LAM YIU CHO AND ANOTHER v. ASIALAND LTD AND OTHERS

HCA 463/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 463 OF 2006

____________

BETWEEN

LAM YIU CHO 1st Plaintiff
NEW RAINBOW OVERSEAS
INCORPORATED
2nd Plaintiff
and
ASIALAND LIMITED 1st Defendant
CHENG CHI HENG 2nd Defendant
ADVANCE PHARMACEUTICAL
COMPANY LIMITED
3rd Defendant
LOYAL ADVANCE LIMITED 4th Defendant

____________

AND

HCA 2339/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2339 of 2007

_________________

BETWEEN

MASTER SUM LIMITED Plaintiff
and
ASIALAND LIMITED 1st Defendant
CHENG CHI HENG 2nd Defendant
ADVANCE PHARMACEUTICAL
COMPANY LIMITED
3rd Defendant
LOYAL ADVANCE LIMITED 4th Defendant

_________________

Before: Hon Chung J in Chambers

Date of Hearing: 20 November 2008

Date of Handing Down Judgment: 16 December 2008

___________________

J U D G M E N T

___________________

Introduction

1. These are the plaintiffs’ summonses taken out on 16 May 2008 pursuant to RHC Ord. 14.

2. The parties herein were also some of the parties in HCA 1944/2005 (“A1944/2005”). Arguments related to that action have been raised in this application; it will be referred to below when necessary.

Background

3. These actions (commenced in March 2006 and November 2007) arise out of the sale by the plaintiffs of part of their shares in the3rd defendant, Advance Pharmaceutical Co. Ltd. (“AP”) to the 1st defendant, Asialand Ltd. (“Asialand”). The agreement was dated 17 September 2002 (“the said agreement”). The 2nd defendant (“Cheng”) was the guarantor under the said agreement.

4. Not only did Asialand purchase shares in AP from the plaintiffs, Asialand also entered into 2 other agreements with AP’s 2 othershareholders to do the same (on similar terms as the said agreement).

5. The first tranche of the share transfer from the plaintiffs was effected in September 2002. The remainder of the shares was orderedto be transferred to Asialand by the court in A1944/2005 in January 2007.

Para. (a) and (c) of the Summons

6. This part of the claim concerns the tax investigation conducted by the Inland Revenue Department (“IRD”) against AP and one of its subsidiaries, Loyal Advance Ltd (“Loyal”). Apparently the investigation was already known to the parties to the said agreement in September 2002.

7. Clause 8 of the said agreement provides (among other things):-

“… [IRD] is investigating [AP and Loyal] regarding the information of their past tax return … If after investigation, [IRD]has to charge [AP] or [Loyal] taxes or penalties … [the plaintiffs have] to be personally responsible for the taxes or penalties… ” (clause 8.1);

“After completion of the transaction of the shares, [the plaintiffs] shall forthwith pay a surety in the amount of [HK$10 million] to ensure the performance of [the plaintiffs’] undertaking as set forth in Clause 8.1 above. The said amount shall be deposited at … S.K. Lam, Alfred Chan & Co. …. to be stake-held … After the confirmation of taxes or penalties from [IRD], Stakeholder Solicitors shall first pay the said Taxes and Penalties… plus interest, the remaining balance to be returned to [the plaintiffs] … ” (emphasis supplied) (clause 8.2).

8. In brief, the prayer for relief seeks monetary judgment in the said sum of $10 million against Asialand and Cheng.

9. By the hearing of this application, the plaintiffs confirmed that the said sum had been fully repaid. This aspect of their claimtherefore only concerns the related costs of this action (including this application).

10. Essentially two lines of defence are raised in this application:-

(a) this action was commenced prematurely;

(b) the claim was wrongly brought against Asialand and Cheng. It should have been brought against the stake-holder, namely, S.K.Lam, Alfred Chan & Co. (“stake-holder”)

11. In relation to sub-para. (b), I agree with the defence it is arguable the stake-holder was keeping the said sum as a principal,and not as the agent of Asialand: Bowstead & Reynolds on Agency (2006) 18th Ed., para. 9-026.

12. The gist of the plaintiffs’ argument is that there was an implied term:-

“[Asialand] has to assist [the plaintiffs] by writing to the IRD for confirmation of the status of the said unpaid tax liabilities… ” (para. C. 6, plaintiffs’ written submission),

and Asialand has breached that term by failing to do so.

13. By reason of the matters set out above, whether such a term should be implied into the said agreement can only be resolved properlyafter trial.

14. In relation to sub-para. (a) above, it is common ground the stake-holder wrote to the IRD on 11 January 2008 to seek confirmationthat the tax audit of AP and Loyal had been completed and the IRD expressly so confirmed on 21 January 2008.

15. I agree with the defence it is also arguable if this part of the plaintiffs’ claim has been prematurely commenced in March 2006.

16. Because Asialand’s liability is arguable, the liability of Cheng as a guarantor is also arguable.

17. To conclude, I do not consider it appropriate to make a costs order in the plaintiffs’ favour in the context of this application. I decline the invitation of the defence to make a costs order in its favour (as if concluding this part of the action will be dismissedat the end). It is inappropriate, in the context of an Ord. 14 application, to attempt such kind of determination. It may be appropriateto do so if this were an Ord. 14A application (where I have jurisdiction (if and when appropriate) to make an order for or againstan applicant).

Para. (b) and (d) of the Summons

18. This part of the claim is founded on clause 11 which in gist provides:-

“… from 17th September 2002 onwards (i) [AP] shall issue to each shareholder including the Plaintiffs reports on the accounts of [AP] and itssubsidiaries including Loyal every 3 calendar months and (ii) if there were any annual net profits, [AP] shall declare and pay eachshareholder including the Plaintiffs dividends of $112,000 per 1% of shares in [AP] … and (iii) if there were still surplus annualnet profit left … [AP] shall further declare and pay dividends … ” (para. 4, re-amended statement of claim).

19. The plaintiffs allege that [Asialand] failed to cause AP (i) to issue financial reports or (ii) to declare or pay dividends (exceptfor the year ending 31 March 2004). This part of this application seeks interlocutory judgment against Asialand for breach of thesaid agreement.

20. The defence raised in this application is in short:-

(1) accounts (albeit some in draft form) and information have already been made available to (or could have been inspected by)the 1st plaintiff (“Lam”), who remained a director of AP until April 2007;

(2) it is trite law dividends can only be declared if there are profits available to do so. The profits as at 31 March 2003 weresold to Asialand and it was resolved by the board of directors no dividends should be declared or paid to Asialand until after AP’sbooks of accounts had been investigated. There was net loss for the year ending 31 March 2005 and no dividend could be declared;

(3) any claim for dividends for the year ending 31 March 2006 is misconceived because the said agreement required the plaintiffsto assign and transfer to Asialand their interests in the 2nd tranche of the shares by 17 September 2005 (recital (A) thereof).

21. There is evidence which (at least arguably) can support the above lines of defence.

22. Because Asialand’s liability is arguable, the liability of Cheng as a guarantor is also arguable.

Para (e) of the Summons

23. This is a claim for final judgment of $1.5 million to be entered against AP. The re-amended statement of claim pleads that:-

“[on] 17th September 2002 and prior to the execution of [the said agreement], [AP] under a prior and collateral contract … had made an undertakingto the Plaintiffs … as evidenced in a document signed by [Cheng on AP’s behalf] … to pay the Plaintiffs … $1,500,000.00 onthe condition … the [plaintiffs] was to execute [the said agreement] then unexecuted … ” (para. 19 thereof).

It is also pleaded the plaintiffs have entered into the said agreement but AP failed to pay the said sum.

24. The terms of a document dated 17 September 2002 expressly state that AP was to pay (besides another sum) $1.5 million. While themeaning of those terms is undisputed, the defence is essentially that there was no consideration in support of the promise to pay. It is alleged the document was executed before the execution of the said agreement.

25. This part of the plaintiffs’ case is plausible and prima facie sustainable: Toy Major Trading Co. Ltd. v. Plastic Toys Ltd., CACV 11/2007 cited in Hong Kong Civil Procedure 2008, para. 14/4/4. This is because, besides AP’s promise to pay $1.5 million, the said document also expressly provided for the paymentof a sum referrable to the dividends payable by AP.

26. It is trite law a mere assertion by the defendant is insufficient; the defendant’s affidavit must “condescend upon particulars”:Hong Kong Civil Procedure 2008, para. 14/4/4.

27. The evidence adduced by the defence is inadequate. Apart from asserting that the said document was executed afterwards, no explanationhas been given regarding the reasons why, and the circumstances under which, the said document was executed. Nor was there explanationas to why AP promised to pay the said sums.

Para. (f) of the Summons

28. This is also a claim against AP for the sums of $333,333.33, $275,000 and $400,000 (total $1,008,333.33) (collectively “the said 3 sums”). It arises as follows.

29. As stated above, the IRD conducted a tax investigation against AP and Loyal. The plaintiffs and the other vendors of AP’s sharestogether deposited with the IRD a sum to meet any liability on AP’s part for tax and penalties assessment. Subsequently, the IRDrefunded part of the said sum to AP after deducting the tax and penalties imposed against AP. It is common ground the said 3 sumswere the part of the refund earlier advanced by the plaintiffs.

30. The sums of $333,333.33 and $275,000 were paid to the IRD before the execution of the said agreement. In relation to those sums,the defence relies on clause 4 of the said agreement which stipulated:-

“[The plaintiffs declare] that [they have] not loaned to [AP] as at the date of completion”.

31. Because those 2 sums were in the nature of loans advanced by the plaintiffs in AP’s favour, the defence contends that the plaintiffsshould be taken to have waived those 2 sums.

32. Whether the above contention is valid depends on how the word “loan” in clause 4 should be construed. The plaintiffs arguethat the word should not cover:-

“all sums paid by Ps to IRD … These sums were simply deposits made by Ps on account of their contingent liability for tax penalties”(para. G.5a, plaintiffs’ written submissions).

On the other hand, the defence argues that word should cover any payment in the nature of a loan as between the plaintiffs and AP.

33. It is settled that:-

“The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. Andthis involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve. Quite often this exercise will lead tothe conclusion that although there is no reasonable doubt about what the parties meant, they have not expressed themselves very well. Their language may sometimes be careless and they may have said things which, if taken literally, mean something different fromwhat they obviously intended.”

(Marble Holding Ltd. v. Yatin Development Ltd. [2008] 4 HKLRD 950, para. 20 quoting Jumbo King Ltd. v. Faithful Properties Ltd. and Others (1999) 2 HKCFAR 279, 296).

34. It is not proper to conduct a minute examination of the factual details in an Ord. 14 application: Hong Kong Civil Procedure, para. 14/4/9 (especially at p. 191).

35. With that approach in mind, this is a line of defence which is arguable.

36. The sum of $400,000 was admittedly paid after the execution of the said agreement, and hence clause 4 has no application. In relationto this sum, the defence relies on AP’s counterclaim in the sum of $1,413,719.64 ($760,719.64 + $653,000); alternatively, $961,022.70($326,022.70 + $635,000).

37. Whether the counterclaim can be relied on depends on whether it is barred under the doctrine of issue estoppel. The plaintiffs’argument is that the counterclaim has already been determined in their favour in A1944/2005. The defence argues that there is noissue estoppel.

38. AP’s counterclaim consists of the following:-

(a) $760,719.64 (alternatively, $326,022.70) being the dividend overpaid to the plaintiffs;

(b) $653,000 being the amount of compensation payable for a sum irrecoverable from one of AP’s customers (King Wai Hong).

Details relating to the above sums have been set out in a report compiled by Messrs. Deloitte.

39. Because of the issue raised, it is necessary to summarize the judgment dated 31 January 2007 handed down in A1944/2005 (“the Jan 07 judgment”).

40. Asialand, AP, Lam and one New Rainbow Overseas Incorporated were also the parties in A1944/2005. According to the Jan 07 judgment,AP sued to recover overpaid dividends while Asialand sued to recover overpaid purchase price. The cause of action relied on wasfraudulent or reckless misrepresentation.

41. The Jan 07 judgment concerned an application to strike out (among other things) the part of the claim based on fraudulent or recklessmisrepresentation. The deputy judge was not satisfied that there was a representation relating to the correctness or accuracy ofthe accounts, or that any representation was made to Asialand. The part of the Jan 07 judgment which the plaintiffs emphasise is:-

“There are further matters that render the pleadings going to fraudulent misrepresentation inherently bad. Mr Ting prior to [17September 2002] was aware that there was a question mark over the recoverability of some or all of the amounts in question; the auditorshad made reference to this when certifying the accounts [14 November 2001]. On [17 September 2002], Mr Ting raised the matter again,and was able to persuade two out of the three vendors to pay the same out of their own pockets. Mr Lam was the one who refused tocomply” (para. 55 thereof).

The reference to “pay the same out of their own pockets” refers to the sum of $635,000 paid by each of the other 2 vendors ofthe shares. “Mr Lam” therein refers to the 1st plaintiff herein.

42. I agree with the plaintiffs the part of the Jan 07 judgment quoted above shows that the court has in effect decided against AP’scounterclaim. The basis of the determination was not only about the lack of misrepresentation or the identity of the representee,but also that the representee did not rely on any representation.

Para. (g) of the Summons

43. This is a claim against Loyal for $190,000. The defence concedes liability for $137,750 (in its opposing affirmation, and confirmedby counsel during the hearing). The plaintiffs are willing to abandon the difference ($52,250).

Conclusion

44. In view of the matters set out above, final judgment will be entered in the plaintiffs’ favour in relation to:-

(1) $1.5 million against AP (para. 23 to 27 above);

(2) $400,000 against AP (para. 36 to 42 above);

(3) 137,750 against Loyal (para. 43 above).

There will be unconditional leave to defend the remainder of the plaintiffs’ claim.

45. The paragraph numbering of the 2 summonses differs slightly. The paragraph numbers set out above refer to those in the summonstaken out in HCA 463/2006; but the relief sought in the summons taken out in HCA 2339/2007 is essentially the same. This judgmentapplies equally to the latter summons subject to appropriate modifications to the paragraph numbers therein.

Costs Order

46. In view of the partial success, it is inappropriate to make any costs order nisi pursuant to Ord 42 r 5B(6). The parties are invited to lodge with court and serve their respective written submissions on costswithin 7 days from the date of handing down of judgment.

(Andrew Chung)
Judge of the Court of First Instance
High Court

Ms Audrey Eu, SC leading Mr Simon Yip, instructed by Messrs Lau, Kwong & Hung, for the Plaintiffs in both actions

Mr Paul Shieh, SC leading Ms Lina Chan, instructed by Messrs S. K. Lam, Alfred Chan & Co., for the Defendants in both actions