NG KWOK WING v WONG NAI PING

DCCJ 3908/2009

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3908 OF 2009

________________________

Coram: Deputy District Judge R. Yu in Court

Date of Hearing: 15^th and 16^th July 2010

Date of Handing Down Judgment: 29^th October 2010

________________________

JUDGMENT

________________________

The Plaintiff’s case

1.  The Plaintiff claims a total sum of HK$600,000 from the Defendant.  It is the case of the Plaintiff that by an oral agreement made in or about October 2007 (“the 1^st Agreement”), the Defendant agreed to procure the acquisition of 10% of the shareholding in Makoto Japanese Restaurant Limited (“Company”) by the Plaintiff for the price of HK$250,000.  The Plaintiff has paid the sum of HK$250,000 to the Defendant on or about 20 October 2007.  The Plaintiff claims that it is an implied term of the 1^st Agreement that the Defendant would do all things necessary on his part to procure the transfer of 10% of shareholding in the Company to the Plaintiff.

2.  By another oral agreement made in about March 2008 (“the 2^nd Agreement”), the Defendant has agreed to procure the acquisition of another 10% of shareholding in the Company by the Plaintiff for the price of HK$350,000.  The sum has been paid by the Plaintiff on 1 March 2008 when the Plaintiff issued a blank cheque to the Defendant.  The Defendant has filled in the name of the Company as payee.

3.  The Plaintiff also claims that it is an implied term of the 2^nd Agreement that the Defendant would do all things necessary on his part to procure the transfer of another 10% of shareholding in the Company to the Plaintiff.

4.  In breach of the implied term, and despite repeated requests by the Plaintiff, the Defendant has wrongfully refused or failed to procure the acquisition of 20% shareholding in the Company by the Plaintiff.  The Plaintiff claims that the consideration for the payment of the said sums of HK$250,000 and HK$350,000 has wholly failed. The Plaintiff therefore claimed repayment from the Defendant.

The Defence and Counterclaim

5.  It is the case of the Defendant that in or about 2007, he and his son David Wong decided to form a limited company to run a Japanese restaurant.  The Defendant was to own 80% of the shareholding and his son to have 20%.  The limited company was subsequently set up and known as Makoto Japanese Restaurant Limited (i.e. the Company).  It has been agreed between the Defendant and his son that they should share both the profits and the loss of the Company in direct proportion to their respective shareholding.

6.  Upon knowing the Defendant’s intention of setting up the Company, the Plaintiff indicated his interest in investing in the Company.  In around 2007, the Plaintiff and the Defendant entered into an oral agreement (“the Oral Agreement”) whereby the Plaintiff agreed to invest in the Company by way of acquiring from the Defendant 20% of the shares in the Company at two stages.  I shall come back to the terms of the Oral Agreement later. 

7.  It is one of the terms of the Oral Agreement that the Plaintiff should share the profit and the loss of the Company in proportion to his shareholding.  And if he fails to contribute his loss, the Defendant could pay the Company and recover the same from the Plaintiff.

8.  It is not disputed that the Plaintiff had paid HK$250,000 to the Defendant in or around October 2007 for the acquisition of 10% of the shares of the Company.

9.  It is the Defendant’s case that at the beginning of 2008, the Plaintiff and the Defendant agreed, having regard to the total investment in the Company, the price of the next 10% shares of the Company would be HK$350,000.  Pursuant to the Oral Agreement, the Plaintiff paid HK$350,000 in or around March 2008 for the purchase of another 10% of the shares in the Company.

10.  The Defendant claims that at all material time, he is ready and willing to transfer 20% of the shares of the Company to the Plaintiff’s son.

11.  The Defendant also claims that in or around June 2009, he met the Plaintiff at the clubhouse of Fairview Park, Yuen Long.  The Defendant chased the Plaintiff for details of the Plaintiff’s son.  The Plaintiff refused to provide.  The Plaintiff further requested to sell his 20% shares of the Company to the Defendant and the Defendant refused.

12.  It is Defendant’s case that the Company was operating at a loss most of the time since the commencement of the business.  It is avers that for the period from 24 January 2008 to 31 March 2009, the Company suffered a loss of HK$1,614,687. The Plaintiff shall bear a proportion of the loss in the sum of HK$322,937.40.

13.  The Defendant says he has regularly reported the progress of the restaurant business to the Plaintiff and asked the Plaintiff to contribute to the loss.  The Plaintiff has not made any payment. The Defendant has paid the Company the said sum of HK$322,937.40 on behalf of the Plaintiff to the Company.  The Defendant counterclaims against the Plaintiff for the sum of HK$322,937.4.

14.  The Defendant claims that the Company was still operated at a loss from 1 April 2009 to the date of the Defence and Counterclaim.  The Defendant claimed further damage to be assessed.  This head of claim is not pursued by the Defendant at the end and no evidence is introduced.

15.  In the Reply and Defence to Counterclaim, the Plaintiff denies the terms of the Oral Agreement. In particular, the Plaintiff denies that the Plaintiff would nominate his son to take up any of the shares acquired from the Defendant, or that the Defendant shall have a right to claim against the Plaintiff for the operational loss of the Company.

16.  The loss of the Company is not admitted by the Plaintiff and the Plaintiff also denies that the Defendant had paid for the loss of the Company as alleged.

The Plaintiff’s evidence

17.  The Plaintiff adopted his witness statement dated 5 February 2010 as his evidence in chief.  He also applied for leave to supplement his witness statement by oral evidence at the trial, and leave has been granted.

18.  It is the oral evidence of the Plaintiff that he came to know the Defendant in about 2006 through the introduction of PW2.  The Plaintiff stated in his witness statement that by the 1^st Agreement, he had been invited by the Defendant to invest in the Company. It is not disputed that the Company was only incorporated on 24 January 2008.    

19.  Through conversation with PW2, the Plaintiff came to know that the Defendant wanted to invite some of his friends to invest in a restaurant business to be established. At that time, he was only informed by PW2 that the restaurant would be located in Wan Chai and he was not aware that there would be a limited company to hold the business.  He told PW2 not to trouble his friends as they were not familiar with the Defendant.  He offered to take up 10% shares as a gesture of support. PW2 said the total investment would be around HK$2,000,000 and he asked PW2 to relate his intention to the Defendant.

20.  The Plaintiff said in evidence that the Defendant did call him up and asked for payment of his shares.  The Defendant visited him in one evening and he paid the Defendant by cash.  The Defendant provided a Chinese receipt to him.  And the Defendant said he would operate one of the best restaurants in Hong Kong serving Japanese cuisine.

21.  At that moment, the Plaintiff said he did not ask for transfer of shares and had not asked for the address of the restaurant.  There was no discussion on the formation of a limited company.

22.  I note that this evidence is different from paragraph 1 of his witness statement, where he said the Defendant invited him to join the Company as shareholder (“邀請我入股「公司」”).

23.  The Plaintiff said in 2008, the Defendant again invited him to increase his shareholding to 50%.  He refused.  Later, PW2 discussed the matter with him and he finally agreed to take up another 10% of the shareholding.

24.  Initially, he thought his investment sum for the second 10% shares would still be HK$250,000.  He visited the restaurant to look at the decoration with the Defendant and he was then informed by the Defendant that total investment had been increased to HK$3,000,000.  Therefore his contribution should be a total of HK$600,000 for his 20% shareholding.

25.  On this occasion, the Plaintiff said he had not discussed with the Defendant about management or who should be the directors.  There was no discussion as to how to share the loss.

26.  In his witness statement, the Plaintiff said the Defendant failed to procure his acquisition of shares in the Company.  He further elaborated in evidence that about June 2008, he went to the restaurant with three of his colleagues.  He had prepared his address and identity documents and provided the same to the Defendant to ask for transfer of shares.  He also asked the Defendant for the accounts who did not provide him with any, but said it would be ready soon.

27.  The Plaintiff said,  three months later, he asked the Defendant for transfer of shares and he also asked for the financial document of the Company.  The Defendant said he was waiting for the accountant to complete the documentation.  The Defendant also said the business was good.

28.  The Plaintiff said the Defendant did not report monthly to him.  About the meeting in June 2009, the Plaintiff agreed that he met the Defendant at the Clubhouse of Fairview Garden.  He had on that occasion offered to buy the shareholdings of the Defendant in the Company.  Alternatively, he could sell his shares to the Defendant.  The Defendant said it was a good idea but he had to think about it.  But he had not come back with any solution. 

29.  On cross-examination, the Plaintiff agreed that even when he paid the second payment of HK$350,000, the Defendant had not mentioned about the forming of a limited company.  But he believed the business would be run by a limited company.  He agreed that when he gave the blank cheque to the Defendant for the second payment of HK$350,000, and when the Defendant put down the name of the limited company, he was shown the name of the Company.

30.  The restaurant had a test run of its business in April and it was formally opened on 15 May 2008.  But he has not asked for the structure of the Company. 

31.  On cross-examination, the Plaintiff claimed that for the first half year of 2009, he had chased after the Defendant on three occasions by telephone.  When he could not get in touch with the Defendant, he consulted his legal adviser. Counsel for the Defendant put to the Plaintiff that he treated the Defendant as a partner and they have to share loss and profit.  The Plaintiff denied.

32.  The Plaintiff called Chui Chi Ming (“PW2”) as his second witness.  PW2 adopted his witness statement dated 5 February 2010 as his evidence in chief.

33.  According to PW2, the Defendant is his brother-in-law.  The Defendant told him that he wanted to start a Japanese restaurant and wished to find a few partners, including the Plaintiff.  Later, the Plaintiff told him that he had paid HK$250,000 to join the Company.  In about 2008, the Plaintiff told him that the Defendant invited him to increase the shareholding in the Company to 50%.  The Plaintiff said he was not interested.  He persuaded the Plaintiff to acquire another 10% shareholding, as a gesture to help a friend.

34.  He confirmed that the Defendant had informed him in 2007, after Mid Autumn Festival, of the intention to set up a Japanese restaurant in Wan Chai. Defendant asked him if he was interested and whether his friends might be interested to invest.  He then talked to the Plaintiff who agreed to join the Company by taking up 10% shares.  He said thereafter, it was the business between the Plaintiff and the Defendant.  He did not know the operation of the business.  He was also told that the investment would be about HK$2,000,000 – HK$3,000,000. 

35.  PW2 also confirmed that he asked the Plaintiff to invest another 10% shares in the Company, just to help a friend. 

The Defendant’s Evidence

36.  The Defendant gave evidence.  He adopted his witness statement dated 31 January 2010 as his evidence in chief.  According to his evidence, he knew the Plaintiff in 2006.  Both the Plaintiff and the Defendant enjoyed good food and the Plaintiff had come to his house on many occasions for dining.

37.  In 2007, the Defendant and his son decided to set up a Japanese restaurant, which restaurant was to be operated through a limited company.  The initial arrangement was for the Defendant to own 80% of the shareholding and his son to have the balance of 20%.  When the Plaintiff knew about his planning, he also showed interest.  He wished his son, when he came back from overseas, could learn to operate restaurant business.  After some discussion, he had an oral agreement with the Plaintiff that the Plaintiff would acquire from him 20% shareholding on conditions as follows:-

(a)        The Plaintiff would pay HK$250,000 by end of 2007 to acquire 10% shareholding.

(b)       In March 2008, the Plaintiff would acquire another 10% shares of the Company and the price should be determined by the total investment in the Company.

(c)        The Plaintiff, the Defendant and his son would share all loss and profit of the Company from March 2008 in proportion to their shareholding.  Accordingly, the Plaintiff would share 20% of the loss and profit of the Company.

(d)       If the Company operates at a loss and the Plaintiff fails to pay his share of the loss to the Company, the Defendant is at liberty to pay to the Company for the loss which should be the responsibility of the Plaintiff.  In such circumstances, the Defendant shall have a right to claim against the Plaintiff for the loss paid by the Defendant which should be the responsibility of the Plaintiff.

(e)        If the Company operates at a loss and the Defendant fails to pay his share of the loss to the Company, the Plaintiff is at liberty to pay to the Company for the loss which should be the responsibility of the Defendant.  In such circumstances, the Plaintiff shall have a right to claim against the Defendant for the loss paid by the Plaintiff which should be the responsibility of the Defendant.

(f)         The Plaintiff would nominate his son to take up the shares of the Plaintiff in the Company and the details of the Plaintiff’s son would be provided to the Defendant when his son returned to Hong Kong.

38.  According to the Defendant, the Plaintiff had in accordance with the Oral Agreement paid HK$250,000 to him in October 2007.  And in early 2008, taking into account the investment in the Company, the  agreement with the Plaintiff that his second 10% shareholding of the Company should be valued at HK$350,000.  The Plaintiff paid HK$350,000 in about March 2008.  The Japanese restaurant was formally opened on 15 May 2008 and the Plaintiff as one of the investors of the Company, did participate in the ribbon cutting ceremony.

39.  The Defendant said he was in charge of the restaurant but he did not receive any salary.  The Plaintiff and his son did not participate in the management.  At that time, being hit by the financial crisis, the restaurant business was bad. There was loss every month.  The Defendant said he reported the financial position of the Company to the Plaintiff monthly.

40.  According to the Oral Agreement, since the Company was trading at a loss, the Plaintiff should share the loss.  However, the Plaintiff told the Defendant that, as the financial position of every month could be different, he would make contribution after seeing the accountant’s report.

41.  The Defendant said he injected cash to the Company monthly to cover the loss.  He also claimed that after the restaurant started business, he had on many occasions asked the Plaintiff for information of his son.  The Plaintiff gave the excuse that his son had not returned to Hong Kong and he would let the Defendant know the details when he came back.  When the equestrian item of the Olympic Games was carried out in Hong Kong, he met the Plaintiff and his son. Again he asked for the information of his son and the Plaintiff only promised to provide them later.

42.  Towards the end of 2008, the Defendant suggested to the Plaintiff to transfer 20% of the shareholding to the Plaintiff.  The Plaintiff refused.

43.  In June 2009, the Defendant met the Plaintiff at the club of Fairview Park.  By then, the accounts of the Company were not ready.  The Defendant asked the Plaintiff to inject cash to cover the loss which the Plaintiff refused.  The Plaintiff also refused to provide the particulars of his son.  On the same occasion, the Plaintiff suggested to sell all his shares to the Defendant, which the Defendant refused.

44.  The Defendant said the Plaintiff did not contact him anymore.  And by August 2009, he received the first demand letter from the Plaintiff’s solicitor asking for a refund of HK$600,000.

45.  The Defendant also produced a report by the accountant covering the period from 24 January 2008 to 31 March 2009.  According to the report, the loss of the Company for this period is HK$1,667,963.41.  According to the Oral Agreement, the Plaintiff should bear a share of the loss at HK$333,592.68, which the Plaintiff has failed to pay.  The Defendant claimed that he has paid the Company for the share of the loss which is the responsibility of the Plaintiff.  Accordingly, the Defendant claimed that the Plaintiff should pay him HK$333,592.68.

46.  On cross-examination, the Defendant admitted that he had been carrying on business through limited company in the past.  He knew about the difference between a limited company and a partnership.  Mr. Ng, counsel for the Plaintiff,  also put to him that the arrangement for sharing of profit is different from trading through a limited company, which the Defendant agreed.

47.  It is not disputed that the Defendant wrote a receipt to the Plaintiff setting out he had received HK$250,000 from the Plaintiff for the Japanese restaurant.  The Defendant said he had been there with the Plaintiff for about an hour.  Mr. Ng put to him that for such important terms as to sharing of profit and loss, he should put it down in writing.  The Defendant said they trusted each other.  

48.  From the document, all the share capital has been issued to the Defendant and his son.  In total, they are holding 100% shareholding of the Company.  Mr. Ng queried why he issued all the shareholding to himself and his son, as by then the Plaintiff had paid the first HK$250,000.  The Defendant gave the reason that it was at the advice of the accountant. 

49.  Mr. Ng also put to the Defendant that he had not demanded the Plaintiff for injection of capital or payment for the loss, which the Defendant denied. 

50.  This is the Defendant’s case and there is no other witness.

Issues in Dispute

51.  On or about 9 March 2010, the parties have filed an agreed Statement of Issue.  The parties agree that the followings are the matters in dispute:-

(a)        Whether there are two agreements, namely the 1^st and 2^nd Agreements, or there is only one agreement, namely the Oral Agreement.

(b)       Whether there is any agreement that the Plaintiff’s son shall take up the Plaintiff’s shares in the Company.

(c)        Whether there is any agreement that the shareholders including the Plaintiff and the Defendant should share the loss of the Company.

(d)       What is the amount of the loss suffered by the Company?

(e)        Has the Defendant wrongfully refused or failed to procure the acquisition of 20% of the shareholding in the Company by the Plaintiff and/or transfer any of the said shares to the Plaintiff or at all?

(f)         Did the Defendant report the affairs of the Company to the Plaintiff?

52.  I would add one more issue – is the agreement(s) that I found to exist between the Plaintiff and the Defendant an agreement for the acquisition of share only or as stated by the Defendant that it is an investment in the Company.  I would explain later the importance of this issue.

Discussion and Ruling

53.  Before I move in to consider the evidence of the parties, it is noted that the Company has only been incorporated on 24 January 2008.

54.  The first issue to be determined is whether there is one agreement, (the Oral Agreement as claimed by the Defendant), or 2 agreements (the 1^st and 2^nd Agreements as claimed by the Plaintiff.)  I do not see the importance of this issue except on the credibility of the parties.  The main difference between the version of the Plaintiff and the Defendant is how to determine the price for the 2^nd 10% shareholding in the Company.

55.  The Plaintiff said he initially has agreed to acquire 10% share in the restaurant. Later he has agreed to acquire another 10% share at a revised price when the Defendant invited him to take up 50% of the shareholding.  PW2 has also confirmed that he persuaded the Plaintiff to take up the 2^nd 10% shareholding.  Their evidence has not been shaken on cross examination by Mr. Shum, counsel for the Defendant.

56.  The Defendant says that there is only one agreement.  The Plaintiff would purchase 10% of the shares of the Company in late 2007 at HK$250,000 and he would purchase another 10% shareholding in March 2008 at a price to be mutually agreed between the Plaintiff and the Defendant taking into account the total investment by all the investors.  So for the acquisition of the 2^nd 10% shares, the price is not determined, and there is no agreed formula to set the price.  It has to be agreed between the Plaintiff and the Defendant.  Hence at best this is an agreement to agree.  Even on the Defendant’s own case, there is a second agreement when he agreed the price with the Plaintiff in March.

57.  On the balance, I believe the evidence of the Plaintiff and PW1 that there are 2 agreements and the acquisition of the 2^nd 10% shares is a separation agreement.

58.  The Plaintiff claims that there is an implied terms that the Defendant should procure the acquisition of the shares.  While this is not admitted in the Defence, it is the Defendant case that the Plaintiff acquires from him 20% of the shares in the Company.  It must be obliged upon him to transfer the shares to the Plaintiff or his nominee.  That leads to the second issue, whether there is any agreement that the shares be transferred to the Plaintiff’s son.  This is important to the Defendant to explain the delay in transferring the shares.

59.  The Defendant said it has been agreed that the shares be transferred to the Plaintiff’s son as the Plaintiff wishes his son to learn the business of restaurant when he comes back from overseas.  He has asked the Plaintiff for the particulars of his son but the Plaintiff failed to provide.  This is denied by the Plaintiff. 

60.  A shareholder does not have participation in the daily operation of a limited company, as the management would be vested with the board of directors.  If the Plaintiff wishes his son to learn the business of the Company, he should arrange his son to be a manger or director of the Company.   There is no reason why he needs to defer taking up the shares until his son returns to Hong Kong.

61.  And it is the evidence that all the shares in the Company have been issued to the Defendant and his son.  By the time when the Company was incorporated and the shares allotted, the Plaintiff has given the first HK$250,000 to the Defendant.  If the Defendant is waiting for the Plaintiff to give him the names and details of his son to complete the allotment of share, there is no reason why at least 10% of the shareholdings should be kept for the Plaintiff or his nominee. 

62.  The evidence of the Defendant is not believable and I found against the assertion of the Defendant that he has been waiting for the Plaintiff to provide him with the particulars of his son to arrange the transfer.  I accept the evidence of the Plaintiff that he has requested for the transfer of shares from the Defendant who has failed or refused to transfer the shares to the Plaintiff. But the more difficult question is whether the Plaintiff’s evidence is sufficient to prove total failure of consideration on the part of the Defendant that justifies a claim for refund of the money paid to the Defendant.

63.  In a simple case, when a person pays a sum to another to buy the shares in a company, the failure to transfer the shares would be a breach.  The payer is entitled to seek specific performance or to accept the repudiation and treat the agreement as terminated.  Indeed, at the opening of Mr. Ng, he submitted that the Defendant has been in breach of the 1^st and 2^nd Agreement, and has failed to procure Plaintiff’s acquisition of the shared.  Plaintiff “accepted the repudiation” of the 1^st and 2^nd Agreement by the Defendant and sought a refund of the money paid.  But this is not the cause of action by the Plaintiff as pleaded.  Mr. Ng corrects himself at the closing to rely on total failure of consideration.

64.  Paragraph 7 of the Statement of Claim pleads the assertion that the Defendant has wrongfully refused or failed to procure the acquisition of 20% shares in the Company by the Plaintiff.  Paragraph 8 of the Statement of Claim plead that “the consideration for the payment of the said sums of HK$250,000 and HK$350,000 has wholly failed and the Defendant has had and received the said sums to the use of the Plaintiff.”  In gist, this is a restitution claim.

65.  Mr. Ng submitted that the restitution claim is based on total failure of consideration and it is not necessary for him to prove termination of the agreement. 

66.  To understand the argument of Mr. Ng, I would refer to the case of Shanghai Tongji Science and Technology Industrial Company Limited v. Casil Clearing Limited[2004] 3 HKLRD 550.  I would first refer to the head notes –

“A claim for restitution based upon principles of unjust enrichment predicated on the total failure of consideration involved asking four questions : (a) was the defendant enriched? (b) was the enrichment at the plaintiff’s expense? (c) was the enrichment unjust? (d) were there any applicable defences applicable?”

67.  Further, at paragraph 81, Mr. Justice Reberio PJ adopted the judgment of Lord Goff in Stocznia Gdanska SA v. Latvian Shipping Company[1998] 1 WLR 574:

“In truth, the test is not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due. The present case cannot, therefore, be approached by asking the simple question whether the property in the vessel or any part of it has passed to the buyers. That test would be apposite if the contract in question was a contract for the sale of goods (or indeed a contract for the sale of land) simpliciter under which the consideration for the price would be the passing of the property in the goods (or land). However before that test can be regarded as appropriate, the anterior question has to be asked: is the contract in question simply a contract for the sale of a ship? Or is it rather a contract under which the design and construction of the vessel formed part of the yard's contractual duties, as well as the duty to transfer the finished object to the buyers? If it is the latter, the design and construction of the vessel form part of the consideration for which the price is to be paid, and the fact that the contract has been brought to an end before the property in the vessel or any part of it has passed to the buyers does not prevent the yard from asserting that there has been no total failure of consideration in respect of an instalment of the price which has been paid before the contract was terminated, or that an instalment which has then accrued due could not, if paid, be recoverable on that ground.”

68.  Applying the principle, the Plaintiff has to show that the Defendant was unjustly enriched and there is no applicable defence.  And if the 1^st and/or 2^nd Agreements are contracts for the acquisition of shares simpliciter, and when the Defendant fails to transfer the share, it is total failure of consideration and would allow the Plaintiff to seek recovery.  But if they are contracts to invest in a business to be established, and acquisition of share is just part of the agreed terms, then failure to transfer may not be total failure of consideration.  The Court has to look at the contract and to determine if there was performance by the Defendant on part of the contract. I also note the Defendant claims that the Plaintiff agrees to invest in the Company.

69.  Hence, it must be relevant to the argument of the Plaintiff that there is a total failure of consideration to determine if the agreement is for acquisition of shares in the Company, or an investment in the Company or the restaurant business.

70.  Paragraph 1 of the Statement of Claim set out the 1^st Agreement.  The Plaintiff pleaded that by the 1^st Agreement, the Defendant agreed to procure the acquisition of 10% of the shareholding in the Company by the Plaintiff.  While the name of the Company is stated in paragraph 1 of the Statement of Claim, it is a fact that in October 2007, the Company has not been formed. 

71.  Further, the contents of the Plaintiff’s oral evidence conflict with part of his written statement.  It is the oral evidence of the Plaintiff that he did not know if a company would be formed to run the business when the 1^st Agreement has been formed.  He did not even ask. Couple with the fact that the Company has not been incorporated in October 2007, his own evidence does not support his case that the 1^st Agreement is to acquire shares in the Company.

72.  Paragraph 2 of the Statement of Claim referred to a receipt signed by the Defendant acknowledging the receipt of the sum of HK$250,000.  And on this document, the Defendant made reference not to the limited company, but to the name of the Japanese restaurant.  I also note the evidence of the Defendant that the Plaintiff is to invest in the Company. 

73.  Taking all these matters into account, when the Plaintiff paid the HK$250,000, he cannot establish that it was for the acquisition of 10% shares in the Company. The overall picture from the evidence points to his acquisition in a restaurant business to be formed by the Defendant.

74.  It is also the evidence of the Plaintiff that he asked the Defendant for the monthly statement or account of the Restaurant.   It again points to his interest and concern with the daily operation and business of the Company. The 1^st Agreement cannot be a contract to acquire share simpliciter.  It is an agreement to acquire a share in the business of the restaurant and as part and parcel of the terms, shares of the Company should be transferred to the Plaintiff.

75.  As far as the 2^nd Agreement is concerned, though it was reached after the Company was incorporated, I see no new fact that has arisen to change the intention of the Plaintiff.  It is the oral evidence of the Plaintiff that he was not aware of a limited company has been incorporated when he paid for the 2^nd 10% shareholding.  Only on cross-examination when he remembers that the name of the Company written by the Defendant has been shown to him.  It shows that he is interested in the business and not the company behind.  He must be investing on the same terms as the 1^st Agreement.  I conclude that the 2^nd Agreement must equally be an agreement to invest further in the restaurant business. 

76.  I found that the 1^st and 2^nd Agreements are contract to invest in the restaurant business.  It is not disputed that the restaurant has been established and in operation.  The mere fact that the shares have not been transferred would not justify a claim for total failure of consideration for a contract to invest in the restaurant business. 

77.  In the supplemental written submission provided by Mr. Ng, he submits that if he has to rely on termination upon repudiation by the Defendant, service of the writ would be an act to accept the repudiation and no express plead is required. 

78.  I cannot agree that when the claim is to be based on repudiation, such need not be pleaded.  But more important, if this is a claim based on repudiation, the remedy would be damages and not for restitution.  There have to be evidence on the damages suffered by the Plaintiff as a result of the breach, which may not be the HK$600,000 paid.

79.  Accordingly, while the Defendant has been in breach for not transferring the share when requested, I am not satisfied that the Plaintiff proved that there is total failure of consideration and the Defendant has been unjustly enriched.  I therefore dismiss the claim.

80.  I now proceed to consider the counterclaim.

81.  It is the Defendant’s case that he has agreed with the Plaintiff in the Oral Agreement that they have to share loss in proportion to their receptive shareholding. 

82.  Given my earlier finding that there are 2 separate agreements, I do not accept his allegation of the terms of the Oral Agreement.  I would just add the following ruling to support my finding that the Defendant failed in any event to establish any agreed terms as alleged on sharing of loss. 

83.  Mr. Ng rightly pointed out that if the Plaintiff and the Defendant are to share loss and profit in proportion to their shareholding/investment in the restaurant business, to the extent that they have to contribute more than their capital injection, the arrangement is more akin to a partnership arrangement.  It is contrary to what was in fact carried out by the Defendant (and intended by the Defendant) to form a limited company to run the business.

84.  If the Defendant has agreed the sharing of profit and loss of a business to be established, one would expect such important term be put down in writing. Further, the term for claiming contribution from the Plaintiff is in very specific condition.  It is structured in the form that when the Plaintiff fails to pay the Company the loss, only when the Defendant has paid the sum to the Company, the Defendant would be entitled to recover the same from the Plaintiff.  With that kind of complication, I am sure the term must be well designed before the Defendant discusses the same with the Plaintiff.  Or it would be the result of discussion between the Plaintiff and the Defendant on the night when the first HK$250,000 has been paid to the Defendant.  The Defendant has written a receipt for the money and I cannot see any reason why the Defendant has not put down the alleged terms in writing, if they have been agreed.  

85.  The Defendant tries to explain in evidence that he trusted the Plaintiff.  I found his evidence on the detail terms unbelievable.

86.  Further, even if there were such terms, the burden really rests on him to prove that he has paid the Plaintiff’s share of loss to the Company.  I have only been shown a number of bank vouchers showing payment into the Company by the Defendant. Clearly I have no evidence as to the purpose of this payment.  While the Defendant claimed that he has paid for all the loss of the Company, the burden rests upon him to prove that he had paid the Plaintiff’s share and it was upon him to demonstrate how he had paid. 

87.  Further, he only claims the loss suffered by the Company from March 2008, when the Plaintiff has taken up a total of 20% shares.  The only evidence to prove the loss of the Company is the Audit Report adduced by the Defendant for the period from 24 January 2008 to 31 March 2009.  The report does not support the period of claim.  There is no evidence on the loss for the period starting from March 2008.

88.  So even on his own case, he fails to prove the actual loss of the Company and that he has made the payment to the Company.  Accordingly, he failed to prove that he has the right to recover against the Plaintiff.

89.  In conclusion, I dismiss the counterclaim.

90.  As I have dismissed both the claim and the counterclaim, I consider this an appropriate case where I would make no orders to cost in this action.

Mr Danny Ng, instructed by Messrs. Joseph S. C. Chan & Co., for the Plaintiff.

Mr Kenneth Shum, instructed by Messrs. C. Y. Tsang & Co. for the Defendant.