Nice & Well Ltd v. Fu Mee Yuk Shirley
Read the full judgment text of HCA 2726/2008 on BabelCite. This High Court CFI judgment was delivered on 31 December 2010.
1. The plaintiff is a company incorporated in Hong Kong on 23 June 2000 under the Companies Ordinance.
Cites 1 case
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HCA2726/2008 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 2726 OF 2008 ------------------------ BETWEEN
------------------------ Before : Hon Suffiad J in Court Dates of Hearing : 30–31 August, 1 and 10 September 2010 Date of Judgment : 31 December 2010 ---------------------- JUDGMENT ---------------------- 1.The plaintiff is a company incorporated in Hong Kong on 23 June 2000 under the Companies Ordinance. 2.At all material times, the defendant and one Leung Kar Fai (“LKF”) were the only two directors and shareholders of the plaintiff, each holding one half of the issued shares of the plaintiff. 3.The dispute herein is essentially a dispute between LKF and the defendant concerning the affairs and their dealings in the plaintiff, but due to the nature of that dispute, the plaintiff is a necessary party in this action. Leave was granted to LKF in HCMP 2148 of 2008 to bring a derivative action in the name of the plaintiff against the defendant. 4.Accordingly, this is a statutory derivative claim by the plaintiff made pursuant to section 168BC of the Companies Ordinance against the defendant for :
5.The plaintiff also seeks to account for and inquire as to the whereabouts of HK$1,563,000 taken from the plaintiff by the defendant. Background 6.The plaintiff was acquired by the defendant together with one Chan Koon Hung (“Chan”) on 12 July 2000 and on 18 July 2000 the shares in the plaintiff was formally transferred to the defendant and Chan. 7.On 28 July 2000 the plaintiff entered into a Provisional Sale and Purchase Agreement to purchase Flats A and B on the 1st floor of Teemko Court, Nos. 57 and 59 Java Road, North Point (“the Property”). The purchase price for the Property was $1,767,000.00. 8.On 21 August 2000 Chan transferred his half share in the plaintiff to LKF who thereafter held 50% of the plaintiff equally with the defendant. 9.The plaintiff has thereafter opened and maintained a bank account, being account no. 180828-001, with Wing Hang Bank Ltd (“Wing Hang Bank”). The madate given by the plaintiff to Wing Hang Bank was that for cheques issued equivalent to or under $10,000, the signature of one director alone would suffice. However, for amounts over $10,000 the signatures of both directors, namely the defendant and LKF, were required. 10.On 26 August 2000, a mortgage was obtained with the Wing Hang Bank for $1,236,000 in respect of the purchase of the Property by the plaintiff and the outstanding amount of $531,000 was put up half each by LKF and the defendant, being the two shareholders of the plaintiff. 11.On 8 September 2000 the plaintiff took possession of the Property and renovation and decoration works were carried out in respect of both Flat A and Flat B of the Property in October 2000. Thereafter, both Flat A and Flat B of the Property were used by the plaintiff to carry on a business of tuition classes which were operated and run by LKF. 12.From December 2001, only Flat A of the Property continued to be used to carry on the tuition business. Flat B was leased out by the plaintiff at a monthly rent of $8,200. 13.On or about 20 December 2001 the plaintiff was granted overdraft facilities of up to $100,000 by Wing Hang Bank. 14.In December 2002 the tuition business of the plaintiff completely ceased and as from March 2003 Flat A of the Property was also leased out by the plaintiff. 15.It is not disputed that the tuition business carried on by the plaintiff did not generate any profit to the plaintiff but in effect resulted in losses to the plaintiff. 16.Some time in May 2007, the plaintiff entered into an agreement to sell the Property for HK$4,230,000. 17.On 14 May 2007 $200,000 by way of deposit was received by the plaintiff in respect of the sale of the Property. 18.On 23 May 2007 a further deposit of $223,000 was received by the plaintiff. 19.Completion for the sale of the Property by the plaintiff took place on 29 June 2007 when the plaintiff received the balance of the purchase price for the Property. Plaintiff’s case 20.It is the plaintiff’s case that :
21.In so far as the $1,000,000 claimed by the plaintiff is concerned, the plaintiff’s case is that the plaintiff had neither approved repayment of the loan in the amount of $1,000,000 to the defendant nor had the plaintiff approved loan interest at the rate of 12% p.a. in respect of such loan nor indeed any repayment of interest. 22.Notwithstanding that the plaintiff had not approved those matters stated above, the defendant, who was in control of the plaintiff’s cheques, had on 3 July 2007 repaid to herself, using the plaintiff’s cheque, the sum of $1,000,000 by way of repayment of loan and which loan carried loan interest at the rate of 12% p.a. 23.As for the sum of $563,000 claimed by the plaintiff, it is the plaintiff’s case the total amount of $563,000 was made up of :
24.It is the plaintiff’s case that the defendant had no authority to make out these 35 cheques to herself and that there was no resolution of the plaintiff or of the shareholders authorizing same. 25.In this respect, it is the case of the plaintiff that there was no written resolution of the plaintiff to evidence such approval for the defendant to have obtained from the plaintiff the amounts now claimed by the plaintiff. 26.Furthermore, the plaintiff points to the fact that in respect of the 35 cheques above issued between 15 and 27 May 2007, each for $10,000, ten of those cheques were all issued on the same day, namely, 15 May 2007, while 20 of those cheques were all issued on another day, namely, 25 May 2007. It is the plaintiff’s case that the defendant had issued a number of cheques all on the same day, and all for the amount of $10,000 due to the fact that the defendant could sign those cheques alone without the need to get LKF to countersign and in that way to hide from him the fact that the defendant was making out those amounts of payment to herself without the proper authorization and approval. Defence case 27.As a matter of fact, it is not disputed by the defendant that she had received :
28.As for the last of the 35 cheques, the one drawn on 27 May 2007, the defendant’s case is that that cheque was not received by her but was paid to a contractor for services rendered to the plaintiff for repairs to the Property. 29.It is also the defence case that at the outset, after LKF became an equal shareholder with the defendant in the plaintiff, it was orally agreed between the defendant and LKF that the plaintiff would be operated on the following basis :
30.In so far as the 22 cheques totalling $213,000 is concerned, it is the defence case that by early December 2001, the defendant had made loans to the plaintiff which by then had exceeded $400,000 and which was far more than the loans by LKF to the plaintiff. Therefore in line with what had been agreed between the defendant and LKF, the defendant had caused the plaintiff to make repayment to her by issuing the following cheques (all signed by the defendant alone) :
31.This was done by the defendant to offset her increasing shareholder’s loan to the plaintiff and had been clearly reflected in her Shareholder’s Loan Account which she had prepared in June 2007 (updated in July 2008) a copy of which she had given to LKF. 32.As for the 34 cheques between 15 and 25 May 2007, each for $10,000, it is the defence of the defendant that in a telephone conversation between the defendant and LKF on or about 14 May 2007, after agreeing on selling the Property at $4,230,000, LKF had further agreed with the defendant that upon receipt by the plaintiff of the preliminary deposit and down payment for the sale, part of the defendant’s shareholder’s loan then outstanding would be repaid to the defendant first. As a result of such agreement between the defendant and LKF, the defendant made out those 34 cheques to herself as partial repayment of the shareholder’s loan by her to the plaintiff. 33.As for the $1,000,000, the defence case is that on or about 29 June 2007 (i.e. the completion date when the Property was sold) when the plaintiff received the balance of the purchase price from the sale of the Property, the defendant and LKF met at the “Canteen” restaurant in International Finance Centre II to discuss the sharing of the profits and repayment of the shareholder’s loan. 34.Based on estimation, the defendant and LKF agreed to a distribution of profits at $1,000,000 to each of them. 35.Furthermore, since the defendant had prepared and brought along with her the Shareholder’s Loan account of the defendant, a copy of which was given to LKF, LKF had agreed to the repayment of loan in the amount of $1,000,000 with interest accrued at the rate of 12% p.a. 36.As for LKF’s loans to the plaintiff, it was further agreed by the defendant and LKF that as and when LKF had prepared his own shareholder’s loan account, and if the funds left in the plaintiff was insufficient to repay the loans made by LKF to the plaintiff, the defendant would make re-adjustment and repay part of what she had already received so as to cater to the repayment of LKF’s loans by the plaintiff. 37.As a result of such agreement between them, two cheques were made out, one to LKF for $1,000,000 being his share of profits and the other cheque for $2,000,000 to the defendant being her share of profits as well as repayment of her loan to the plaintiff. Both cheques were counter-signed by LKF and the defendant. The issues 38.The plaintiff in her opening submission has identified the following main issues in dispute between the parties :
39.In coming to a determination on the above main issues, it would also be necessary to make findings on the following disputed issues of facts. 40.Firstly, as to the oral agreement alleged by the defendant to have been reached between the defendant and LKF at the outset as to how the plaintiff would be run, and stated in paragraph 29 above in this Judgment, sub-paragraphs (a), (c) and (g) thereof are admitted by the plaintiff. 41.It would therefore be necessary to make findings on those matters alleged by the defendant in (b), (d), (e) and (f) of paragraph 29 above. 42.It would also be necessary to make findings on whether there was such oral agreement between the defendant and LKF which is alleged by the defendant to have taken place at the Canteen restaurant in the International Finance Centre II on or about 29 June 2007, but disputed by the plaintiff/LKF. 43.Finally, the defendant has also pitched her case on the basis that the plaintiff, as a company, was in fact run like a “quasi-partnership” by the defendant and LKF and invite such finding to be made. 44.Apart from the above matters, there were also a number of disputed factual matters in the evidence given by LKF on behalf of the plaintiff and the evidence of the defendant, no doubt, due to the long history involved in this case. However, those factual differences between them were only peripheral to the main dispute between them. Some of those factual differences will be touched on when I come to deal with the evidence. Where necessary, findings will also be made of those peripheral disputed facts but it may not be necessary for the purpose of this judgment to make specific findings on each and every one of them. The evidence 45.The evidence in this case came from LKF given on the plaintiff’s behalf and from the defendant herself. 46.Both of them had filed witness statements which were adopted at trial as their evidence-in-chief. 47.The 1st statement of LKF, after dealing with formal matters relating to the plaintiff and also with the purchase of the Property by the plaintiff and its subsequent sale in May 2007 (all of which are not in dispute), LKF then goes on in that 1st statement to deal with the disputed matters between the parties. 48.In summary, LKF says that on 3 July 2007, the defendant had without authority caused the plaintiff to repay her loan in the amount of $1,000,000 which was excessive and for which the defendant had failed to disclose that she had charged interest at 12% p.a. which had never been approved either. 49.LKF goes on to state that auditors were instructed in September 2007 to prepare audited financial statements of the plaintiff and it was only on 16 May 2008 when he was alerted by the auditors (via its affiliate) that the defendant had misappropriated funds of the plaintiff to her own account that he came to know that the defendant had without authorization caused the plaintiff to pay her a total of $563,000.00, the subject of the claim by the plaintiff now. 50.The matter was then put in the hands of his solicitors leading to the granting of leave to bring this statutory derivative action in the plaintiff’s name against the defendant. 51.LKF goes on to say that during the running of the tuition business by the plaintiff, he was working full time in that tuition business and there was a mutual understanding between him and the defendant that LKF was entitled to a monthly salary of HK$30,000 as well as being reimbursed for all his expenses incurred in relation to the tuition business. Moreover, that understanding was not conditional upon the tuition business turning out to be profitable. 52.LKF also states that there was no agreement, oral or written, as to the repayment of the shareholder’s loan to the plaintiff and no agreement as to the interest to be charged on such shareholder’s loan. There was also no agreement as to distribution of profits to any of the shareholders. 53.The only agreement was that the gain or losses of the plaintiff would be shared equally between the shareholders. 54.LKF also says that at no time had he given his consent to the defendant to withdraw the monies now claimed by the plaintiff nor was there any directors’ resolution to that effect. Therefore the defendant had effectively misappropriated such funds from the plaintiff’s bank account to her own account. 55.The 2nd statement of LKF was made in reply to the defendant’s witness’ statements. 56.In his 2nd statement, LKF confirmed that the defendant did receive HK$2,000,000 from the plaintiff by way of Cheque No. 00157 while LKF himself received HK$1,000,000 by way of Cheque No. 00161, but disagrees that the reason for such payments was due to the agreement alleged by the defendant. 57.LKF goes on to explain that after the sale of the Property and having collected the balance of the proceeds from a law firm, he had discussed with the defendant in a restaurant in Central in June 2007 the distribution of the profits. In this respect LKF and the defendant had agreed to distribute $1,000,000 each of them being a share of the profits first. 58.Also at that meeting the defendant had given him some documents which the defendant claimed to be the unaudited accounts prepared by her in respect of the plaintiff. The defendant said that she would like to be re-imbursed for the money she had spent for the plaintiff, which the defendant estimated to be $1,000,000. 59.LKF trusted the defendant and thereby agreed to such reimbursement to the defendant of HK$1,000,000 on a temporary basis and subject to the final audit to be done. 60.That was the reason why LKF counter-signed on Cheque No. 00157 for HK$2,000,000 to the defendant. 61.In cross-examination LKF said he first met the defendant’s husband in 1985, and in 1986 met the defendant when he and the defendant were colleagues at the Hong Kong Polytechnic. Some time later LKF and his wife had played host to the defendant when the defendant went over to Canada. Since then he had become good friends with the defendant. 62.LKF further said that in May or June 2000 the defendant had invited him to join in a tuition business only but not to join the plaintiff. He refused to join only the tuition business but indicated that he would be interested to join the plaintiff for investment purpose. Ultimately he did join the plaintiff, taking over the half share of the plaintiff from the withdrawing shareholder. 63.LKF further said that the defendant told him she had lost her job with the Hong Kong Polytechnic and wanted to start a tuition business giving tuition in financial courses. It was intended for both the defendant and LKF to run the tuition business since they both have expertise in that area. 64.A short while later, the defendant told LKF that the defendant had secured another job with the Chinese University and suggested that he alone should run the tutorial business. At the same time, the defendant agreed with LKF that LKF would be paid a salary of $30,000 per month for running the tuition business. That amount of salary to LKF was calculated on the basis of 80% of the defendant’s salary at the Chinese University. 65.LKF was referred by counsel for the defendant to an email dated 13 March 2008 in which he asserted to the auditors that he was entitled to a salary of $28,000 (from the tuition business) but could not explain why he had given that figure of $28,000 to the auditors and not $30,000 as alleged by him in evidence. 66.When it was also pointed out to LKF that in his own shareholder’s loan account prepared by LKF in July 2007 there was no claim for salary by him in those accounts whether for $28,000 or $30,000 per month, LKF agreed that he had not included any claim for salary in those accounts without any explanation given. 67.LKF also gave evidence that during the time when the tuition business was ongoing, he was aware of all the documents relating to the tuition business, but the other documents of the plaintiff which did not relate to the tuition business were all kept by the defendant. 68.As for bank documents of the plaintiff, the evidence of LKF was that the bank documents were kept by the defendant and he did not have them. It was only in May or June 2007 that he had asked the defendant for the bank documents of the plaintiff. 69.When further cross-examined on the bank documents, LKF admitted that there was a time when the bank statements of the plaintiff were mailed to the tuition school but were handed over to the defendant. After the tuition business closed, the bank statements were mailed direct to the defendant’s address. The reason given by LKF for that was because the defendant was the person who took care of the accounts of the plaintiff. 70.LKF agreed that during the time the tuition business of the plaintiff was ongoing, both he and the defendant did contribute to the expenses of the plaintiff by way of shareholders’ loans, but after January 2003 (the time when the tuition business ceased), he stopped to contribute making any further shareholder’s loan to the plaintiff. The reason for that, according to LKF, was because the plaintiff was receiving a monthly rent of some $17,000 from the Property being rented out while the mortgage monthly payment which the plaintiff had to meet was only about $12,000 per month. 71.LKF said that he did not know the plaintiff had accumulated outstanding management fees of over $200,000 between March 2003 and 2007, but he did know that the plaintiff had a overdraft account of $100,000. When asked about the interest rate for the overdraft account of the plaintiff, LKF said that he did not know the exact figure of the interest rate but that it would depend on the prime rate at the time. 72.LKF agreed with counsel for the defendant that the rental income from the Property for the period 2003 to 2007 was insufficient to meet all of the expenses of the plaintiff, but disagreed that when he stopped the tuition business LKF told the defendant that he had no more capital to contribute to the plaintiff but that the defendant will have to meet the expenses of the plaintiff herself from that time onwards. 73.LKF agreed that he had left all the management decisions to the defendant. LKF further said that if the plaintiff did not have sufficient money to meet its expenses, the defendant ought to have prepared the proper accounts with which to ask the shareholders to contribute. In this respect LKF puts the blame on the defendant for not having prepared the proper accounts of the plaintiff. 74.LKF was also cross-examined as to what happened in May, June and July 2007when the decision was taken for the Property to be sold and after its sale. 75.LKF said that the defendant had called him by phone on a number of occasions and finally they agreed on a sale price for the Property. In the course of those conversations between them, they had also discussed about the moneys loaned to the plaintiff by both of them and how such loans would be repaid. 76.When it was put to LKF by counsel for the defendant that on 14 May 2007, the defendant had spoken to LKF about repayment of moneys to the defendant first, LKF agreed that he had said to the defendant that the accounts had to be calculated first, after which it was possible that repayment could be made to the defendant first. LKF emphasized that the outstanding accounts had to be finalized first before there could be repayment of loans. 77.LKF further agreed that when the time came for completion of the sale of the Property, the defendant had contacted him to go to a solicitors office to sign the necessary documents. After signing at the solicitors office, the defendant suggested to LKF to sit down at a nearby restaurant to discuss some matters. They went to a fast food restaurant on the 2nd floor of the IFC where they had discussed for about an hour. They had discussed distribution of the profit from the sale of the Property and also the repayment of the shareholders’ loan. 78.During the meeting at the fast food restaurant, the defendant had shown to LKF a set of accounts which the defendant had prepared. According to LKF, he was taken by surprise by the set of accounts from the defendant since the defendant had not forewarned him about them nor had the defendant told him to prepare his own set of accounts. For that reason, he had not prepared any accounts himself at that meeting relating to what was owed to him by the plaintiff. 79.It is the evidence of LKF that at the fast food restaurant, he had only taken a glance at the accounts prepared by the defendant. The defendant pointed out to LKF that from the set of accounts prepared by the defendant, the plaintiff had owed to the defendant some $1,031,000 odd loaned by the defendant to the plaintiff over the years. 80.As LKF trusted the defendant, he agreed to counter-sign two cheques from the plaintiff, one cheque (cheque no. 00157) for $2,000,000 to be paid over to the defendant. The other cheque, (cheque no. 00161) for $1,000,000 to LKF himself. The two cheques represented distribution of profits of $1,000,000 to each of them. The further $1,000,000 to the defendant was for repayment of loan by the plaintiff to the defendant but subject to final audit of the accounts of the plaintiff. 81.LKF further explained that since when the two of them were at the Canteen restaurant he had only taken a glance at the accounts prepared by the defendant, he was not in a position to know that the defendant had charged loan interests of 12% p.a. up to May 2007 in those accounts prepared by the defendant. 82.When asked whether LKF himself had also adopted the same rate of interests in his own shareholder’s loan accounts prepared by LKF in July 2007, LKF said that he had made reference to the defendant’s accounts and had adopted her interest rates, but that the defendant had rejected his sets of accounts. 83.In re-examination, upon further clarification by the court, LKF said that he was given a copy of the defendant’s shareholder’s loan account to take away at the fast food restaurant before he counter-signed the two cheques for $2 million and $1 million. 84.The $1 million to each of them was the distribution of profits agreed between the two of them. The further $1 million to the defendant was a temporary repayment of the defendant’s loan to the plaintiff but subject to the final audit. LKF said he had agreed to that $1 million repayment of the defendant’s loan because the defendant had pointed out to him the figure of $1,030,000 odd owed to the defendant by the plaintiff for the loan. 85.LKF said he was not aware during their meeting at the fast food restaurant of the repayment to the defendant of $10,000; $9,000 and $4,000 by three different cheques all on the 3 December 2001 which was stated in the accounts given to him by the defendant. 86.LKF also said he was not aware of the two amounts of repayment to the defendant both in the sum of $10,000 on 13 and 23 May 2002. Nor the seven repayments by cheques each for $10,000, two of which were on 7 July 2004 and the other five on 17 March 2005. 87.LKF was also not aware when he was at the fast food restaurant of the ten repayments by cheques stated in the accounts of the defendant, again each for $10,000—two of which were on 16 June 2005 and eight of which were on 14 November 2005. 88.LKF also said that he was not aware at the time of the three entries shown in the shareholder’s loan accounts of the defendant on 15, 17 and 25 May 2007 totalling some $340,000. 89.It was the evidence of LKF that he only discovered those entries for repayment in the accounts prepared by the defendant after he had taken the accounts home and after going through them carefully at home. It was then that LKF suspected something but it was only after confirming his suspicions with his auditors in about March or April 2008 that he knew what had happened. 90.Thereafter LKF said he had not ratified the payment of those cheques to the defendant. 91.LKF also said that after the defendant had agreed to LKF’s salary being calculated at 80% of the defendant’s salary, the defendant’s husband had gone to see LKF and told LKF that the tuition business could not afford to pay LKF that salary. LKF then said to the defendant’s husband that the salary could be paid to LKF at a later stage but that LKF would claim his daily transportation and lunch expenses which could be deducted from his salary in future. Such daily expenses were to be paid out to LKF at the end of each month and the deferred salary would be deducted when the plaintiff started to make a profit as a whole. 92.The defendant also gave evidence. 93.The defendant adopted her two witness statements as her evidence-in-chief and when in the witness box also produced to court (in addition to the documentary evidence in the trial bundle) a computer download showing her employment with the Chinese University, in particular her appointment and salary (Exhibit D1). 94.The relevant parts of the defendant’s evidence can be summarized as follows. 95.The defendant and LKF were good friends having known each other for a number of years before their joint investment in the plaintiff. They came to know each other when both were qualified accountants and teachers. 96.In 2000, the defendant came to know that the Property was put up for sale at an attractive price. Initially the defendant invited Chan, being a friend of hers, to join with her in investing in the Property by acquiring the plaintiff on or about 18 July 2000 as the vehicle with which to hold the Property. 97.The sale and purchase agreement to purchase the Property was entered into by the plaintiff on 28 July 2000. 98.Thereafter, Chan wanted to pull out from that investment for personal reasons. 99.As a result, the defendant approached LKF to take over the half share of the plaintiff from Chan. LKF informed the defendant that he was interested in running a tuition centre in North Point. 100.On 21 August 2000, formal arrangements were made for the transfer of Chan’s share in the plaintiff over to LKF, after which the defendant and LKF became equal shareholders in the plaintiff. Both the defendant and LKF were also appointed as directors of the plaintiff. 101.Because of their long time friendship and trust for each other, the defendant and LKF agreed that there was no need to formalize their arrangement in writing, thus the relative absence of minutes in the running of the plaintiff, except where such paperwork was required by statute or required for banking purposes. 102.Moreover, the defendant orally agreed with LKF as follows :
103.The Property was purchased by the plaintiff for $1,767,000. For that purpose, the plaintiff obtained credit facilities of $1,236,000 from the Wing Hang Bank on or about 26 August 2000 to complete the purchase with the Property being mortgaged as security for the credit granted by Wing Hang Bank. 104.The balance of the purchase price was contributed equally by the defendant and LKF. 105.Completion for the purchase of the Property by the plaintiff was on or about 8 September 2000. 106.Thereafter agreement was reached between the defendant and LKF to use the Property as a tuition centre to carry on a tuition business of the plaintiff to be run and managed by LKF. LKF had suggested that he should be paid a salary of $30,000 per month, but the defendant was not agreeable to that. Ultimately they came to an understanding that LKF would run the tuition business on a trial basis and mutually agreed as follows :
107.There was never any indication by LKF or agreement between them that LKF could charge meal allowances, or transportation or parking expenses for running and managing the tuition business of the plaintiff. 108.Initially, both Flats A and B of the Property were used for the tuition centre after renovations had been carried out. As matters turned out, the tuition business was not profitable and by December 2001, only Flat A of the Property continued to be used for the tuition business of the plaintiff. Flat B was rented out by the plaintiff. 109.When things did not improve in the tuition business, at the end of 2002 the tuition business of the plaintiff closed down and even Flat A was rented out in early 2003. 110.By early December 2001, the defendant had already loaned over $450,000 to the plaintiff (without taking account of any interest) which was far more than the loan made by LKF. On 3 December 2001 the defendant, in accordance with what had been agreed between herself and LKF, issued 3 cheques for HK$10,000, HK$9,000 and HK$4,000 to be paid to the defendant to reduce the increasing gap between their respective loans to the plaintiff. LKF was aware of these repayments at all times since he was at the time actively involved with the tuition business which was still going on. 111.On 20 December 2001, the plaintiff applied to and was granted an overdraft facility of HK$100,000 by Wing Hang Bank with the interest rate at 2.25 % over prime. 112.After obtaining the overdraft facilities from Wing Hang Bank, and by agreement with LKF, two cheques each for HK$35,000 were issued by the plaintiff in favour of the defendant. These two cheques were jointly signed by the defendant and LKF and were for the purpose of further reducing the amount of the loan made by the defendant to the plaintiff. The defendant also explained (in re-examination) that this repayment was split into 2 cheques each for $35,000 because the defendant intended to bank the 2 cheques into two different accounts of hers with two different banks. 113.At that time no repayment was made to LKF as was agreed between them because the defendant’s loan to the plaintiff still exceeded by far the loan from LKF to the plaintiff. 114.After the tuition business of the plaintiff closed at the end of 2002 or early 2003, LKF informed the defendant that he had insufficient finances to contribute towards the maintenance of the Property including its mortgage repayments. 115.As a result, from January 2003 until the sale of the Property in June 2007, the defendant alone contributed funds into the plaintiff to maintain the Property, at times having to use her own overdraft facilities with the Hong Kong and Shanghai Banking Corp Ltd. 116.As can be seen from the shareholder’s loan account prepared by LKF, LKF had only put up some $287,000 by way of loan to the plaintiff up to 31 December 2002 and thereafter had stopped making any more contributions to the plaintiff because, as LKF said, he was not in any financial position to continue with such contributions. 117.In contrast to the amount loaned by LKF to the plaintiff, the defendant had to continue alone to make loans to the plaintiff since January 2003 and by May 2007, the defendant had personally loaned some HK$1,043,000 odd of her own funds to the plaintiff since the rental income alone from the Property was insufficient on its own to meet all the expenses including the mortgage repayment of the plaintiff in maintaining the Property. 118.In accordance with what had been agreed between them (LKF and the defendant) the defendant had caused the plaintiff to further repay her the amount of $190,000 between 13 May 2002 and 14 November 2005. 119.This further amount of $190,000 was repaid to the defendant in the following manner :
All these 19 cheques were signed singly by the defendant. 120.On 14 May 2007, the defendant had called LKF on the phone to discuss with him the sale of the Property by the plaintiff and the repayment of part of the defendant’s loan to the plaintiff. 121.In that phone conversation, it was agreed between them that the plaintiff would sell the Property for $4,230,000. It was also agreed between them that upon the plaintiff receiving the preliminary deposit and down payment for that sale, a portion of the defendant’s loan to the plaintiff would be repaid by the plaintiff first. 122.On the same day, i.e. 14 May 2007, the plaintiff received $200,000 as initial deposit from the purchaser in respect of the sale of the Property by the plaintiff. 123.In line with what was agreed between her and LKF, the defendant caused 12 cheques drawn on the plaintiff’s bank account, each for $10,000, to be made out in favour of the defendant on 15 May 2007, as well as a further cheque on 17 May 2007 in like manner. All these 13 cheques were signed singly by the defendant. 124.Upon receipt by the plaintiff of the down payment of $223,000 on 23 May 2007 for the sale of the Property, the defendant also caused 21 cheques drawn on the plaintiff’s bank account, each for $10,000 to be made out in favour of the defendant on 25 May 2007 to offset part of her loan to the plaintiff as agreed with LKF. 125.LKF had been informed and had agreed to such repayments to the defendant in their phone conversation on 14 May 2007. 126.Completion date for the sale of the Property by the plaintiff was 29 June 2007. On that day, both LKF and the defendant had gone up to a solicitor’s office in Central to sign the necessary documentation for the sale of the Property by the plaintiff. They also received the balance of the purchase price in the amount of $3,807,000 on behalf of the plaintiff. 127.After they left the solicitor’s office, the defendant and LKF went to the “Canteen”, a fast food restaurant in the International Finance Centre II for a discussion between themselves as to the distribution of profits and the winding up of the plaintiff. 128.In the “Canteen” restaurant, the defendant provided to LKF a copy of a shareholder’s loan account prepared by herself showing the loan she had made to the plaintiff over the years. That shareholder’s loan account showed that the plaintiff owed some $1,031,000 odd to the defendant to date inclusive of interest. [The total amount of the loan outstanding from the plaintiff came to $428,454.50 and the accrued interest at the rate of 1% per month from October 2002 to 30 June 2007 came to $603,389.50.] 129.However, LKF had not prepared a similar account showing the total amount of his loan to the plaintiff. 130.In the discussion, upon estimation by both, they agreed that they should be able to enjoy a profit of $1,000,000 each from the sale of the Property. 131.They further agreed to the following :
132.Pursuant to such agreement between them, two cheques drawn on the plaintiff’s bank account were made out. The first cheque (Cheque no. 000157) was for $2 million made out in favour of the defendant. The second cheque (Cheque no. 000161) was for $1 million made out in favour of LKF. Both cheques were countersigned by both LKF and the defendant. 133.The defendant also explained that the reason why the two cheque numbers were not sequential was because the three cheques in between those two were wrongly written on and tore up at the restaurant. 134.The defendant and LKF met again on 20 July 2007 when LKF presented his shareholder’s loan account to the defendant. 135.Upon seeing LKF’s accounts, the defendant was shocked to learn that LKF had claimed some $238,854 for transportation and food expenses for the period from October 2000 to November 2002 during the time when the tuition centre was being run by LKF when such expenses had never been discussed or agreed between them. 136.At that meeting between the defendant and LKF, LKF did not comment on the rate of interest charged by the defendant since he had also adopted the same rate of interests in LKF’s shareholder’s loan accounts. Neither did LKF say anything to the effect that the defendant had been withdrawing money from the plaintiff’s bank account in an unauthorized manner. 137.As the defendant was not prepared to accept the accounts prepared by LKF in respect of his shareholder’s loans to the plaintiff (due to his claiming the amount of transportation and food expenses which had never been agreed between them), the audit of the plaintiff’s accounts cannot be finalized and the plaintiff faces potential litigation from the Inland Revenue Department for its failure to file tax returns. 138.On 4 July 2008, after further reflection on the accounts as a result of this dispute with LKF, the defendant has caused a sum of $164,690.33 to be deposited back into the plaintiff’s bank account on the basis that she may have received a bit more than she was entitled to in so far as the distribution of profits was concerned. 139.After that repayment by the defendant, the plaintiff’s bank account stands at a credit balance of $427,461.90 as at 4 July 2008. 140.In cross-examination, the defendant was asked to explain why on a number of occasions she would issue a number of cheques each for $10,000 to herself all on the same day instead of one cheque for the full amount. 141.In answer to that question the defendant explained that the first time that happened was the three cheques all issued on 3 December 2001 for $10,000, $9,000 and $4,000 respectively totalling $23,000. That was the time when Flat B of the Property was leased out and LKF had informed the defendant that the leasing out of Flat B had resulted in $24,000 odd being received by the plaintiff for rent and rental deposit. The defendant then reminded LKF that since the plaintiff had some surplus from the rent and rental deposit and the defendant’s loan to the plaintiff was at that time greater than LKF’s loan she should be repaid some of that loan first as had been agreed between them. LKF agreed to that. However, since the LKF was residing in Fo Tan, the tuition center was in North Point, but it was the defendant who held the cheque book of the plaintiff, out of convenience, LKF further agreed that the defendant could make out three cheques under $10,000 which she could sign by herself rather than for one cheque of over $10,000 which required both their signatures. Ever since that time she took it that LKF had authorized her to make out cheques for repayment to herself in such manner. 142.When further asked why they did not change the bank mandate to alter the signing method for cheques, the defendant answered that they did not think about changing the bank mandate. Finding of fact 143.In this dispute everything turns on the credibility of LKF and the defendant. 144.However, before I go into the issue of credibility, I can safely make the finding that the plaintiff, as a company, was carried on as a quasi-partnership by LKF and the defendant. Such a finding is not difficult to make on the evidence since everything points in that direction and it is quite clear that everything was done on an informal basis by both of them in so far as their running of the plaintiff was concerned. 145.On the evidence before me, the plaintiff was a small private company. It had only two shareholders and both of whom were also directors. It’s only one real asset was the investment in the Property. The tuition business was a side venture. Both shareholders and directors being long term friends had mutual trust and confidence in each other, at least at the commencement of this venture in August 2000. 146.In this respect it must also be noted that there is a complete lack of written resolutions (both of the plaintiff in general meeting and of the Board), even where important decisions of the plaintiff were made such as the setting up of the tutorial centre by using the Property, cessation of the tutorial business, the decision to sell the Property in May 2007 and the decision to distribute $1,000,000 as profit. 147.Not only were there no written resolutions evidencing such above decisions by the plaintiff, there was not the slightest mention by either LKF or the defendant that such written resolutions ever came into existence, apart from the oral agreement of the two of them to carry out such decisions. 148.Moreover, there was no mention by any party that there was ever any Annual General meetings or Board meetings carried out where the plaintiff was concerned. Instead everything appears to have been decided, where the plaintiff was concerned, only by oral agreement made between LKF and the defendant. 149.There was no evidence of any annual financial statement or proper accounts of the plaintiff (whether audited or otherwise) and even the shareholder’s loan accounts were prepared by each of LKF and the defendant separately only in 2007 and exchanged between them, but not before that time. 150.Accordingly, I find that the plaintiff was carried on by LKF and the defendant as a quasi-partnership and that any decision reached between them which involved or affected the running and operation of the plaintiff, they would treat such a decision as one made by or on behalf of the plaintiff without there being any formal board meeting or resolution to that effect. 151.The above further supports the defendant’s case that there was agreement between her and LKF at the outset that it would not be necessary for them in running the plaintiff to draw up detailed minutes or make written resolutions of the plaintiff unless it was required by legislation for statutory purposes or for banking purposes. I therefore accept that evidence of the defendant and find that there was such agreement between LKF and the defendant in so running the plaintiff. 152.I also accept the defendant’s evidence that there was agreement between them that loans from the shareholders to the plaintiff would carry interest at 1% per month. 153.That there was such an agreement between them is shown not only by the fact that the shareholder’s loan account of the defendant had included in it such rate of interest charged by her in respect of the loans made by her to the plaintiff over the years, and when that shareholder’s loan account was presented by her to LKF at the “Canteen” restaurant on 29 June 2007, not only did LKF not make any comment on such interests rate, but more importantly, LKF had adopted the same rate of interests for his own shareholder’s loan account which he presented to the defendant in July 2007. 154.Even if there was no such agreement between the defendant and LKF, the evidence from LKF that he merely adopted that rate of interest used by the defendant when preparing his own shareholder’s loan account would be sufficient evidence from which the inference could be drawn that LKF had thereby ratified such rate of interest charged by the defendant. 155.Moreover, when the fact that LKF had charged such rate of interest as the defendant did was put to him in cross-examination, LKF’s answer was that the defendant had rejected his set of shareholder’s loan account. However, it cannot be disputed that the defendant had rejected LKF’s accounts not due to the rate of interest charged by LKF but because LKF had claimed in those accounts for transportation and food expenses which the defendant says had never been agreed between them. 156.Accordingly, such rejection of LKF’s shareholder’s loan accounts by the defendant can have no impact on the rate of interests charged by LKF in those accounts. 157.Thirdly, I also accept the evidence of the defendant that there was agreement between her and LKF at the outset that any surplus in the plaintiff’s accounts would be used to reduce or lower the loans of the shareholder who had contributed more to the plaintiff first. That such agreement must have been made between them is clearly shown from the subsequent conduct of the defendant and LKF as follows :
158.Given the above reasons, I have no hesitation in accepting the defendant’s evidence that LKF knew and consented to the repayments made by the plaintiff to the defendant between 3 December 2001 and 25 May 2007 (now complained of by the plaintiff) altogether totalling $553,000. 159.As to the remaining $10,000 (i.e. the cheque on 27 May 2007) I also accept the defendant’s evidence that that cheque was used to repay a contractor for repairs to the Property and not paid to the defendant herself. 160.As for the repayment of the $1,000,000 to the defendant at the Canteen restaurant, the evidence was that that cheque (cheque no. 000157) was made out and signed on 29 June 2007, but likely it was dated 3 July 2007, which would explain the date for it as claimed by the plaintiff (albeit nothing turns on the difference in the dates) I find for the reasons given above, that LKF had consented to and agreed to such repayment as well as to the rate of interests charged on such loan. 161.For the reasons given above, LKF had lost all credibility in so far as his evidence goes in this litigation, albeit that at the start of the plaintiff’s case it was made to appear at first brush that the plaintiff may have a prima facie case against the defendant due to the fact that the defendant had on so many occasions made out cheques to herself for the ceiling limit of $10,000 all on the same day such that her signature alone would suffice for all those cheques to go through the bank. 162.However, having heard her evidence in the case, I accept her evidence that the issuing of each of those cheques within the signing limit for only one signatory was done with the knowledge and agreement of LKF and was done out of convenience rather than with a view to misappropriate funds from the plaintiff or with any intention to deceive either the plaintiff or LKF. 163.That there was no intention to deceive can readily be seen by the fact that in the defendant’s shareholder’s loan account, all such repayments to herself, on occasions by a number of cheques all on the same day and for exactly $10,000 have been clearly and expressly listed out for LKF to see including the cheque numbers and with nothing hidden from him. Moreover, all such repayments to the defendant had been taken into account in reducing the debt owed by the plaintiff to the defendant in respect of the defendant’s loans. 164.I further find that there was no misappropriation of funds, no negligence and no breach of fiduciary duty by the defendant since what was done by her was done with the knowledge consent and agreement of LKF, being the only other shareholder and director of the plaintiff. 165.In so far as finding of facts in this case are concerned, I note that although the evidence in this case involving the accounts have strayed well beyond the bounds of what is necessary to deal with this case, and in fact the real dispute between LKF and the defendant seem to be over their respective shareholder’s loan accounts between them, the above findings would be sufficient for me to dispose of this litigation. 166.I do not propose to, and it is not necessary for me to make specific findings as to all other matters relating to the accounts between LKF and the defendant. 167.However, in so far as some of the ancillary matters relating to the accounts, and for which evidence had been adduced by the parties, may have an indirect bearing on the findings I have made above are concerned, I will make the following findings which will also have a bearing on the credibility of both of them :
168.In this respect, LKF has been further shown to be wholly unreliable as a witness. LKF’s evidence was that he was initially asked by the defendant to participate in the tutorial business only (without joining in the plaintiff or the investment joint venture in purchasing the Property). LKF said that later in August 2000 the defendant then told him that he will have to run the tutorial business on his own because the defendant had been offered a post by the Chinese University which she has accepted — and therefore offered him a salary to run the tuition business. This evidence from LKF has been shown to be untrue by the computer printout produced into evidence by the defendant as Exhibit D1 which showed that the defendant started working with the Chinese University since August 1999. The only inference why LKF came out with this untrue evidence must be that he tried to use this untrue evidence to support his case that he was promised a salary at the outset by the defendant for running the tutorial business all on his own. Decision 169.On the finding above that the plaintiff was carried on as a ‘quasi partnership’ by LKF and the defendant it follows from the decision in Ebrahimi v Westbourne Galleries [1973] AC 360 that although equitable principles did not entitle a party to disregard the obligation which he assumed by entering a company, it enabled the court to subject the exercise of legal rights to equitable considerations of a personal character arising between individuals which might make it inequitable to insist on legal rights or to exercise them in a particular way. 170.Therefore whether the defendant’s actions were fair should be looked at in its proper context within the nature of the plaintiff and what was agreed between the defendant and LKF in determining whether there has been a departure from the proper standards. 171.On the above findings that what was done by the defendant when issuing the cheques to herself, most of which were for $10,000, in order that she could be the only signatory, was done with the knowledge consent and agreement of LKF, the fact that there were, strictly speaking, no proper resolutions of the plaintiff authorizing the defendant to do so, cannot and do not make those withdrawals by the defendant unauthorized withdrawals. 172.Moreover, on the findings made above, there can be no basis to come to the conclusion that there has been any breach of trust, breach of fiduciary duty, negligence or fraudulent design on the part of the defendant. 173.Accordingly, for the reasons given, the plaintiff ’s case against the defendant must be dismissed and I so order. Costs 174.On the question of costs, since this is a statutory derivative action, the question of costs is no so straightforward as merely to follow the event and that the court has extensive powers to award costs, not merely as between the immediate parties to this case but that the powers to award costs extend to the member (in this case LKF) who instituted these proceedings and or “any other parties to the application or proceedings” under section 168BI of the Companies Ordinance. 175.In those circumstances, rather than make the usual costs order nisi, I would need to hear submission on costs from the parties before making any costs orders. One reason for asking for submissions on costs is such that LKF should be given the chance to address the court as to why costs should not be ordered against him personally in the light of the above findings. 176.Accordingly, full written submissions on the appropriate costs order to be made are to be lodge with my clerk within 14 days from this judgment being handed down and a ruling on costs will be given in written form at a later date.
Ms la Fontaine Chung, instructed by Messrs Ho, Tse, Wai & Partners, for the Plaintiff Mr Earl Deng, instructed by Messrs Chui & Lau, for the Defendant Please refer to CACV20/2011 for the relevant appeal(s) to the Court of Appeal. | |||||||||||
Cases cited in this judgment
Further hearings and rulings under HCA 2726/2008