Kwok Chin Wing v. 21 Holdings Ltd and Another

CACV 55/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 55 OF 2011

(ON APPEAL FROM HCA NO. 2332 OF 2004)

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BETWEEN

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Dates of Hearing: 8 and 9 December 2011

Date of Judgment: 9 December 2011

Date of Handing Down of Reasons for Judgment: 20 December 2011

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REASONS FOR JUDGMENT

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Hon Tang VP:

1.I have had the advantage of reading Kwan JA's judgment in draft, I agree with it and have nothing to add.

Hon Kwan JA:

2.This is an appeal of the 1^st defendant 21 Holdings Limited (initially known as Rockapetta Holdings Limited) from a decision of Saunders J handed down on 2 March 2011 after a trial of 14 days. Judgment was given in favour of the plaintiff Kwok Chin Wing against the 1^st defendant in the sum of $44.5 million with interest and costs. This was for the outstanding balance of the advances made by the plaintiff. The plaintiff’s claim against the 2^nd defendant Chan Sheung Wai for fraudulent misrepresentation was dismissed.

3.It is not in dispute that the plaintiff had made advances in the total sum of $83 million and that he was repaid only $38.5 million. The crucial question was to whom his loans were made. The judge decided that the loans were made to the 1^st defendant, rejecting the latter’s case that the loans were made to two of its wholly owned subsidiaries, Rockapetta Industrial Company Limited (“RICL”) and Grand Extend Investments Limited (“GEIL”).

4.In summary, it was argued in this appeal that the judge’s finding was not the case of the plaintiff as pleaded, which was that the advances were made to the 1^st defendant and its subsidiaries (“the Rockpetta Group” or “the Group”), as opposed to the 1^st defendant alone. Furthermore, there was no or no sufficient evidence to support the judge’s finding that the loans were made to the 1^st defendant, or any finding (which the judge had not made) that the loans were made to the Group.

5.We have allowed the appeal at the end of the hearing with costs to the 1^st defendant here and below and gave leave to the 1^st defendant to withdraw the money paid into court as security for stay of execution pending this appeal. These are the reasons for judgment.

The background

6.The plaintiff is a co-founder of the Rockapetta Group of companies. The Group had been engaged principally in the design, manufacture, sale and distribution of toys for young children and infants. RICL was incorporated in Hong Kong in 1985. It had a paid up capital of $1.2 million. In 1992, RICL and a Mainland party formed a co-operative enterprise in the Mainland known as Shenzhen Rockapetta Toys Company Limited (“SRTCL). SRTCL became the manufacturing arm and RICL was the distribution and sales arm of the business operations. RICL also owned the land in Shenzhen on which the toy factories were situated. GEIL was incorporated in Hong Kong in 1991, with a paid up capital of $10. It did not undertake any business activity and was used to hold a property in Yau Tong which housed the offices of RICL in Hong Kong.

7.In January 1994, with a view to listing the above business enterprise on the Stock Exchange of Hong Kong, the 1^st defendant was incorporated in Bermuda. It was then known as Rockapetta Holdings Limited and it became the holding company of RICL, GEIL and other subsidiaries of the Group. It has remained a listed company in Hong Kong. The plaintiff had been the chairman and an executive director of the 1^st defendant from the outset until he resigned from his office on 11 April 2001. He was the major shareholder of the 1^st defendant, holding over 30% of its shares until he disposed of most of his shares in March 2001.

8.After the listing of the 1^st defendant in 1994, RICL remained at all times the major operating arm of the Group, until the plaintiff presented a petition to wind up this company in July 2002. RICL was wound up by the court in October 2002. As for GEIL, its property in Yau Tong was sold in 1997 at a loss and it had remained inactive ever since.

9.The Group’s performance had not been satisfactory since 1995. The banks started to reduce facilities granted to RICL and other companies within the Group and demanded repayment of facilities. The 1^st defendant had executed guarantees in favour of banks to secure facilities granted to RICL. For the purpose of repaying the banking facilities and meeting the general working capital requirements of the Group, the plaintiff extended loans totalling $83 million between May 1995 and March 1998 by issuing cheques or causing his brother to issue cheques. Twenty cheques were issued in this way and there was evidence that ten of the cheques were made out to RICL and deposited into its bank account.

10.The audited accounts of RICL for the year ended 31 March 1996 contained this statement: “During the year, Mr Kwok Chin Wing has granted a loan of HK$28,000,000 to the Company [i.e. RICL]. The loan is unsecured, interest free and not repayable within the next twelve months.” In the balance sheet, the sum of $28 million was shown as a “Loan from a director.” The financial statements were signed by the plaintiff and another director of RICL, Anthony Chu Chi Wai (“Anthony Chu”).

11.Similar statements and entries appeared in the audited accounts of RICL for the years ended 31 March 1997, March 1998 and the period from 1^st April 1999 to 31 December 1999 regarding the loans made by the plaintiff to RICL. In the directors’ report for the financial statements for the period from 1^st April 1999 to 31 December 1999, the following appeared under “Directors’ Interests in Contracts”:

“Loans from a director to the Company [i.e. RICL] outstanding at 31^st December, 1999 amounted to HK$69,000,000. The loans bear interest at a prime rate from 1^st April, 1999 onwards. Interest amounting to approximately HK$1,200,000 was waived by the director, accordingly interest payable on the outstanding loans during the period amounted to HK$3,162,123. In addition, loans from a director to a fellow subsidiary outstanding at 31^st December, 1999 amounted to HK$14,000,000. The loans bear interest at prime rate from 1^st April, 1999 onwards. Interest payable on this [sic] loans during the period amounted to HK$885,068.”

12.In the audited accounts of GEIL disclosed at the trial for the period from 1^st April 1999 to 31 December 1999, the directors’ report contained similar statements under “Directors’ Interests in Contracts”:

“Loan from a director to the Company [i.e. GEIL] outstanding at 31^st December, 1999 amounted to HK$14,000,000. The loan bears interest at a prime rate. Interest payable on the loan during the period amounted to HK$885,068. In addition, loan from a director to a fellow subsidiary outstanding at 31^st December, 1999 amounted to HK$69,000,000. The loan bears interest at a prime rate. Interest amounting to approximately HK$1,200,000 was waived by the director, accordingly interest payable by this fellow subsidiary on the loan during the period amounted to HK$3,162,123.”

13.In the balance sheet of GEIL as at 31 December 1999, the amount of $14 million appeared under “Non-current liability” as “Loan from a director”. The audited accounts of this company for the year ended 31 December 2000 contained similar statements and entry. The plaintiff was one of the two directors who had signed these financial statements of GEIL.

14.The annual reports of the 1^st defendant, in English and Chinese, for the years from 1996 to 2002 were produced. The relevant parts were the directors’ report, the consolidated balance sheet of the Rockapetta Group, and the balance sheet of the 1^st defendant. When the plaintiff was in office, he signed the consolidated balance sheet and the balance sheet of the 1^st defendant as the chairman of the board of directors of the 1^st defendant for every year up to the year ended 31 December 2000.

15.For the year 1996, in the directors’ report under “Directors’ Interests in Contracts of Significance”, it was stated that “During the year, Mr Kwok Chin Wing has granted a loan of $28,000,000 to a subsidiary of the Company [i.e. the 1^st defendant]. The loan is unsecured, interest free and not repayable within the next twelve months.” In the consolidated balance sheet as at 31 March 1996, the amount of $28 million appeared as “Loan from a director”. In the balance sheet of the 1^st defendant as at 31 March 1996, there was no entry regarding this loan.

16.The annual report for the year of 1997 contained similar statements that “During the year, Mr Kwok Chin Wing has granted an additional loan of $30,000,000 to subsidiaries of the Company [i.e. the 1^st defendant]. Total loans from Mr Kwok as at 31^st March, 1997 amounted to HK$58,000,000. The loans are unsecured, interest free and not repayable within the next twelve months.”  The amount of $58 million appeared in the consolidated balance sheet as “Loans from a director” and this item was not recorded in the balance sheet of the 1^st defendant.

17.The directors’ report in the annual report for 1998 recorded that during the year, the plaintiff “has granted an additional loan of $25,000,000 to subsidiaries of the Company [i.e. the 1^st defendant]” and that total loans from the plaintiff as at 31 March 1998 amounted to $83 million. As in previous years, the loans totalling $83 million were recorded in the consolidated balance sheet and did not appear in the balance sheet of the 1^st defendant.

18.The directors’ report in the annual report for the year ended 31 March 1999 stated that interest on the loans of $83 million “shall be accrued from 1^st April, 1999 onwards at Hong Kong Prime Lending Rate”. The treatment of the loans in the consolidated balance sheet and the balance sheet of the 1^st defendant was the same as before and in the subsequent years.

19.In the directors’ report of the annual report for the financial year ended 31 December 1999, the following statements appeared:

“Total loans from Mr Kwok Chin Wing as at 31^st December, 1999 amounted to HK$83,000,000. The loans bear interest at prime rate from 1^st April, 1999 onwards. Interest amounting to approximately HK$1,200,000 was waived by the director, accordingly interest payable by the Group on the loans during the period amounted to approximately $4,047,000.”

20.In the directors’ report of the annual report for 2000, the following statements appeared:

“Total loans from Mr Kwok Chin Wing outstanding as at 31^st December, 2000 amounted to HK$44,500,000. The loans bear interest at prime rate. Interest amounting to HK$3,167,000 was waived by the director, accordingly interest payable by the Group on the loans during the year amounted to HK$2,451,000.”

21.In the annual report of 2001, the loans from the plaintiff were re-classified as “Other loans” instead of “Loans from a director”, following his resignation as a director in April 2001. Otherwise, there is no change in respect of the statements concerning his loans. 

22.Apart from the accounts and annual reports, I should mention two letters dated 31 March 1999 from the plaintiff to RICL and GEIL respectively. The letter addressed to RICL read:

“Re: Loans totalling HK$69,000,000.00

I refer to the loans totalling HK$69,000,000.00 (“the Loans”) granted by me to your Company [i.e. RICL] up to date and would confirm that the Loans shall be unsecured and not repayable on 1^st April, 2000 or such other date the parties shall agree. Interest shall accrue on the loans or part thereof at the prime lending rate of Hong Kong dollars as quoted by the Hongkong and Shanghai Banking Corporation Limited from time to time from 1^st April, 1999 up to and including the date of full repayment of the loans.

Please confirm your agreement to the abovementioned terms and conditions of the Loans by signing and returning the duplicate copy of this letter to me.”

23.This letter was signed by Anthony Chu, another director of RICL, confirming acceptance of its contents. The plaintiff’s letter to GEIL of the same date referred to the loans he granted to GEIL of $14 million and was on the same lines. Again, Anthony Chu signed on behalf of GEIL to signify its acceptance of the contents of that letter.

24.The above agreements by letter were ratified by resolutions in writing of the board of directors of RICL and GEIL passed on 24 August 1999. Each of the resolutions was signed by the plaintiff and Anthony Chu.

25.On 23 March 2000, agreements were made for the placing and subscription of shares in the 1^st defendant.  Victory Wall Enterprises Limited (“Victory Wall”), the company through which the plaintiff held shares in the 1^st defendant, entered into a placing agreement with investors to sell part of its shares. Victory Wall then entered into a subscription agreement with the 1^st defendant to subscribe for new shares in the 1^st defendant at a price which was the same as the placing price. In the public announcement made by the 1^st defendant on the above, the reason for the exercise was stated as follows:

“The placing and the subscription are effected to raise fund for the Company [i.e. the 1^st defendant]. The Company will use the estimated net proceeds of the subscription of approximately HK$30.5 million as to about HK$25 million for repayment of short term borrowings of the Company and the balance of about HK$5.50 million as general working capital.”

26.Following the placing and subscription, the 1^st defendant issued two cheques to the plaintiff dated 31 March 2000 for $11 million and $14 million. The cheques were signed by the plaintiff and another director of the 1^st defendant Yiu Kui Leung. The amounts of $25 million were received by the plaintiff as repayment of part of the advances he had made in the total sum of $83 million.

27.On 26 May 2000, the plaintiff wrote to RICL and GEIL separately in similar terms. He referred to his loan to RICL of $69 million and his loan to GEIL of $14 million, stating that the loans were repayable on demand but he would not demand payment “unless the Group has sufficient working capital for its operations to meet its liabilities”. He also waived interest of $1.2 million for the loan to RICL during 1 April to 31 December 1999.

28.In June 2000, there was an increase of the authorised share capital of the 1^st defendant by the placement of new shares and the subscription of convertible notes. The net proceeds raised of about $48 million were not used to repay the plaintiff’s advances but were applied for the working capital requirements of the company. Instead, the plaintiff received further repayments in the total sum of $13.5 million from the price of goods sold received by the Group. A total of five cheques were issued for this purpose, between 30 June 2000 and 17 October 2000, reducing the outstanding balance of the plaintiff’s loans to $44.5 million; four of the cheques were issued by RICL, and one was issued by another subsidiary Rockapetta Toys Manufacturing Company Limited. No further repayment was made thereafter.

29.As mentioned earlier, the plaintiff sold most of his shares in the 1^st defendant in March 2001 and resigned from his offices in the Group in April 2001. The 2^nd defendant then became chairman of the board of directors of the 1^st defendant. 

30.On 23 November 2001, the plaintiff sent a letter of demand to RICL in respect of the loans he granted to RICL totalling $69 million. It was stated that as at 31 October 2001, $56,011,277.34 was still owed as set out in an attached schedule and the plaintiff demanded immediate repayment. A statutory demand was sent by the plaintiff’s solicitors to RICL dated 14 June 2002 for $57,824,454.35. This was followed by a winding-up petition presented by the plaintiff against RICL on 8 July 2002 based on the debt in the statutory demand. The petition was verified by the plaintiff’s affirmation of the same date. A winding-up order was made on his petition on 9 October 2002.

31.The writ in the present action was issued by the plaintiff against the 1^st defendant in October 2004, claiming the outstanding balance of the advances he made in the sum of $44.5 million and interest. It took more than six years for the action to come to trial. 

Judgment of the court below

32.The judge noted that the plaintiff’s claim against the 1^st defendant was put in three ways.

33.Firstly, it was argued that the loans “were advanced to the Group as a whole, and that consequently that [the 1^st defendant] itself is liable for repayment” (paragraph 11 of the judgment; emphasis supplied).

34.Secondly, it was argued that in March 2000, in the course of the 2^nd defendant reaching an agreement with the plaintiff to buy 100 million of the shares in the 1^st defendant held by the plaintiff through Victory Wall, the 2^nd defendant, on behalf of the 1^st defendant, agreed with the plaintiff to ensure, and did ensure, that the 1^st defendant would repay the plaintiff’s outstanding loans, which then stood at $83 million. This alleged agreement was referred to in the pleadings and the judgment as “the Initial Agreement”.

35.Thirdly, it was argued that at a board meeting of the directors of the 1^st defendant on 19 June 2000, it was agreed between the 1^st defendant and the plaintiff that in consideration of the plaintiff agreeing not to demand immediate payment of the outstanding balance of his loans for so long as he might see fit, the 1^st defendant would repay the outstanding balance from the price of goods sold by the Group. This alleged agreement was referred to in the pleadings and the judgment as “the Subsequent Agreement”.

36.The judge dismissed the plaintiff’s claim as founded on the Initial Agreement and the Subsequent Agreement. The Initial Agreement is completely contrary to extensive contemporaneous documents including signed documentation and the judge found that the plaintiff has not overcome the extremely high hurdle of establishing such an agreement. The Subsequent Agreement also failed as it was the plaintiff’s case that this agreement came about because of the alleged non-performance of the Initial Agreement. The Initial and Subsequent Agreements did not feature in this appeal and were not the subject of the Respondent’s Notice.

37.The plaintiff and the 2^nd defendant were the only witnesses who gave evidence at the trial; the 2^nd defendant did so on his own behalf and on behalf of the 1^st defendant. The plaintiff impressed the judge as being “a decent, honest and genuine man, but one who was quite out of his depth when it came to complex financial arrangements”. The judge accepted his evidence that in many aspects of his business life, “he was entirely dependent upon experts such as lawyers and accountants and bankers to make arrangements for him.”

38.The 2^nd defendant, who is an experienced merchant banker and a chartered accountant, was held by the judge to be a witness not capable of belief. The judge was of the view that the 2^nd defendant “demonstrates an utter lack of personal or commercial morality” and that a person “with such morality is not a person who is capable of belief”.

39.The judge found for the plaintiff on his “primary case” in these terms:

“I am satisfied that there is no doubt at all that the loans made by Mr. Kwok were advanced to the holding company, Rockapetta [the 1^st defendant], generally for its purposes in respect of the Group.” (paragraph 26 of the judgment; emphasis supplied)

“I find nothing intrinsically offensive with the concept that a person may advance funds to a group of companies by giving those funds to the chairman of the group, i.e. the chairman of directors of the holding company, with it being understood between the person advancing funds and the chairman of directors that although the funds are to be used by a specific subsidiary of the group, the holding company will be responsible for repayment of the advance.” (paragraph 46 of the judgment)

“While it is right that there is no separate legal entity such as a ‘Group’ that does not, in my view, prevent an arrangement surrounding an advance, described in paragraph 46 above, from being made. That is the arrangement that I have found Mr. Kwok made when, in his capacity as a private individual and a lender, and in his capacity as chairman of directors of the Rockapetta Group, he made arrangements with Mr Leung [Eric Leung Yuk Lun, the financial controller of the Group; “Eric Leung”] to advance funds to Rockapetta [the 1^st defendant], which funds were ultimately used by RICL and GEIL.” (paragraph 48 of the judgment; emphasis supplied)

“For the [sic] these reasons I am satisfied that Mr. Kwok’s primary case, that the loans were to Rockapetta [the 1^st defendant], is made out. As a result of fund-raising exercises, partial repayment of loans were made by Rockapetta. There is no dispute that the balance of the loans have not been repaid, nor has interest been paid. Consequently Mr. Kwok is entitled to judgment for the amounts claimed of $44.5 million, together with interest thereon.” (paragraph 51 of the judgment; emphasis supplied)

40.The reasons for the conclusion at paragraph 51 of the judgment appeared in paragraphs 27 to 50. Before I examine these reasons, I would like to deal with the submission of Mr Edward Chan, SC, who appeared with Mr C. Y. Li for the 1^st defendant in this appeal, that the judge’s aforesaid findings on the “primary case” were different from the way the plaintiff’s case was put as mentioned in paragraph 11 of the judgment and as pleaded by the plaintiff.

How the primary case was pleaded

41.The Statement of Claim, as amended four times, pleaded the primary case in this way:

“Between March 1995 and March 1998, the Plaintiff advanced to the Group a total sum of HK$83 million (as to HK$69 million advanced to or through RICL and as to HK$14 million to or through GEIL (collectively, “the Loans”)) for the purpose of repaying the bank facilities granted by various banks to companies within the Group and the general working capital requirements of the Group. At all material times, funds and other income of the Group were treated as a common pool of funds for the whole Group. Therefore, although each company of the Group maintained its own bank accounts, funds of the Group were transferred freely from one bank account of one company to another within the Group as and when they were required, or a company in the Group would make payments on behalf of other companies in the Group when required (as the case may be).” (paragraph 5 of the Re-Re-Re-Amended Statement of Claim)

42.This is re-asserted in the Amended Reply to the 1^st defendant’s Re-amended Defence:

“The 1^st Defendant’s admission that ‘the Plaintiff had advanced a sum of HK$69 million on RICL and a sum of HK$14 million to GEIL’ is frivolous and embarrassing, as it was never alleged by the Plaintiff that the said sums were advanced to RICL and GEIL. The Plaintiff says that the said sums were advanced to the Group (as to HK$69 million advanced to or through RICL and as to HK$14 million to or through GEIL) for the general working capital requirements of the Group.” (paragraph 5 of the Amended Reply)

43.Mr Chan pointed out it is not the plaintiff’s pleaded case that his loans were made to the 1^st defendant, as opposed to “the Group”, being the 1^st defendant and all its subsidiaries. Although the judge had correctly stated this to be the position in paragraph 11 of his judgment, the findings in the subsequent paragraphs of 26, 48 and 51 that the loans were made to the 1^st defendant were different from the pleaded case. The trial below was conducted on the bases of the alleged advances to the Group, the Initial Agreement and the Subsequent Agreement. Mr Chan submitted that the plaintiff is not entitled to judgment on an unpleaded case. Being a formal document, a pleading “cannot be held to include a cause of action which its language does not adequately express” (Balfour Beatty Construction Ltd. v. Parson’s Brown & Newton Limited and Ors., (1990) 7 Const LJ 205, English Court of Appeal). It would be extremely rare for the Court of Appeal to allow unpleaded issues of fact to be run for the first time, as the court will often not be in a position to take the view confidently that the other side has not been prejudiced (Wing Hang Bank Ltd. v. Crystal Jet International Ltd. [2005] 2 HKC 638 at para. 6(3)).

44.Mr Kumar Ramanathan, SC, who appeared for the plaintiff, contended that “the pleadings accommodate the trial judge’s findings” (Poon Hau Kei v. Hsin Chong Construction Co. Ltd. Taylor Woodrow International Ltd. Joint Venture [2004] 2 HKC 235 at para. 20). I do not agree with this. I note that in the course of the plaintiff’s cross-examination, the judge had made these remarks to the 1^st defendant’s counsel Mr C. Y. Li:

“The issue here is a factual one, Mr Li. It would be open to somebody to advance funds to a particular company which was a subsidiary of another company on a basis whereby both sides understood that although the subsidiary received the funds, the holding company would be liable for it. It is an issue of fact. Mr Ramanathan, as I understand his case, takes on the obligation of establishing that fact.” (T108K to N)

45.That, however, is not the plaintiff’s case as pleaded, but would appear to be the basis on which the judge subsequently made his findings in paragraphs 46, 48 and 51 of the judgment.

46.Mr Ramanathan took a fallback position that on the evidence, the judge could legitimately and was entitled to find that the advances were made to the Group as a whole. In his written submission, he argued that the judge could and should have found that the loans were to the 1^st defendant and its subsidiaries and that the 1^st defendant and its subsidiaries were jointly and severally liable for repayment of the same.

47.At all material times when the loans were made, there were nine companies in the Rockpetta Group, including the 1^st defendant as the holding company. There was no change in the number of subsidiaries at all material times. It is possible at law for the loans to be made to the Group, being the 1^st defendant and its subsidiaries. Mr Chan submitted that although this is possible at law, this is unlikely to have happened in reality and is not borne out on the evidence properly analysed. 

48.I would agree with Mr Chan. Lending to nine companies with each of them made jointly and severally liable for repayment of the loan to the external creditor is unusual, to say the least. Although companies in a group may pool their resources and internal lending may take place, and a loan obtained from an external creditor may be on-lent by a company to another company within the group, this does not provide a legal basis that vis-à-vis the external creditor, all the companies in the group should assume liability for the external loan. Mr Ramanathan changed his position in his oral submission and sought to argue that in a lending to a group of companies, not all the companies would be made liable but only the holding company and whichever company in the group that had the use of the funds. That would depend on the loan agreement that was actually made, and this is not a case pleaded by the plaintiff.

The plaintiff’s evidence on the primary case

49.I turn to what the plaintiff had said in evidence as to whom the loans were made, bearing in mind that the only evidence on the circumstances in which the loans were made came from the plaintiff, and that he was found by the judge to be an honest man.

50.The plaintiff said this in his witness statement:

“13. As the founder and Chairman of the Group and the major shareholder of the Defendant [the 1^st defendant], the last thing I would have wanted to see was the demise of the Group. Without the necessary funding, the Group would be in serious financial troubles and would have difficulties in maintaining its daily operation. In the light of this, and for the purpose of repaying the bank facilities granted by various banks to companies within the Group, I had made various loans to the Group during the period from May 1995 to March 1998 in the aggregate sum of HK$83 million on an unsecured and (initially) interest-free basis (“the Loans”). …

15.       Insofar as I could recall, when I intended to advance money to the Group, I was orally advised by the accountants of the Group that it would be more convenient to advance the Loans to the Group through its subsidiaries rather than the Defendant [the 1^st defendant], a listed company. I was further told that, since the Loans were advanced for the benefit of the Group and would be treated as a pool of funds for the Group and used freely among the companies within the Group, it did not matter as to which company or companies within the Group were to be recipients of the Loans to be advanced. Accordingly, the Loans were paid to different subsidiary companies of the Defendant.

17.       After making the last advance to the Group in March 1998, no further loan or advance was made by me to the Group. As at that time, the aggregate liability of the Group towards me had reached the sum of HK$83 million, which was a very substantial amount. …” (emphasis supplied)

51.He made similar statements in his oral testimony, as appeared in the following extracts:

“The reality was that when the money was advanced into the group I did not specify which of the companies should be the recipient. And the accountant of our company usually would deposit the money into a company that was in urgent need of funding. Therefore I did not give a clear or specific instructions to our in-house accountants or Deloitte [the auditors] as to which of the companies should be the recipient so that the money would be deposited with it. Since the company is - - the group itself was wholly owned, a 100 per cent owned, and therefore I did not care which of them would receive the funding. And I also don’t pay attention to this.” (T112I to M)

“To me I will take that the money was all - - was lent to all the companies” (T120H to I)

“Well, but to me all the companies has equal access to use my money. Likewise all the companies bear the responsibility of repaying me the loans because every company use my money. Therefore I did not bother with which accounts of which companies was the money deposit.” (T122F to G)

“… the company [the 1^st defendant] was listed already in 1996. But to me there was not any problem. The money was also available for all the companies. Well every companies [sic] would have access to my funding, and they would come to this particular company [RICL] to get the funding. Even any company under the group did not have any money, any funding, it would also come forward to this particular company to get the funding. Any subsidiaries that was [sic] in need of money also came to this particular company to get the funding.” (T123H to L)

“Q. Now, Mr Kwok, having gone through some of these documents, do you still maintain your previous evidence that your understanding would be that the loan was advanced to all the companies so that you can actually ask all the companies, whoever they may be, to pay you?

A. Yes.” (T127I to J)

“A. Well, actually I did not mean to advance the loans to these two particular companies [RICL and GEIL]. My intention was to allow all the companies to have access to my funding or my money.

Q. If so, why designate these two companies to be the borrower?

A. Well, at that time I did not make any choice at all. I simply told people working in the accounting division that, ‘Just give the money to whichever company in need of money.’ To me, I did not make any distinction because at the end of the day it was a consolidated account, which of the company was in need of money. Anyway, when the company was in need of money, then I deposit the money to it. So once the money was deposited with the company any of them could have access to it. The money could be transferred from one to the other. For example, this Grand Extend Investments Limited [GEIL] actually did not carry out any business. Still I advanced the loans to this company.” (T127T to T128E)

“To me it does not make difference because everyone or each of the company was in need of money, then they could have equal access to it. And now if the repayment needed to be made, then each of them need to shoulder the responsibility.” (T129G to H)

“COURT: Let’s break it down. We know that one of your reasons for advancing the loans to the group through the two companies [RICL and GEIL] was that the money was available to every one.

A. Right.

COURT: Is there any other reason that you advanced the loans to the group through those two companies?

A. Because at that time the accountants told me that – reality was that the loan was lent to the group but when it was to be shown in the annual report, the accountant wanted me to have it shown in the accounts of the subsidiaries. To me it doesn’t matter because it was the advice given to me by the auditor and, at the end of the day, everyone has equal access to the money.

Q. Yes. Mr Kwok, we all know that the 1^st defendant, Rockpetta Holdings, had at least eight subsidiaries – subsidiary companies. Can you tell us why specifically you like to have the loans amounting to a total of 83 million all through these two companies?

A. Because RICL was a very active company. As to the Grand Extend [GEIL], at that time it held a property and the property itself has incurred a debt owed to bank and mortgage payment needed to be made every month.

Q. So Mr Kwok, in other words, your loans were tailored or directed to the company in need of funds.

…

A. You mean the funds?

Q. Can I ask you this, Mr Kwok? Do you extend the loans to RICL because it was an active company and a company in need of working capital?

COURT: Well, that’s unfair because he’s made it quite clear … that, although the loans were paid into those two companies, in his mind, he was lending to the group. And it is unfair to express the question in that way because he – to say to him, “You extended the loan to RICL” is not his evidence.

…

COURT: His evidence is that he extended a loan to the group which was received by the group in the accounts of RICL on the advice of his accountant. ” (T278P to 279U)

Analysis of the plaintiff’s evidence

52.On the plaintiff’s evidence the relevant parts of which have been set out in extenso, I think it is fair to say that such evidence, assuming it were to be accepted, simply does not support a finding that the loans were made to the 1^st defendant, as opposed to the Group. It is not the plaintiff’s evidence that there was such an agreement or understanding. His evidence was that the money was lent to the Group, he did not specify with which company the money was to be deposited, and every company in the Group that was in need of funds could have equal access to the money he provided. The judge stated in paragraph 27 of his judgment that “the uncontradicted evidence of Mr Kwok was that he made the advances to Rockapetta [the 1^st defendant]”, he was plainly in error here.

53.In paragraph 28 of the judgment, the judge referred to the “first three cheques” drawn by the plaintiff to provide funds needed for the working capital and noted that they were drawn simply to “Rockapetta”, but were banked by Eric Leung, the financial controller or accountant of the Group, to the accounts of RICL. In paragraph 29, he stated that “the first three cheques were drawn payable to ‘Rockapetta’ and not to RICL specifically” and came to the view that this is “plain evidence that Mr Kwok intended the advance to be to the holding company, Rockapetta, for its general use, and not a specific advance to RICL”. In paragraph 31, he drew the inference that “the system having been established at the beginning, with the first three advances, having plainly been made to Rockapetta [the 1^st defendant]”, and he was satisfied that “it was nothing more than mere accounting convenience that the subsequent cheques were made out to RICL or GEIL.”

54.The above findings and inference cannot be supported as they were based on erroneous facts. In the witness statement of the plaintiff, he listed the dates on which he made loans to the Group on twenty occasions from 2 May 1995 to 23 March 1998. The dates of the first three loans were 2 May 1995 (for $5 million), 6 May 1995 (for $5 million) and 16 May 1995 (for $5 million). The three cheques referred to in paragraph 28 of the judgment were not the “first three cheques”. They were dated 26 July 1995 (for $5 million), 16 March 1996 (for $3 million) and 5 July 1996 (for $2 million). Quite apart from the fact that these were not the cheques drawn at the beginning, it is not possible to say that a system was established from the manner these three cheques were drawn over the period of a year. Furthermore, the payee of the three cheques was written in Chinese as “乐家” (the simplified Chinese characters for “Rockapetta”). These two characters do not necessarily mean the 1^st defendant, as the first two characters of the names in Chinese of the 1^st defendant and RICL are identical. The cheques cannot be taken as “plain evidence that Mr Kwok intended the advance to be to the holding company, Rockapetta, for its general use”.

55.In paragraph 32, the judge gave his view that he had no doubt at all that “if Mr Kwok or Mr Leung were asked at the time of the advances: to whom were the advances made; both would have responded: to Rockapetta [the 1^st defendant]”. The plaintiff was questioned exhaustively at the trial on the crucial issue to whom the advances were made. As can be seen from the relevant extracts set out above, his response was that the loans were made to the Group, not to the 1^st defendant.

56.The accounting treatment of the loans in the financial statements of RICL, GEIL, the 1^st defendant and other documents signed by the plaintiff (the letters of agreement made with RICL and GEIL dated 31 March 1999, the board resolutions of RICL and GEIL) cannot be brushed aside as “nothing more than mere accounting convenience”, as the judge had done. The plaintiff gave evidence as to his intentions, which were to lend money to the Group. As to the carrying out of his intentions, and which company or companies were liable to repay his advances, the plaintiff was content to leave it to Eric Leung, the Group financial controller, to book liability for $69 million of the loans to RICL and $14 million of the loans to GEIL, and no entry of the advances was ever made in the accounts of the 1^st defendant. The plaintiff understood the reasons for this, for he said in evidence it was because RICL was a very active company and GEIL at that time held a property and mortgage payment needed to be made every month. He accepted what Eric Leung and others did on his behalf with his authority, and had agreed with the method they chose as to whom the loans were made.

57.It is not correct to say that the plaintiff’s evidence was “uncontradicted”. His evidence of his intentions that the loans were made to the Group is not borne out by his overt acts in the financial documents and other documents he had signed over the years acknowledging that the loans were advanced to RICL and GEIL. And it should not be overlooked that the accounts of the 1^st defendant appeared in the annual reports of the company sent to its shareholders and were made available to the public.

58.Mr Ramanathan urged us to reconstruct the basis on which the loans were made and who should be liable for repayment by looking at the circumstances under which the advances were made, and bearing in mind that the only direct evidence came from the oral testimony of the plaintiff. There is no evidence of an agreement made by the plaintiff in his capacity as a private individual and a lender, with the plaintiff in his capacity as chairman of directors of the Rockpetta Group, for funds to be advanced to the 1^st defendant, as the judge had held in paragraph 48. Nor is there evidence of such an agreement by the plaintiff acting in his different capacities for funds to be lent to the Group, as opposed to mere intention not borne out by his overt acts.  When Mr Ramanathan was asked to draw our attention to any evidence which might support the finding in paragraph 48 that the plaintiff had made arrangements "with [Eric Leung] to advance funds to Rockapetta [the 1^st defendant]", he was unable to do so.  I have set out all of the plaintiff's relevant evidence in paragraphs 50 and 51 above.

59.The judge referred to the definition of a “group of companies” in the Companies Ordinance, Cap. 32. This expression is defined to mean “any 2 or more companies or bodies corporate one of which is the holding company of the other or others”. A group of companies is an economic entity not a legal entity. Even if the loans were advanced to the Group, there is no legal basis to attribute liability of the loans to the 1^st defendant, unless the loans were adopted by the 1^st defendant in some way, for instance by the Initial Agreement or Subsequent Agreement as alleged, but this basis of the claim was rejected by the judge.

60.The plaintiff’s evidence that funds were freely transferred among the companies in the Group and applied wherever they were needed does not establish a case that the loans were made to the Group. Nor is the fact that the annual reports contained a statement that interest on the loans was “payable by the Group”. The judge reasoned in paragraph 36 of the judgment that if the 1^st defendant “is not liable for the advances made under the loans, there is no basis at all upon which the annual report for the Group should record that the interest was payable by the Group” and “instead, the annual report would show that the interest for the loans was payable by RICL and GEIL specifically.” This reasoning is in error. It is usual for the annual report of a listed holding company with subsidiaries to give a description of the financial position, assets and liabilities of the group as a whole. The consolidated accounts of the group would be provided in the report and the individual assets and liabilities of each of the subsidiaries would not be set out. The 2^nd defendant had given evidence to this effect, which was disregarded by the judge.

61.The judge had cited sections 124 and 126 of the Companies Ordinance relating to group accounts in paragraph 47 of the judgment. Section 126(3) provides that the group accounts, if prepared as consolidated accounts, shall comply with the requirements of the Tenth Schedule. Paragraph 20 of that schedule provides that the consolidated balance sheet and profit and loss account shall combine the information in the separate balance sheets and profit and loss accounts of the holding company and of the subsidiaries. Paragraph 21 provides that the consolidated accounts shall, in giving the said information, comply so far as practicable, with the requirements of the Ordinance as if they were the accounts of an actual company. Had the judge been referred to these provisions in the schedule, he might not have made the error that the individual liability of RICL and GEIL should be stated in the annual report of the holding company.

62.In paragraphs 37 to 41 of the judgment, the judge discussed a draft deed in March 2000 to be made by the plaintiff, RICL, GEIL and the 1^st defendant. The recitals to the draft deed mentioned that the plaintiff “has through RICL advanced to [the 1^st defendant] a loan in the amount of HK$69,000,000 (“First Loan”)” and “has through GEIL advanced to [the 1^st defendant] a loan in the amount of HK$14,000,000 (“Second Loan”)”, and that the whole of the proceeds of the two loans were used by the 1^st defendant for general working capital purposes. The operative parts went on to provide that each of RICL, GEIL and the 1^st defendant “confirms and acknowledges to and for the benefit of [the plaintiff]” that “the First Loan is in fact owing by [the 1^st defendant] to [the plaintiff]” and “the Second Loan is in fact owing by [the 1^st defendant] to [the plaintiff]”, and that in consideration of the confirmations, acknowledgments and agreements therein set out, the plaintiff discharges and releases RICL and GEIL from their obligations under the First and Second Loans.

63.Although the draft deed was not executed, the judge formed the view this was clear evidence that the plaintiff’s instructions to his solicitors in March 2000 were as set out in the recitals, and this was at a time when the plaintiff would have been unable to anticipate the future dispute that the 1^st defendant would deny liability for the loans. He held that the draft deed is consistent with the plaintiff’s case the loans were advanced to the 1^st defendant. The judge is also in error here. The terms of the draft deed plainly cannot be regarded as support for a case that the loans were advanced to the 1^st defendant.

64.The judge further referred to the partial repayments of the loans made by the 1^st defendant of $25 million and the abandonment of an action brought by the 1^st defendant against the plaintiff and another former director Yiu Kui Leung who signed the cheques for $25 million in the plaintiff’s favour. In paragraph 50 of the judgment, he stated that the 1^st defendant was “obliged to abandon those proceedings and judgment was given in favour of Mr Kwok”. He regarded the 1^st defendant’s abandonment of that position “goes further to substantiate the conclusion that it then accepted liability for the loans.” The action was withdrawn by consent and judgment was not given in the plaintiff’s favour. This happened at a time when new investors took over the control of the 1^st defendant. The judge had read too much into the abandonment of the proceedings.

65.Mr Ramanathan urged upon us to take into consideration these matters: the announcement of the 1^st defendant in March 2000 for the placing and subscription of shares in which it was stated that $25 million of the proceeds would be used for “repayment of short term borrowings of the Company”; that $25 million was repaid by two cheques drawn on the 1^st defendant’s account; that the last partial repayment of the loans in the amount of $2 million was made by a cheque issued by another subsidiary called Rockapetta Toys Manufacturing Company Limited. These are all circumstantial matters; they cannot overcome the deficiency in the plaintiff’s evidence to substantiate his claim that the 1^st defendant should be liable for the loans.

66.For the reasons given above, the judge is plainly in error in holding that the plaintiff’s loans were made to the 1^st defendant. On a proper analysis of the evidence, no case is made out to attribute liability to the 1^st defendant for the plaintiff’s loans on any other basis.  The plaintiff’s claim against the 1^st defendant for repayment of the outstanding balance of his loans must be dismissed.

Hon Yam J:

67.I also agree with the judgment of Kwan JA and have nothing to add.

Mr Kumar Ramanathan, SC, instructed by Messrs Gall, for the Plaintiff/Respondent

Mr Edward Chan, SC and Mr C Y Li, instructed by Messrs Tso Au Yim & Yeung, for the 1st Defendant/Appellant

Please refer to FACV9/2012 for the relevant appeal(s) to the Court of Final Appeal.