common sense dictates that such proposal by Leung made solely for the purpose of extricating himself from the unfortunate predicament of non-receipt of a substantial portion of the Price would specifically state how the unpaid Disputed Sum would be credited so as to avoid any misunderstanding by the contract-breaker. There was no evidence of negotiations or discussions with Chan in respect of such proposal, so there was all the more reason to make the written proposal crystal clear. 110.Leung added there was no need to specifically mention this arrangement in the PASP because Chan had not yet agreed to the repossession or repurchase proposal. But it did not make sense for Leung to ask Chan or the Plaintiff to carefully consider (and hopefully to agree to) the terms of the PASP when there were further arrangements yet to be disclosed that would vary clause 2 thereof. Indeed, when it was suggested to Leung under cross-examination that it flied in the face of commercial or common sense not to refer to the outstanding Disputed Sum in the PASP, Leung was unable to give any sensible reply and said he had no views. 111.In my view, the 11/3/04 and 12/6/04 Letters, far from supporting the Defendant’s case that it sought repossession of the Property, in fact corroborated the Plaintiff’s stance that the Price had been fully paid. There also appeared to be some commercial advantage for Leung to adopt such a course. Leung admitted that the proposed sale and repurchase of the Property was to facilitate his plan to mortgage the Property. So the 12/6/04 Letter and PASP were copied to Leung’s bankers for them to consider granting a mortgage of 70% of the asking price of HK$970,000.00. At first Leung said he would pay the remaining 30% of the asking price, but on further cross-examination revealed that he did not intend to tell the potential mortgagee he would not have to actually pay HK$450,000.00 (ie about half of the asking price), so that if he obtained a mortgage loan of 70% of the asking price, he would be able to acquire the Property and the mortgage loan would nicely cover a large part of the 30% of the price he had to pay. 112.Chan explained (and I accept) the 11/3/04 Letter was addressed to both Chan and Ting because Chan assigned Ting to chase Leung for payment of rent in respect of the Property. Chan believed that the 11/3/04 Letter was in response to Ting’s attempts to chase for the rent for March 2004. Chan understood the 11/3/04 Letter to be an attempt to explain the late payment of rent and to seek indulgence of a few weeks to pay the outstanding rent. Chan said Leung’s proposal to repurchase the Property was only Leung’s wishful thinking and he never agreed to the same. Chan said (and I accept) that upon receipt of the 12/6/04 Letter he told the Defendant the Plaintiff would not resell the Property back to the Defendant. Prelude to the present proceedings 113.By a letter dated 3rd August 2004 from the Plaintiff’s solicitors to the Defendant, the Plaintiff demanded payment of the outstanding rent in respect of the Property for July and August 2004. 114.By a letter dated 9th August 2004 to the Plaintiff’s solicitors, Leung/the Defendant claimed that the Defendant had not yet received the Disputed Sum, so the Defendant decided to cancel the sale and purchase of the Property and the matter was passed to the Defendant’s solicitors for handling. I accept Chan’s evidence that this was the first time he heard of any claim that the Disputed Sum had not been paid. It was more than 10 months after the conveyance of the Property. Prior to this letter, Leung had never intimated that non-payment of the Disputed Sum was the reason for withholding rent. 115.Leung said the Defendant ceased to pay rent as from 1st July 2004 because he thought there was no longer any prospect of the Plaintiff paying the Disputed Sum. The situation had become intolerable and he thought he would set-off the rent payable under the Tenancy Agreement against the outstanding Disputed Sum. Leung said at that time he formed the impression the Plaintiff would not pay the Disputed Sum because Chan or his company never mentioned the Disputed Sum at all. In my view, Leung’s assertions have a sense of unreality. According to him, Chan promised to pay the Disputed Sum “soon”. No attempts were made since the Completion to ascertain from Chan what “soon” meant or to find out from Smart Profit or Chan or Eddy Leung whether the new investors had injected funds into Smart Profit. The sheer lateness and inaction when viewed against continued financial difficulty by the Defendant make the whole situation as alleged incredible. 116.I also reject Leung’s evidence that he had sent other letters to Chan or his company prior to his letter of 9th August 2004 to say that he intended to repossess the Property because full payment of the Price had not been made. These letters were not disclosed in the course of discovery and his explanation that the Defendant’s solicitors told him they need not be disclosed unless ordered by the court was at best limp. It should not be forgotten that his supplemental witness statement was served only on the 2nd day of trial and by that time, with consensus reached between the parties on the Plaintiff’s claim, the parties clearly knew the focus of the trial was on whether the Disputed Sum was outstanding. Conclusion 117.In conclusion, I have no hesitation in concluding that the Disputed Sum had been paid and the Shares had been transferred to Leung’s nominee pursuant to the Swap Agreement. There is no merit in the counterclaim and I dismiss it. I grant judgment for the Plaintiff against the Defendant for (a) the sum of HK$53,067.00 and (b) interest on the arrears of rent at HK$8,000.00 per month for the period from 1st July to 26th August 2004 (ie the date of service of the writ of summons) at 10.088% pa from 27th August 2004 to the date of judgment and thereafter at judgment rate until payment. 118.There is no reason why costs should not follow event. I grant a costs order nisi that the costs of the action including the counterclaim (and all costs reserved, if any) be paid by the Defendant to the Plaintiff to be taxed if not agreed with certificate for counsel. Mr Luk indicated that he intended to resist certificate for counsel. The quantum of the counterclaim exceeds HK$150,000.00 and I have been ably assisted by Mr Chan. I find this to be an appropriate case to grant certificate for counsel. 119.I have reserved the issue of costs of the adjournment on the 1st day of the trial. Since the adjournment was to allow time for the parties to prepare Chan’s and Leung’s supplemental witness statements in respect of the counterclaim, I am of the view that the relevant costs should be in the cause and I make a costs order nisi to such effect.
Mr Abraham Chan instructed by Messrs Fong & Ng for the Plaintiff. Mr Terence Luk of Messrs Fairbairn Catley Low & Kong for the Defendant. | |||||||||||||||||||||||||||||||||||||||||
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