Chung Pui Tak and Another v. Tam Chi Leung Nolan and Another
Read the full judgment text of HCA 1439/2012 on BabelCite. This High Court CFI judgment was delivered on 27 January 2021.
1. The main protagonists of this action are the 1 st plaintiff (“P1”) and the 1 st defendant (“D1”), who were behind the business co-operation in question. Dispute surfaced in about 2009 when trust and confidence between them broke down. P1 started to demand D1 to disclose documents and for an account of their business venture. This action was commenced in 2012. The pleadings have since undergone rounds of substantial amendments, and discovery of documents has continued, including some not w
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HCA 1439/2012 [2021] HKCFI 242 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1439 OF 2012 ________________
________________ Before: Deputy High Court Judge Leung in Court Dates of Hearing: 15, 16, 18, 19, 22-26, 29-31 October; 10 December 2018 Date of Judgment: 27 January 2021 ____________ JUDGMENT ____________ 1.The main protagonists of this action are the 1st plaintiff (“P1”) and the 1st defendant (“D1”), who were behind the business co-operation in question. Dispute surfaced in about 2009 when trust and confidence between them broke down. P1 started to demand D1 to disclose documents and for an account of their business venture. This action was commenced in 2012. The pleadings have since undergone rounds of substantial amendments, and discovery of documents has continued, including some not without substantive argument before the court. The issues in dispute arising out of the claim are multiple, and there is also a counterclaim. Chinese law experts and accounting experts were engaged by the parties, who all testified at the trial. Mr Chiu appeared for the plaintiffs while Mr Ng, with Miss Ho, appeared for the defendants. A. BACKGROUND 2.Prior to 2002, P1 and his family wholly owned and controlled Everbest Printing Company Limited (“Everbest”), a Hong Kong company in the business of printing and packaging. Everbest has its factory in Nansha, Mainland China. In 2002, 49% of the shares in Everbest were sold to a foreign entity, but P1 and his family retained control of the company until the remaining 51% of the shares were sold to that entity in 2005. P1 however stayed as a consultant of the company. He withdrew from Everbest completely in June 2006. By then, P1 was over 70 years old. 3.Printing Force Company Ltd (“Printing Force”) was at the material time a Hong Kong company in the printing business and a supplier of Everbest. D1 was a part owner of the company and its sales director. In such business context, P1 and D1 came to know each other in 1992-1993. 4.P1 has since reposed much trust and confidence in D1. This was apparent from various dealings between the parties. In 1995, the two purchased two shops in Mongkok as investment in equal shares. The properties were arranged to be held by Kid Art Limited (“Kid Art”), which was a Hong Kong company then owned by D1 and his wife as his nominee. Not only did P1 leave the management and rental matters of the shops to D1, but he also extracted from D1 no shareholdings in Kid Art or written acknowledgment of his beneficial interest in Kid Art or the invested properties. Kid Art held a bank account with HSBC which only D1 could operate. 5.Further, in 2003, P1 and D1 came together to form a joint venture business in the Mainland, which became the subject matter of dispute in this action. What is not in dispute about the joint venture is that whilst P1 and D1 agreed to share the beneficial interest in and profit from the joint venture, the registered foreign corporate investor of the business was Kid Art. The joint venture business was also left to be operated and managed solely by D1. Once again, P1 did not require from D1 any written acknowledgement or declaration of the former’s beneficial interest in the business. It would appear that such arrangement was the personal preference of P1. In any event, his trust and confidence in D1 at the time was once again evident. 6.The joint venture business mentioned above, eventually known as Guangzhou City Hui Guang Packaging Materials Company Limited (“Hui Guang”), and various other related entities came into existence in the following manner. 7.In September 2003, D1 resigned from Printing Force. According to him, he would be actually leaving his post there in mid-November 2003. Learning that D1 intended to set up his own printing business, P1 introduced him to his friend, Kenneth Fung (“Fung”), and through whom D1 further came to meet Ho Shing Tung (“Ho”). This led to D1’s eventual takeover of the printing business then owned or controlled by Ho through a Fine Arts Offset Printing Company Limited (“Fine Arts”). D1 started operating the new printing business in Hong Kong in mid-November 2003 pending completion of the sale and purchase of the business, which happened later towards the end of the year. The consideration for the sale and purchase of the printing business was HK$2.8 million. The ownership of the printing business and printing machines were later transferred to Best Tri Printing Company Limited, the 2nd defendant (“D2”), for onward sale by its shareholders, of which one was Ho’s wife. D1 (and his wife) formed Fine Group Trading Limited, the 3rd defendant (“D3”), another Hong Kong company, to purchase and to hold the printing business of D2. D1 and his wife were the directors of D3. It should perhaps be noted that according to P1, of the entities involved in their joint venture business, he had no idea about the existence of D3 until after their dispute arose. 8.It was around that time in 2003 when P1 had discussion with D1 about the possible joint venture between them in the Mainland mentioned above. They came to a verbal agreement (“the JV Agreement”). The idea was that the joint venture would produce and supply carton boxes and packaging materials, which Everbest would also need for its business. D1 would be solely responsible for the operation and management of the joint venture business, while P1, by virtue of his then control over Everbest, would cause Everbest to place orders with the joint venture to ensure that the new business venture would sustain initial profitability. It was also agreed that P1 and D1 would respectively own 60% and 40% of interest, and would be entitled to the profits of the new company in proportion to their respective shareholdings. As a matter of personal preference, P1’s 60% shareholding in the new company would be held either by D1 or indirectly by another company of D1 on trust for him. So much of these terms of the JV Agreement are undisputed. Those that are disputed are set out below. 9.P1 contends that it was agreed that he would provide the bulk of the initial capital for setting up and enabling the joint venture business to reach a state of substantive operation. In consideration of D1 being given 40% of the shares in the new company and sharing 40% of the profits (without having to contribute towards its capital), D1 would hold 40% of the issued shares in his newly acquired printing business, D2, or cause the same to be held, in trust for P1. Essentially, P1 would have 40% beneficial interest in D2 pursuant to this trust in his favour (“Trust for D2 Shares”). 10.D1 denies that there was agreement for P1 to be the sole contributor of the financial capital of the joint venture business. Further, whilst D1 does not dispute that the parties agreed upon P1’s (potential) entitlement to 40% shares in D2, he contends that it was not part of the JV Agreement. Nor was it in terms as P1 contends. It was, according to D1, a separate investment agreement between the parties reached prior to the JV Agreement. According to D1, D1 agreed to give P1 an option to acquire 40% shareholding in his new printing business then being acquired, by paying him 40% of the cost of acquisition of that within a period of 3 years from November 2003. If P1 did not exercise the option, any sum that P1 might be putting into the new printing business during the 3 years would be regarded as money lent by him to the business (“the Option Agreement”). 11.There is no dispute that on 24 November 2003, P1 paid D1 by cheque drawn in favour of Kid Art for the sum of HK$400,000.00. P1 says this was his first payment for the setting up of the joint venture business pursuant to the JV Agreement whereas D1 says this sum was P1’s contribution towards the first HK$1 million payment for acquiring the business of D2. 12.Kid Art had also raised a HK$500,000.00 loan (“the Kid Art Loan”) from Pacific Finance (HK) Limited (“Pacific Finance”) on second mortgage of the two Mongkok shops. The loan was utilised for the purpose of D2. But there is dispute as to the exact purpose. P1 says that he understood his share of the loan was deployed for the working capital of D2 whereas D1 says that it was P1’s further contribution towards the purchase price of the business of D2 pursuant to the Option Agreement. What is not in dispute is that the parties already applied the 60:40 sharing ratio to the loan in accordance with the interest sharing ratio between them in D2. On this basis, P1 was supposed to contribute 40% of the loan, ie HK$200,000, and the remaining HK$50,000 of his half share of the loan money obtained was supposed to be returned to him. There is no dispute that this HK$50,000 was also extended by P1 to D1 as a personal loan at the request of D1. It will be seen that D1 purported to return this sum of HK$50,000 to P1 in early 2004, an episode which is not without evidential significance. 13.In other words, according to D1, P1 has contributed a total sum of HK$600,000, ie HK$400,000 by cheque plus HK$200,000 out of the Kid Art Loan, towards the acquisition of D2. On the contrary, P1 says the HK$400,000 was his contribution to the capital of the joint venture business while his share of HK$200,000 out of the Kid Art Loan went to the working capital of D2 and not its acquisition. 14.In March 2004, P2 was set up in connection with the joint venture business. This Hong Kong company became the corporate vehicle facilitating the implementation of the JV Agreement. P2 in Hong Kong would collect the business income, then contemplated to be the orders placed by Everbest, and settling the business expenses of the joint venture. P2 would then distribute the profit between P1 and D2 in the 60:40 ratio. The parties then contemplated the profit margin from sales to Everbest would be about 11%. 15.Initially P2 was wholly owned by Gravipas Strategic Holding Ltd (“Gravipas”), a BVI company beneficially owned by P1. On 24 May 2004, Gravipas transferred all its 10,000 shares in P2 to D1, who simultaneously executed a declaration of trust of the entire 10,000 shares in favour of Gravipas. In other words, the beneficial ownership of P2 remained with P1 through Gravipas, which D1 held as its trustee. D1 became the sole director of P2. 16.In June 2004, the Mainland authorities finally granted approval for the establishment of the joint venture business, Hui Guang. Kid Art became the registered foreign corporate investor of Hui Guang. D1 became the registered legal representative and sole director of Hui Guang. The factory of Hui Guang was set up in the vicinity of Everbest’s factory in Nansha. 17.On or about 13 December 2005, 90,000 new shares of P2 were issued. 85,000 of those new shares were allotted to D1 and the other 5,000 were allotted to Ms Wang Yan Yun (“Wang”), who hold the same as nominee of Mr Bowen Lam (“Lam”), a business acquaintance of P1. D1 then made a declaration of trust as regards 45,000 of those shares in P2 in trust for Gravipas. The beneficial interest in P2 was thus 55% in P1 (through Gravipas held by D1 as trustee), 40% in D1 and 5% in Lam (through Wang as his nominee). 18.In late 2005 to 2006, Kid Art was again used as the corporate vehicle for a separate joint venture investment in digital printing business in Beijing (“the Beijing Investment”). The Beijing Investment involved P1, D1 and various other investors. In that connection, the shareholding of Kid Art was altered and increased from 2 shares to 10,000 shares. 7,000 of those were held by D1. It was agreed between P1 and D1 that 6,000 out of the 7,000 shares would be so held on trust for Gravipas. In other words, P1, through Gravipas, which D1 held as its trustee, remained 60% beneficial owner of Kid Art. The remaining shares were held by the various investors or their nominees. In the same year, Kid Art opened an account with DBS Bank for the purpose of the Beijing Investment, which both P1 and D1 could operate. D1 and his wife remained the directors of Kid Art. 19.As mentioned, P1 withdrew completely from Everbest. 20.In 2008, the Beijing Investment ran into problem. The investors began to pull out, and P1 bought out most of them, thus leaving behind D1, Wang and P1. Pursuant to P1’s request, on or about 21 May 2008, D1 transferred the 6,000 shares in Kid Art under his name to Gravipas. P1 became legally 85% majority shareholder of Kid Art. D1 and Wang held 10% and 5% respectively. P1 was also appointed a director of Kid Art in place of D1’s wife. 21.In the same year, Hui Guang went into problem as well after less than 5 years of operation. On 28 May 2008, the Mainland authority issued a writ of execution against Hui Guang, followed by closure of Hui Guang by the court. The joint venture investment in Hui Guang ended up in total loss. However, D1 brought such news to P1 and Lam, when they met in Shenzhen only in February 2009. On that occasion, P1 asked D1 to formally transfer 40% of the shares in D2 to his son. There is no dispute that D1 communicated to P1 his stance that P1 had to pay a price to be negotiated for purchasing the 40% of shares in D2. According to D1, he also requested P1 to share his expenses incurred in an attempt to salvage Hui Guang. 22.The relationship between the parties, including trust and confidence, broke down. In mid-2009, P1 started to demand D1 for an account of the business of the entities involved in the joint venture business and the production of the business and account documents of P2 and Hui Guang. The progress and the stance of the parties were documented in the contemporaneous email correspondence between them. 23.On 9 October 2009, upon P1’s instruction, D1 transferred to Gravipas the 55,000 shares that he held in P2 on trust for Gravipas mentioned above. After the transfer, 55% of shareholding in P2 was held by P1 through Gavipas, 5% by Wang and 40% by D1. 24.On or about 24 March 2010, a joint extraordinary general meeting of P2 and Kid Art was held where it was resolved, with P1 plus Wang as the majority, to remove D1 from the directorship of P2 and Kid Art, and to appoint himself as the sole director of P2 and his wife, Ms Wong Wai Bun (“P1’s Wife”), as an additional director of Kid Art. 25.With the accounting documents that P1 managed to obtain from D1 by the end of 2009 (“the Accounting Documents”), P1 had a certified public account, Yeung Kwok Keung (“Yeung), to study and to carry out audit, who produced his first report dated 11 January 2010 (“the Yeung 1st Report”) and his second report dated 25 June 2012 (“the Yeung 2nd Report”). Various problems and queries were raised regarding Hui Guang and P2. 26.On 14 August 2012, the present action was commenced. However, the plaintiffs’ request for documents of P2 and Hui Guang ensued. B. THE CLAIM 27.P1 claims against D1 and/or D3 (which held the shares in D2) for a declaration that D1 or D3 held 40% of all the issued shares in D2 as trustee for P1, and for the necessary vesting order. 28.Further, the investigation into the Accounting Documents both prior to and subsequent to the commencement of action reveals the following items (“the Items”) that were said to be either falling outside the normal course of business of P2 or not backed up by contracts or supporting documents. They on their face are said to be irregular, baseless or exorbitant, and ought not to have been paid by P2:
29.P2 claims against D1 for breach of fiduciary duty to P2 for failing to give a full account of P2, particularly in respect of the Items, and breach of his duty of good faith to P2 and conflict of interest, which allegedly caused loss to P2 (and Hui Guang) for his own personal gain. Accordingly, P2 claims against D1 for an account and an order for payment upon taking of such an account. 30.In connection with the item of subcontracting fees mentioned above, P2 also has a claim on the basis that the defendants’ case in respect of that item is accepted. It is averred that on such basis, P2 would be the authorized agent of Hui Guang to receive material processing fees incurred in the subcontracting done for D2, and a sum of HK$3,664,319.63 or HK$4,972,500.53 remains outstanding and payable by D2. 31.P2 claims against D2 and D3 for dishonest assistance or receipt of trust properties, and for an account and an order for payment upon taking of such an account. Against D2 and/or D3, P2 claims for an account. Against all the defendants, the plaintiffs claim for further necessary account, enquiries and tracing. C. THE DEFENCE AND COUNTERCLAIM 32.According to D1, P1 and D1 entered into the Option Agreement first. Upon the subsequent proposal of P1, the parties then entered into the JV Agreement, and therefore the same did not contain the Trust for D2 Shares as alleged. 33.D1 also denies the alleged breach of fiduciary duty to P2 in respect of the Items. Insofar as the item of management fees paid to D2 is concerned, the defendants also raise an alternative defence, namely, in the event that the defendants, or any of them, should be liable in respect that item, they should nevertheless be entitled to an allowance for the actual provision of the human resources and management services by them to Hui Guang. 34.D2 and D3 deny the alleged dishonest assistance or receipt of trust properties. 35.D1 and D3 counterclaim against P1 and P2 respectively. D3 counterclaims for the sum of HK$637,360.53 being the outstanding management fees owed by P2. D1 also counterclaims against P1 is for the sum of HK$689,879.18 being the 60% share of the abortive salvage cost allegedly incurred by D1 for Hui Guang in October or November 2007, which D1 says P1 is liable to contribute pursuant to the parties’ agreement. D. THE ISSUES AND WITNESSES 36.The parties have compiled a joint list of issues. The majority of the issues are agreed formulation, with a few which the parties disagree mainly as to whether they have the necessary footing in terms of pleading. The issues discussed below align with those set out in the list, albeit not in their exact formulations, and broadly fall into the following parts:
37.For the plaintiffs, P1, P1’ wife and Lam mentioned above testified at the trial. 38.For the defendants, D1, Tam Yim Fan (“Tam”) who was the assistant manager and cashier of Hui Guang, To Wai Chung (“To”) who was the auditor of D2 and D3 between 2004 and 2006, and Tse Yuk Ping (Brenda) (“Tse”) who was the auditor of D2 and D3 since 2011 testified. 39.In connection with the legal issues arising out of the item of subcontracting fees, Yongjun Peter Ni (“Ni”) and Professor Xianchu Zhang (“Zhang”) were the Mainland law experts engaged by the plaintiffs and the defendants respectively. They produced their respective written opinion on 27 March 2017 to be followed by their joint report dated 9 June 2017. Zhang produced his supplemental opinion on 8 August 2017. They testified at the trial. 40.The accountancy experts engaged by the plaintiffs and the defendants are Yeung (who, as mentioned, prepared the Yeung 1st Report and Yeung 2nd Report) and John Robert Lees (“Lees”) respectively. Yeung produced his 1st expert report on 25 April 2016 and Lees produced his on 17 June 2016. Yeung produced his 2nd expert report on 26 October 2016. They too testified at the trial. 41.I would quickly mention for the record about Yeung as the plaintiffs’ accounting expert in this trial. Obviously out of prudence, Mr Chiu made disclosure of information about Yeung that he said had just come to his notice after the trial has begun. What came to Mr Chiu’s notice was that in 2005, Yeung was the financial controller of a company owned by Fung, the person whom P1 introduced to D1 as mentioned above. P1 later became a shareholder of that company, but Yeung has not come to know P1 personally by the time when he resigned from that company a year later. Yeung was subsequently introduced by Fung in around September 2009 to undertake the examination of the Accounting Documents for P1. Yeung was also engaged as an auditor of North Pine Limited, which, as mentioned above, was beneficially owned by P1, as well as an auditor of another company of which P1 was a nominee director. Other than that, Yeung and P1 are not personal acquaintances. In his evidence, Yeung also gave evidence of the above background. Throughout the trial until closing, no issue was taken by the defendants as to the independence of Yeung as an expert. Nor am I impressed that there should be. E. THE OPTION AGREEMENT VERSUS THE TRUST FOR D2 SHARES 42.This is a question of fact. Counsel refer to numerous authorities in respect of the approach in assessing evidence and credibility. The assessment entails consideration of undisputed facts, contemporaneous documents, inherent and relevant probabilities: see Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd, HCA 1957/2005 (28 July 2011) at §§21-24; Hui Cheung Fai v Daiwa Development Ltd (unreported) HCA 1734/2009 (8 April 2014) at §§76-81. 43.Counsel also refer to the circumstances that allow the court to draw adverse inference from the absence of silence of a witness who may be expected to have material evidence to give on an issue: see for instance, Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd & Ors, CACV 90/2012 (17 September 2013) at §§106-107, citing the principles set out in Wisniewski v Central Manchester Health Authority [1998] PIQR 324 at 340 and Prest v Petrodel Resources Ltd [2013] UKSC 34 at §44. The incidence of the burden of proof of an issue and that of explaining matters concerning an issue when reasonably called upon or fairly expected to do so will have bearing on the application of this principle. It does not appear to me that these principles are in dispute. 44.As discussed below, it becomes clear that the major context in which the plaintiffs ask this court to draw adverse inference against the defendants is the explanation of the circumstances surrounding and the reasoning behind the treatment of the Items in the accounts. In such context, it is indeed true that Jacky Chan, the account clerk, and Jacky Liu, the auditor, at the relevant time were not called as witnesses. E1. The evidence 45.Much is said about the evidence of P1 and D1 in respect of the dates of the relevant events. As mentioned, there is dispute as to the sequence of the JV Agreement and the Option Agreement alleged by the parties respectively. The fact is that neither’s evidence in this respect was completely coherent. It is really the construction of the sequence and content of the events, with reference to the available contemporaneous documents, that matters. 46.According to P1, he learned about D1’s resignation from Printing Force, which undisputedly happened in September 2003. It was upon D1’s expression of the intention to start his own printing business then that P1 introduced him to his friend, Fung. Through Fung, D1 came to meet Ho, who D1 understands owned or controlled the printing business being sold. P1 was not involved in the acquisition of D1’s new printing business. There is no dispute that D1 started to operate his new printing business in mid-November 2003. According to P1, it was in late November 2003 when D1 consulted P1 on this new printing business that P1 proposed their setting up of a joint venture business. As a result, the two met at P1’s office in Nansha. The JV Agreement was made, and P1 made payment on 24 November 2003 towards the initial capital of the joint venture to be set up. 47.According to D1, he met Ho in about mid-October 2003. They then engaged in negotiation for the sale and purchase of Ho’s printing business, including eventually agreement on the consideration for that at HK$2.8 million. D1 stated that it was in late October 2003 when he invited P1 to consider if the latter would be interested in investing in his new printing business as well. That brought about their meeting, where D1 informed P1 that the former would start operating the new printing business in November or December 2003. Then the Option Agreement was reached. In court, D1 said that the Option Agreement was reached when they met during the first half of November 2003. 48.According to both P1 and D1, the former only made introduction that led to the latter’s negotiation and eventual agreement for the acquisition of the new printing business. There is no dispute that P1 was not involved in such negotiation or agreement. However, had D1 conceived the idea of co-investing with P1 in the printing business to be acquired, one would have expected him to have mentioned this plan to P1 before meeting or negotiating with whoever D1 got to know upon P1’s initial introduction. It is not so much about whether P1 would then have been involved in the actual negotiation with Ho. The past dealings between P1 and D2 tend to show the pattern of P1 so that he could probably have left it to D2 to handle the matter anyway. It is more about the inherent probability of D2’s version, which effectively suggests that the idea of co-investment with P1 in the new printing business somehow came about between mid-October and early November 2003 after he had already come to agreement with Ho for the acquisition of the printing business. Hence the credibility of the alleged discussion leading to the Option Agreement. 49.D1 questions the lack of declaration of trust in respect of the Trust for D2 Shares alleged by P1. Instances such as the declarations of trusts in respect of the shares in P2 subsequently arranged to be executed by D1 in favour of Gravipas concerning P2 in 2004 and 2005 (mentioned above) are referred to. However, putting aside any specific reason for those subsequent declarations of trust, I see the fact of those declarations to have existed side by side with the undisputed lack of any form of written acknowledgement of P1’s beneficial interest in the parties’ not insignificant co-investment in the Mongkok shops prior to the JV Agreement and of P1’s beneficial interest in the joint venture business of Hui Guang pursuant to the JV Agreement. There is nothing inherently improbable about the lack of written acknowledgement or declaration to evidence the Trust for D2 Shares alleged by P1. This to me is a neutral consideration in the circumstances. 50.According to D1, the option to P1 to become a shareholder of D2 would last for 3 years from November 2003. It is unknown why the alleged commitment of P1 to invest in the new printing business of D1 would have to take the form of an option and for such duration. As far as D1 was concerned, he seemed to be in need of finance for acquiring the business. The term D1 reached for the acquisition of the new printing business was to pay the agreed consideration by instalments in 4-5 months. As far as P1 was concerned, his financial ability as well as trust and confidence in D1 in running business at the relevant time should not be doubtful. There is no suggestion that P1 needed the time either for financial reason or for observation about D1’s performance in his new printing business. Quite on the contrary, according to D1, his confidence that P1 would exercise the option sufficed to cause him to already recognise and treat P1 as a 40% shareholder of D2 immediately. Evidence of that will be discussed below. 51.P1 honestly was unable to recall precise dates. Nor was D1 actually. However, P1 was reminded by other incidents and contemporaneous documents that were relevant and proximate in time. According to him, the idea of forming a new joint venture business with D1 came about around the time when another joint venture of his in similar business in the Mainland did not turn out well, and problems about the financial situation and mismanagement of that venture became clear in late November 2003. P1 was referring to his joint venture business with a Bolem Kay (“BK”) by the name De Bao Paper Factory in the Mainland (“De Bao”), from which Everbest used to obtain the supply of packaging materials such as carton boxes. The email from BK dated 22 November 2003 confirmed the difficult situation then. The email also revealed a similar pattern of P1 leaving the management of De Bao to BK. According to P1, it was the timing of such situation and the opportunity arising out of D1’s new business venture that caused him to propose co-operation with D1. On 24 November 2003, he caused a cheque to be drawn for his first contribution towards the initial capital of the joint venture. He was adamant in his evidence about the purpose of such contribution as opposed to that alleged by D1. 52.The above evidence of P1 is questioned on the basis that he is described as having effectively jumped at the decision of setting up a new joint venture to replace De Bao and coming to agreement with D1 within literally just days between De Bao’s email and P1’s payment of the HK$400,000. In my view, this is not a fair reading of P1’s evidence. It was never the evidence of P1 that the idea of forming a new joint venture with D1 to replace De Bao came about only as a result of and subsequent to that email. When he referred to De Bao in his witness statement, P1 made clear that De Bao was not making profit and finally that email dated 20 November 2003 confirmed the mismanagement and liquidity problem in that venture. In view of P1’s pattern of handling investment, the fact that he would come to agreement with D1 at the meeting (arranged after that email) in late November 2003 and then made payment towards the setting up of the new joint venture, in my judgment, is not inherently improbable. 53.To clear any doubt, though, I should mention a couple of other points which may cause query. 54.First, it can be seen that throughout his pleading and witness statement, P1 made references to the new printing business introduced to D1 by the name of D2 well from the outset. The evidence however tends to suggest that the name of D2 might have entered into the picture only just before December 2003 and thus prior to the JV Agreement. Apparently, the sale and purchase of the new printing business was originally intended to be effected by way of asset transfer, though somehow only two offset printing machines (described by D1 as the soul and spirit of the printing business) were involved, at the agreed consideration. The vendor and transferor was one Fine Arts Offset Printing Company Limited (“Fine Arts”), which apparently operated the printing business under the control of Ho. This later changed to become share transfer together with the assets. What happened, according to D1, was that the machines were transferred by Fine Arts to the shareholders of D2, one of which was Ho’s wife, before the shareholders of D2, as vendor, transferred their shares together with the machines. Hence the formal sale and purchase agreement entered into on 8 December 2003 between the shareholders of D2 as the vendors and D3 as the purchaser (“the 8/12/2003 Agreement”). 55.There may be question as to how the eventual identity of the corporate vehicle owning the new printing business acquired by D1 came to be known by P1 at the time of the JV Agreement in late November 2003. Considering all the circumstances, I think P1 probably did not at the time. P1 quite consistently claimed no involvement or contemporaneous knowledge about how the new printing business was acquired by D1 or its terms. He claimed no idea about the existence of D3 being formed to hold D2 until after the dispute in the present case has arisen. I believe that. The plaintiffs’ pleadings and witness statement were all compiled well after these facts were known, and there is nothing sinister about P1’s references to D2 and not Fine Arts for the purpose of identification of the relevant party in these court documents. 56.Second, it became clear from the evidence in court that the Trust for D2 Shares under the JV Agreement might not have been agreed in terms as precise as that pleaded at the same time as the other terms. In his witness statement, P1 explained that the term was agreed after the parties agreed that the initial capital to be registered for the new joint venture would be US$140,000, which P1 undertook to pay. In court, he accepted that the registered capital investment amount of US$140,000 for the joint venture became known in early, most probably by February, 2004. That said, and putting this together with all the other evidence, I will not say that this affects the integrity of P1’s evidence in respect of the Trust for D2 Share as a term of the JV Agreement between the parties. It was only the exact percentage that might have been fixed by February 2004 upon the registered capital investment of Hui Guang being known. 57.The cheque dated 24 November 2003 for HK$400,000 paid to Kid Art referred to above was drawn by D1 on the bank account of North Pine Ltd (“North Pine”), another company of P1’s. As mentioned, D1 said that this was payment by P1 as investment into D2 pursuant to the Option Agreement. In support, he relied on his own acknowledgement of receipt written on a photocopy of the voucher in respect of the deposit of that cheque into the HSBC account of Kid Art on 24 November 2003. According to him, it was P1 who presented to him the photocopy and asked him to acknowledge receipt of that during their meeting at Everbest’s office at Nansha in late November 2003. In other words, D1 had no knowledge about the drawing and the deposit of the cheque, which was allegedly done by P1. 58.P1 refuted the above allegation. According to him, he just gave D1 the cheque. P1 discovered among the documents disclosed by the defendants a HSBC counter advice on the balance of the HSBC account of Kid Art dated the same date as the above deposit voucher. It bore the signature of D1 who obtained such advice. It was printed one minute immediately after the time of the deposit as per the deposit voucher. As Mr Chiu put it, this put D1 squarely at the bank one minute after the cheque was deposited there. His version of P1 depositing the cheque and then produced the deposit voucher only when they met afterwards could not possibly be true. When his version of how he came to write the acknowledgement on the deposit voucher is rejected, the evidential value of that in support of the truth of what the self-serving content of the acknowledgement became nil. 59.Then there was the Kid Art Loan in the sum of HK$500,000 obtained from Pacific Finance. There is no dispute that the parties acknowledged share of the loan for the purpose of D2 in the 60:40 ratio. According to P1, that was in line with the understanding under the Trust for D2 Shares whereas according to D1, this was based on the understanding under the Option Agreement. Both parties suggested that the loan was probably arranged in about October 2003. D1 therefore argues that there had to be consensus between the parties regarding the 60:40 ratio for the purpose of D2 prior to the discussion and arrangement for such finance. It follows that such consensus could not be reached under the JV Agreement, which was reached only in late November 2003 as alleged by P1. 60.Indeed, P1 actually referred to the discussion about the Kid Art Loan after the JV Agreement had been reached in November 2003, but at the same time referred to his understanding that the loan was taken out in September or October 2003. The need to reconcile the evidence was apparent. P1 was indeed asked about this in court. Essentially, P1 claimed no prior knowledge about the application for the loan, and he came to know about that only afterwards. Effectively, he agreed to join in to share the loan as represented by D1 to him. As other matters, the loan arrangement was made by D1, who was in a position to do so as it was he who controlled Kid Art then. As mentioned, D1 said in court that it was during the first half of November 2003 when the Option Agreement was reached. In other words, the Kid Art Loan would have been arranged prior to the Option Agreement even on the basis of D1’s case. There was therefore no real inherent inconsistency or improbability in the evidence of P1 in this respect, if fully understood. 61.The timing aside, the parties also differ in respect of the purpose of the Kid Art Loan. D1 says this was applied to foot the bill for the cost of acquisition of D2 whereas P1 says he was given to understand that this was for liquid or working capital of D2. P1’s share of that was HK$200,000. As to the balance of HK$50,000 of his share of the loan, it was also lent to D1 personally. Some evidence is particularly relevant to this dispute. The Mongkok properties were apparently put for sale in late 2003, which was completed in December 2003. According to P1, that was also handled by D1 through Kid Art. Net of repayment to Pacific Finance (including the Kid Art Loan), the net proceeds were distributed between the two of them with each receiving a little less than HK$1.7 million. The HK$50,000 out of P1’s share of the Kid Art Loan, which was lent to D1, had to be repaid. Because of that, D1 caused Kid Art to draw the cheque dated 23 February 2004 for the sum of HK$50,000 payable to North Pine, P1’s company. As mentioned, the parties by then already knew the registered capital investment of Hui Guang, and, according to P1, fixed the percentage for the Trust for D2 Shares. Hence 40% of the beneficial interest in D2 for P1. D1 made his own note on a photocopy of the cheque of such breakdown, namely that because of the capita shares (D1 60% and P1 40%), D1 had to repay HK$50,000 (out of the loan amount) to P1. In addition, he himself recorded in the note that the Kid Art Loan was for the liquid capital (“流動資金”) of D2. This record by his own hand, not being self-serving but adverse to his case in respect of the purpose of the Kid Art Loan, cannot be ignored. D1 tried to explain that in court, which did not impress me. 62.Whilst D1claims that the contributions by P1 (HK$400,000 and his HK$200,000 share of the Kid Art Loan) all went to finance the acquisition of D2, the tracing of such deployment of the funds was not entirely clear. D1 explained that HK$1 million of the agreed consideration had already been paid by 1 December 2003. Hence record of that in the payment schedule in the 8/12/2003 Agreement. Whilst he claimed that this was partly funded by P1’s payment and the Kid Art Loan mentioned above, the tracing of that was also not clear. Nor could D1 cast light on this in his evidence. Further, whilst the 8/12/2003 Agreement set out the agreed payment schedule of the balance by two instalments on 29 January 2004 and 30 April 2004 respectively, there was the receipt for what was said to be the balance of the agreed consideration in the sum of HK$800,000 dated 15 December 2003, and it was somehow still issued by Fine Arts. It is difficult to correlate the payment of this sum with the payment schedule under the 8/12/2003 Agreement. There was leasing documentation concerning D2 in January 2004, and the 2005 financial statement of D3, which purchased the shares of D2, indeed recorded the purchase of D2 as a non-cash transaction because the consideration of HK$2.8 million was said to be financed by leasing. The overall effect of the evidence, the plaintiffs say, cast doubt on D1’s case that P1’s payment and his share of the Kid Art Loan were contribution towards the cost of acquiring the new printing business of D2. 63.I now turn to the observation mentioned earlier, namely that notwithstanding the alleged lack of exercise of the option by P1 during the option period under the Option Agreement, the evidence clearly shows that P1 was for all intents and purposes treated as a vested 40% beneficial owner of D2. In a way, D1 did not dispute his such treatment of P1 but for a reason. 64.There was a cheque drawn against the HSBC account of Kid Art in March 2006 with the corresponding deposit voucher of the DBS account of Kid Art dated the following day for the sum of HK$200,000. A note dated 14 March 2006 written by D1 under the heading of P1’s name recorded such deposit of HK$200,000 as the declared dividend of D2 for 2004-2005. 65.On a copy of the bank statement of the BEA account of D1 up to May 2006, D1 made a handwritten record that HK$200,000 from the sale of scrap by D2 would be distributed between P1 and D1. In another note dated 8 June 2006 under the heading of P1’s name, D1 set out the breakdown of how this HK$200,000 dividend was apportioned to P1, namely, HK$200,000 x 40% = HK$80,000. After deducting P1’s share of the tax liability of Kid Art in the sum HK$25,000, the net balance of HK$55,000 was deposited into the BEA account of P1. This explained another cheque drawn by D1 in favour of P1 in the sum of HK$55,000 dated 6 June 2006. 66.By pleading, D1 denied that the first sum of HK$200,000 mentioned above was dividend to P1 but repayment of P1’s share of the Kid Art Loan at P1’s request made in early 2006. When it came to his witness statement in this respect, D1 explained that that this sum was however treated as dividend to P1, serving what he described as a “sweetener” to induce P1 to exercise the option for the 40% shares of D2 under the Option Agreement. However, D1’s own written record mentioned above was an unequivocal reference to dividend payment instead of its alleged tentative nature. D1 said the same about the nature of the other dividend from D2 derived from the proceeds of scrap, out of which HK$80,000 was apportioned to P1. 67.It sounds odd that faced with P1’s alleged demand for repayment, when P1 had not and by such demand indicated that he would not exercise the option after 2 years had already elapsed, D1 would somehow see fit to give P1 dividend as “sweetener” with a view to inducing P1 to exercise the option. If D1 remained confident even up to the latter half of the last year of the 3-year option period that P1 would exercise the option, it also sounds odd that he would somehow consider it to be necessary to induce P1 to exercise the option and to do so by actually distributing dividend. In any event, on the basis of the prevailing general trust and confidence P1 had in D1, one would have expected that express recognition by D1 of P1’s potential beneficial interest in D2 would suffice. There is no suggestion or evidence that P1 expected or demanded dividend from D2 when, according to D1, P2 must clearly know that his entitlement to that still depend upon whether he would exercise his option. 68.D1 claims that when it became clear to him that P1 would not exercise the option, the money that P1 put into D2 – according to him, a total sum of HK$600,000 (HK$400,000 by cheque plus HK$200,000 from the Kid Art Loan) as mentioned above – would be treated as P1’s loan to D2. It would then follow that the above sums of HK$200,000 and HK$80,000 paid to P1 in March and June 2006 respectively would have to be treated as repayment of P1’s loans. If this was ever the understanding of the parties, P1 would have been expected to demand for the repayment of the outstanding debt from D2. He did not, even prior to the breakdown of their co-operation, which happened in 2009. In his evidence in court, D1 somehow made reference to some other settlement with P1, which was out of the blue. 69.Perhaps not as implicating as the distribution of dividend, D1 has undisputedly rendered annual financial statements of D2 for 2005 to P1, while D1 was not a beneficial owner of the company under the Option Agreement. 70.Last, putting aside the dispute as to the exact moment of the day when he did so, P1 did request D1 on the day when the parties and Lam met at Shenzhen in February 2009 to transfer 40% shares of D2 to his son. According to his witness statement, D1 responded that P1 might do so if he would pay up his 40% of his investment and reimburse D2 60% of the alleged salvage expenses spent on Hui Guang. The request by P1 should have been surprising to D1, given that P1 did not just let the option under the Option Agreement lapse but positively confirmed that he would not exercise the option back in 2006-2007, notwithstanding the “sweetener dividend” approach of D1. It is equally surprising for P1 to make such a request, which would have been knowingly and utterly unreasonable. 71.Contrary to D2’s case, the understanding of P1 was that he would be responsible for the bulk of capital investment in the joint venture. Hence the backbone of the Trust for D2 Shares. There is no dispute that in addition to the HK$400,000, P1 has subsequently put in a total sum of RMB810,000 into the joint venture, as set out in a record prepared by D1 among the Accounting Documents. That basically met Hui Guang’s initial capital investment requirement of US$140,000 mentioned above. 72.Insofar as this is to refute P1’s case mentioned in the preceding paragraph, D1 claims that he had also put in capital investment in the total sum of about HK$350,000 into Hui Guang. He referred to the relevant records of those by August 2004 in the general ledgers of Hui Guang. P1 queries whether any such payment, if at all, in fact came from D1’s own source independent from P1’ contribution. P1 raises such query on the basis that his payment went into the HSBC account of Kid Art, which was under D1’s sole control. The utilization and movement of funds after P1’s HK$400,000 injection should be identifiable from the relevant bank statements of that account of Kid Art, but the same are not available. 73.P1 also queries the numerous withdrawals from P2 since January 2005, including 2 sums of HK$100,000 in February and May 2005 into D1’s personal bank account. In cross-examination D1 sought to refer to an alleged documentary record of the 2 sums as dividends distributed among P1, D1 and Lam. The document was not put to P1 or Lam in their evidence in court. The nature of the document and its compiler were also unidentified. Insofar as the document was said to document distribution of dividends among the beneficial owners, both the timing of the distribution and the recipients recorded are questionable. Further, with D1’s written approval, such dividend distribution was subsequently adjusted by the auditor of P2 from dividend to amount due to D1 as director. 74.As to Lam, his evidence was brief, and gave the impression he was a mere investor. He frankly admitted that he was unable to recall the details, partly because of the lapse of time and partly because what he considered to be a relatively insignificant investment in the present case compared to his other investments. However, he was certain that there had never been any general meeting or receipt of financial statement or report from D1 concerning P2 or Hui Guang. 75.P1 and, even more so, Lam impress me that they were never hands on insofar as the operation and management of the joint venture business and the related companies were concerned. According to P1, after his complete withdrawal from Everbest in 2006, the business between Everbest and Hui Guang also became a matter for the former’s purchasing department. This was consistent with P1’s pattern of dealings with D1 all along, and tends to cast doubt on the reliability of D1’s alleged practice of not only rendering annual financial statements but also consulting P1 on matters such as pricing. 76.As to the meeting with P1 and D1 in Shenzhen on February 2009, when D1 brought them the news of the closure of Hui Guang, Lam recalled hearing P1 say that the latter had 40% in a Hong Kong company and the 40% share swap of Hui Guang and that Hong Kong company. Within Lam’s earshot, P1 mentioned his intention to sort out the matter with D1 and asked D1 to transfer the 40% shareholdings in the Hong Kong company to P1’s son. E2. Findings 77.Considering all the evidence, including those specifically discussed above, on balance, I prefer the evidence of P1 and his witnesses, and make the following findings:
E3. Whether the Trust for D2 Shares is enforceable 78.The defendants raise a further issue, as their alternative case, which the plaintiffs disagree. The defendants contend that even if the JV Agreement contained the term in respect of the Trust for D2 Shares, the court cannot enforce the trust. 79.Mr Ng argues that the trust for the Hui Guang shares were not constituted until D1 was given the Hui Guang shares and shared in its profit. The Plaintiffs are seeking to enforce the term of the JVA as if the trust has already been constituted as consideration in support of the Trust for D2 Shares. 80.Mr Chiu argues that what P1 has pleaded in the circumstances (at the time of the JV Agreement) was an executory agreement because both parties knew that the joint venture had yet to come to being. It should be clear as a matter of fact to the parties when the JV Agreement was concluded. It must be understood by the parties to mean an agreement to enter into such a trust when the joint venture would be established. The undisputed fact was that in early 2004 the trust for Hui Guang shares did come into existence and was held by Kid Art as to 60% for P1 and 40% for D1. The declaration sought now is to enforce a term of an executed agreement. The promise to perform was in fact performed, and this constituted good consideration for the Trust for D2 Shares. I agree. 81.Mr Ng also raises the concern about the impact of the change of the shareholdings in Kid Art on the trust for Hui Guang shares. D1 now holds only 5% of Kid Art (with P1 holding 85% and Wang holding 10%). The eventualities were that Kid Art and Hui Guang are both defunct. But Mr Chiu submits that that could not affect his client’s beneficial entitlement to the shares in D2 under the Share for D2 Trust. 82.Mr Chiu submits that Kid Art was in law a legal person who was capable of acting as a trustee for others. It was such, insofar as Hui Guang was concerned. So was it, insofar as the Beijing Investment was concerned. Regarding the former, Kid Art was the vehicle holding all the shares of Hui Guang as a trustee, and must execute such trust in accordance with its terms. If Hui Guang should declare a dividend, the dividend would be proceeds of trust properties and must be distributed in accordance with the terms of the trust regarding Hui Guang, not the apparent interest of the legal shareholders of Kid Art. I also agree. 83.In the circumstances, P1 is entitled to the declaration of his 40% beneficial interest in D2 being held by D1 through D3 on trust for him, and the transfer of the same to him as claimed. F. FIDUCIARY DUTIES OF D1 TO P2 84.The major contentions of P2 is that D1 in his capacity as the director of P2 owes it fiduciary duties, in particular the duty to account, including that to render a true and just account of P2, as well as the duty to act in good faith and to avoid conflict of interest with P2. P1 contends that D1 cannot realistically discharge such duty without explaining the accounts and affairs of not only P2 but also Hui Guang in the circumstances of this case. This is due to the specific role of P2 in relation to the joint venture business. F1. General 85.The statutory and common law bases for the alleged duties are referred to. Insofar as the former is concerned, there is no dispute that the predecessor of the current Companies Ordinance, Cap 622, ie Companies Ordinance, Cap 32 (“CO”), is the applicable legislation at the relevant time of the present dispute. 86.Insofar as the duty to render just and full account is concerned, references are made by P2 to the following provisions:
Insofar as the duty of no conflict is concerned, references are made to the following provisions:
87.Whilst specific penalty provisions for infringement of the above provisions exist, the statute does not serve to remove the applicability of the common law which imposes the duty: see Man Luen Corporation (a firm) v Sun King Electronic Printed Circuit Board Factory Limited [1981] HKC 407 at 413. It is the breach of the duties imposed by the general law that affords the company the right to seek relief against the director. 88.The duty to act in good faith entails not only the lack of mala fides but also the duty to act reasonably for the purpose of the company and in the best interest of the company: see Re Smith and Fawcett Ltd [1942] Ch 304 at p 306. A director, similar to an agent, has a duty not to put himself in a position of conflict of interest with his company: see Regal (Hastings) Ltd v Guilliver and Others [1967] 2 AC 134 (HL) at pp 137, 138. F2. Duty to account 89.In connection with the duty to account, Art 50 of Bowstead and Reynolds on Agency (21st Ed) at p 282 describes the following specific duties of the agent:
There is no reason why the same should not apply to a director. 90.I agree with Mr Ng that the burden lies with P2 to establish the liability to account: see MA (HK) Ltd & Anor v Yeung Yuk Sing & Ors, HCA 1641/2010 (31 October 2017) at §§47-50. However, Mr Chiu is equally right in submitting that in view of the director’s duty to keep and render true and proper account (as mentioned above), once doubt as to whether that was properly done is established on the facts, the burden is on the director to establish the propriety of any particular payment and to account for it, failing which everything is presumed against him: see Psycare Ltd v. Mundy & Ano [2013] EWHC 4573 at §§ 30 to 31, citing Ross River Limited & Anor v Waverley Commercial Limited & Ors [2013] EWCA Civ 910 at §§64 and 94; Boustead (above) at §6-092. 91.Mr Ng emphasizes that a director only owes fiduciary duties to the company, not to other companies or bodies corporation with which the company is associated, eg its holding company or subsidiary: see Gore-Browne on Companies (Vol 1) at §15(8). Based on the principle of separate legal entities, that is. Mr Chiu does not dispute this legal proposition, but he argues that this proposition does not answer the question as to the scope of the director’s fiduciary duties to his company, which depends on the facts and circumstances of the case. 92.Both counsel recognise that how the fiduciary duties are applied to the facts in any given case can only be ascertained by reference to the nature and character of the particular relationship in question: see Kao Lee & Yip v Koo Hoi Yan & Ors [2003] 3 HKLRD 296 at §48; Poon Ka Man Jason v Cheng Wai Tao (2016) 19 HKCFAR 144 at §87 (in the context of the no-conflict duty). Both counsel refer to the so called “scope of business test”. 93.For the purpose of ascertaining the scope of the fiduciary duties of D1 owed to P2, I start by considering the purpose of setting up P2 as well as the nature and character of the relationship between P2 and the joint venture business, Hui Guang. P2 and Hui Guang were not associated but clearly related companies, and P2 also had a specific role in relation to the joint venture business. 94.According to D1, the original idea was to use P2 as the investing foreign corporate vehicle of Hui Guang. The fact, as mentioned, was that the parties eventually used Kid Art instead as the vehicle. The role of P2 in fact became that to facilitate the implementation of the joint venture. It had no production activity. Nor did it have any business independent from the joint venture. According to the pleadings and evidence of the parties, the role of P2 was collecting the income generated from the business of Hui Guang, and defraying the expenses incurred by Hui Guang in its business. However, the parties differ as to the precise scope of P2’s such role. 95.The plaintiffs contend that P2’s role was always intended, and in fact, the “pocket” of the joint venture business so that all the profits of Hui Guang, after defraying the expenses of Hui Guang, would be channelled to P2 for distribution between P1 and D1. On this basis, anything which was done by D1 in respect of Hui Guang that had the effect of reducing the income from or increasing P2’s cost burden to Hui Guang were matters that D1 has to account to P2 in discharge of his duty to P2. The matters now complained about by P2, including the Items, are those that D1 did or caused to be done with such effect on Hui Guang and P2 only to the benefit of him or his companies (D2 or D3). Hence breach of D1’s fiduciary duties to P2. 96.D1 disagrees, saying that the role of P2 was to provide management services to Hui Guang, and from which P2 was entitled it to an agreed 11% of the income of Hui Guang as its commission. This was maintained at least until the business of Hui Guang fell into loss. On this basis, whatever that D1 might have done with effect on Hui Guang did not affect such entitlement of P2. The accounting arrangements of P2 and Hui Guang, D1 says, reflected this. Every item paid by P2 for Hui Guang would be reimbursed by Hui Guang’s sales income collected by P2 on behalf of Huu Guang. Even assuming that D1 did or caused to be done anything causing loss to Hui Guang, that would have remained the loss of Hui Guang and thus breach of D1’s duty to Hui Guang, not P2. 97.D1 relies on a service agreement between P2 and Hui Guang which was dated 1 April 2004 (“the Service Agreement”). The Service Agreement was signed by D1 for and on behalf of Hui Guang, and by Jacky Chan for and on behalf of P2. The short agreement essentially provided that P2 agreed to provide services such as banking and financial services (including arranging settlement on behalf of Hui Guang to suppliers and contractors as well as banking in the payment received from the customers of Hui Guang in Hong Kong). In consideration of such services, Hui Guang agreed to pay service fee based on 11% of its monthly sales. D1 also relies on the financial statements of P2 that treated and recorded such percentage as the income of P2 either as service fee or commission income from its business of providing management service for Hui Guang. 98.As to the Service Agreement and the financial statements, which came about as contemporaneous documents, P1 claims no knowledge about them until after the dispute between the parties arose. Essentially, his case is that they were designs without his prior knowledge, and they did not align with the understanding at the time of the JV Agreement. They, Mr Chiu submits, do not serve to define the role of P2 or limit the scope of D1’s fiduciary duty to P2. 99.P1’s case is not surprising, in the light of his pattern of leaving the operation and management of their co-operations to D1. P1’s demands for accounting documents of P2 and Hui Guang since the breakdown of trust and confidence between the parties in 2009 evidence the genuine lack of knowledge about these mechanisms of implementation of the joint venture on the part of P1. The Service Agreement also strikes me as a design in the form of a contract to regularize P2’ business of handling of the income and expenses of Hui Guang in Hong Kong as well as its own accounting of income and expenses. D1 actually confirmed in court that this was the design of Jacky Liu, whom he consulted and Jacky Liu subsequently was appointed as the auditor of P2. The design was apparently based on the profit margin then estimated to be about 11% of Hui Guang’s sales when the JV Agreement was entered into. 100.At the time of the JV Agreement, the 11% profit margin came about with specific reference to sales to Everbest. As found under the first main issue above, the parties then contemplated the source of business of Hui Guang during the initial stage would be the orders from Everbest and that 11% was the estimated profit margin from such orders. That is the plaintiffs’ pleaded case, properly read. So was P1’s evidence. In that sense, that was all the profits from the joint venture business. 101.Of course, and as Mr Chiu points out, there had to be business other than from Everbest, and the estimated percentage of profit margin applicable to Everbest could not possibly be understood to be applied across the board with other customers which might come to do business with Hui Guang with their own pricing policy. That was also the fact. I can therefore understand the surprise that P1 has about the defendants’ contention that first, P2’s role was limited to receive and retain 11% of the sales income of Hui Guang in the form of commission income for the distribution between P1 and D1; and second, any other profits from the joint venture business would somehow not be for P2 to keep for distribution between them. 102.Indeed, D1’s stance is that such “remaining profit” should be transferred to the DBS account of Kid Art, as the corporate vehicle holding Hui Guang, before distribution between P1 and D1 in the 60:40 ratio. However, the DBS account of Kid Art first came about an account to the use of both P1 and D1 for the purpose of the Beijing Investment mentioned above subsequent to the joint venture business. Further, it is pointed out that D1 himself withdrew HK$100,000, saying that it was dividend, from the account of P2 directly on 24 May 2005 instead of the sum having been transferred first to Kid Art. D1’s attribution of the propriety of doing that to the fact that the withdrawal was by way of a cash cheque, as Mr Chiu submits, is indeed difficult to follow. 103.I see force in Mr Chiu’s argument that the Service Agreement, in these circumstances, could not by its terms negate the fact that P2 was from conception intended and understood by the parties to be the pocket of the income of Hui Guang, and from which P2 would handle the expenses and the resultant profit in accordance with the agreed ratio under the JV Agreement. 104.There is no dispute that consolidated financial statements were prepared for the joint venture business every year. Both sides agree with the observation of Yeung, the plaintiffs’ accounting expert, that according to the accounting standards, if two companies are of the same group eg one is holding one’s subsidiary, there would be a need for making a consolidated financial statement for every year. Though P2 and Hui Guang are not in the same group (or associated through shareholdings), the users who would interpret these financial statements would hope to get the whole picture of how the business is run and also to know the result of this business. In a consolidated statement, the inter-company transactions would be set off, and one can see the performance of the whole group. P2 and Hui Guang in fact are under common ownership. The user would like to group them together for a look at the status of their business. If one simply looks at P2 or Hui Guang alone, that would not reflect the true picture. 105.All circumstances, including those discussed above, I find that given the specific role and scope of the business of P2, as agreed and properly understood, D1 in discharge of his fiduciary to account to P2 was and is under a duty to account for:
F3. Duty of no conflict 106.A director has a fiduciary duty that he must not place himself in a position of conflict of interest in relation to the company’s business. The general law applicable to this case may be put as follows:
107.In Grand Field Group Holdings Ltd, the court explained:
108.I do not see real dispute in respect of the above legal principles either. 109.D1 relies on Art 10(a) of P2’s Articles of Association, which reads:
110.The question of whether Art 10 literally applies insofar as the Items are concerned (which will be discussed below) aside, the questions remain first, whether D1 has put himself in a conflict with the interest of P2; and second, whether D1 has disclosed and obtained approval of P2. 111.Until December 2005, when Wang became a shareholder (as nominee of Lam), P2 had a single registered shareholder, ie D1, who held the shares on trust for Gravipas which was in turned owned by P1. D1 was also the single director. Question arises in respect of how D1 was supposed to discharge his fiduciary duty to P2 to disclose any potential conflict in such circumstances. 112.Indeed, Mr Chiu submits that the circumstances of the present case should constitute exception to the normal rule that a director owes his fiduciary duties to the company, and not to its shareholders. Mr Chiu borrows analogy from the established exception where a special factual relationship between the director and the shareholders in the form of trust and confidence reposed on the director by the shareholders, and the director undertakes or is taken to have assumed responsibility to act on behalf of or for the benefit of the shareholders. In such a case, a duality of duties may exist. In Peskin v Anderson [2001] BCC 874, the court had this to say:
113.There is no reason, Mr Chiu argues, why the circumstances of the present case did not constitute special factual relationship of the kind that could give rise to such fiduciary duty of D1 as the director of P2 to disclose to its shareholder. He refers to the trust and confidence between P1 and D1 that founded the entire business venture, the trust of the entire shareholdings of P2 in D1 as well as D1’s acknowledgement of P1 (and since December 2005, Lam as well) as the shareholder, though beneficially through Gravipas (and in the case of Lam, through Wang). 114.Mr Chiu also submits that when the court is to apply the rules of equity to a director’s fiduciary duties, it is the substance, and not the form that matters. Hence in determining whether a director may have interest in another company which may constitute him in a position of conflict, it matters not whether the conflicting interest belongs to him beneficially or as trustee for others: see Transvaal Lands Company (above) at 503. It is argued that by parity of reasoning, it is difficult to see why in equity he would not also be required to disclose such conflict to a beneficial shareholder whose shares were entrusted to him, and whose interest would be directly affected by that conflict of interest of the director cum trustee in question. Therefore, during the sole legal shareholder period, it is not an excuse for D1 to say that he was not required to disclose his potential conflict position to Gravipas (hence P1) because Gravipas was but a beneficial shareholder. 115.In any event, the fact that the situation of a single (legal) member being also the single director in a company appears to render disclosure by the director to the company impracticable or academic does not therefore absolve the director from liability of conflict of interest to the company, about which the beneficial shareholders must have the locus of complaining. 116.The above argument of P2 drives Mr Ng to argue that if P2 is right, Gravipas should be the party to sue. However, being put forward is not a cause of action for loss suffered by Gravipas, which Mr Chiu accepts will be reflective of the loss of the company. The cause of action is always breach of fiduciary duty owed to P2, which was a situation of a single legal shareholder and director being the one who has the duty to disclose real conflict. In view of the special factual relationship between him and the beneficial shareholders, discharge of the director’s such duty to the company can only be disclosure to the beneficial holders of the shares of the company. 117.All matters considered, I agree with Mr Chiu. F4. Production of accounting and supporting documents by D1 118.Two points should be noted. First, as a matter of fact in the present case, the plaintiffs have to rely on D1 as the sole person in charge of the entire business venture and the related companies for the rendering of their accounting documents. Second, failure or refusal by D1 to render the accounting documents must be justified, when such documents are reasonably expected to have been kept by the related corporate bodies and to be readily available within 7 years. 119.There is no dispute that P1 resided in Beijing during most of the relevant time. Hence his original request for the documents to be supplied to him there. The exchange between the parties in this respect was documented in the email correspondence between July 2009 and August 2010 which Mr Chiu went through when opening this case. By September 2009, documents had been produced, which D1 claimed to be all. However, P1 complained that a lot of supporting documents were missing, including the documents of P2. By the end of September 2009, D1 suggested that P1 returned the documents previously provided to enable D1 to complete the outstanding accounts of Hui Guang within 3 months. P1 did so. Similar effort to obtain accounting documents of P2 did not meet with immediate success, and the documents were retrieved by P1’s wife on his behalf only after arrangement was made to enable D1’s representative to make photocopies of the documents in mid-October 2009. However, there was no sign of the completed accounts of Hui Guang promised by D1 in September 2009 mentioned above. When P1 subsequently requested for the documents of Hui Guang returned to D1, the response of D1 in December 2009 was that the documents would somehow be kept in custody of a Mr Kwong Sai Hung (鄺世雄) at Dongguan, Mainland, and would be available for inspection only. 120.P1 saw the need to enlarge the scope of seeking disclosure of the accounting documents to those of Kid Art. The correspondence since the end of 2009 shows that. The lack of constructive response from D1 caused P1 to cause the taking over of control and management of P2 and Kid Art in early 2010. As mentioned, the disagreement in respect of production of the documents ensued. Production of voluminous documents continued after the commencement of action. 121.It cannot be said that D1 was sufficiently forthcoming in rendering the account and supporting documents of P2 and Hui Guang. D1’s explanation by reference to how Jacky Liu, the auditor, had somehow kept some of the company’s documents was not impressive. Liu was not a witness to explain in any event. D1’s explanation by reference to the difficulty arising out of the seizure by the Mainland court upon the closure of Hui Guang in 2008 did not avail him either. D1 did explain in his letter in December 2009 impact of the closure of Hui Guang by the Nansha Court in 2008, but with reference to the alleged safekeeping of documents of Hui Guang by Kwong as mentioned above. No reference was made to any loss of documents as a result of the closure. Nor was such reference made in the email correspondence between the parties in 2009 mentioned above. If D1 was in a position to offer to compile the audited accounts of Hui Guang by the end of November 2009 as mentioned above, one would have expected him to possess all the necessary documents. Unless he was not even aware that he did not possess all the documents, which, even if true, was not likely to be a matter in his favour. 122.As mentioned, the documents were not fully disclosed even after the commencement of this action and some only after argument before the court. With the Accounting Documents obtained from D1, Yeung came up with the Yeung 1st Report, in which Yeung had noted various documents in support were not found in the Accounting Documents. The Yeung 1st Report was disclosed to the defendants in May 2013. Had the accusation by the plaintiffs been unwarranted, D1 should have been in a position to rebut the specifics, in view of the fact that the documents had been in the possession of D1, and copies of which were made by Jacky Chan, the account clerk, before they were handed over to P1’s wife in October 2009. 123.It should be noted that Lees in his report in 2016 also recorded that D1 was yet to provide him with some necessary supporting documents (in connection with the subcontracting fees). Yet the bulk of documents subsequently disclosed by the defendants did not seem to cast light on those that Lees expected as mentioned in his report. Even after the latest discovery by the plaintiffs a couple of months prior to the trial, the inspection and analysis by Lees, which led to his report dated 9 October 2018, did not add much to D1’s case. 124.The bottom line is that the practical difficulties that D1 referred to, even assuming they were true, would not work in his favour insofar as his discharge of the duty to P2 to render full and true accounts of P2 and Hui Guang is concerned. The two points to note set out at the beginning refer. G. THE MANAGEMENT FEES 125.Mr Ng emphasizes the importance of the general ledgers of P2 and Hui Guang. Yeung agreed as to their relevance from the accounting perspective. In the general ledgers, the income and expenses of P2 were recorded in the profit and loss account section, while the income collected and expenses paid on behalf of Hui Guang were recorded in the balance sheet section, of the general ledger of P2. Essentially, income collected on behalf of Hui Guang became P2’s payables (thus liabilities) and expenses paid on behalf of Hui Guang became P2’s receivables (thus assets) in the balance sheet. On this basis, Mr Ng also emphasizes the importance of the different natures of management fees on the one hand and that of the other 6 items complained about on the other hand. The management fees were expenses of P2 paid to D3, which were part of the profit and loss of P2. The other items complained about were expenses of P2 on behalf of Hui Guang, and thus P2’s receivables. G1. The issue 126.The Accounting Documents show that (i) D2 charged P2 management fee in the sum of HK$15,000 for 2004/2005; (ii) D3 charged P2 management fee in the total sum of HK$1,239,490.32 in 2004-2008; and (iii) P2 paid D1 management fee in the sum of HK$16,000 in 2005/2006. The total management fee was HK$1,270,490.32. The accounting experts managed to verify these figures. According to D1, the management fees consisted of salaries of the staff employed by D3 to work for P2 and his own consultancy fee from P2. They were payable by P2, and recorded as its own expenses. 127.There was no written agreement or written record of any agreement whereby these various management fees became payable by P2. The accounting documents also did not record any disclosure of the basis for these management fees paid by P2 and the interest of D1 in D2 and D3 in this connection. These were related party transactions, the disclosure of which were prima facie expected. 128.D1’s case is that the facts were all disclosed to and known by P1 and Lam through annual meetings arranged by P1. According to D1, the first shareholders’ meeting was held with P1 and Lam in late 2004 at the Chinese Recreation Club. During the meeting, Jacky Chan, the account clerk of P2, explained the accounting treatment of each and every item of P2’s management account for 2004. Amongst them was the item of staff salaries of Mr Eddie Wong (“Wong”) and Mr Kung Chi Yim (“Kung”). It was also resolved, apparently verbally without record, that consultancy fee in the sum of HK$8,000.00 would be paid to D1, and salaries would be paid to Wong and Kung. Such consultancy fee to D1 and salaries to the staff would be consolidated into a single item of management fee in the future management accounts and audited Accounts. 129.D1 also said that in early 2005, Jacky Liu, the auditor, proposed that the salaries of the management staff of P2, which were paid by D3, should be reimbursed by P2 and booked as management fee in P2’s accounts. D1 agreed. Since the financial year of 2004/2005, the item of staff salaries in the previous profit and loss account of P2 has become management fee. 130.D1 expressed surprise that P1 claimed no knowledge about the payment of consultancy fee to him and management fees to D3 in reimbursement of the staff salaries that D3 had paid. He referred to the instance of P1 requesting D1 to raise the salary of Wong, who was P1’s brother in law. Wong in turn was P1’s representative at the office of Hui Guang. Every year after compilation of the audited financial report of P2, D1 would sign it on behalf of Gravipas, and personally deliver a copy of the signed report to P1, which he believed would be passed on to Lam as well. He added that the joint venture business was all along run in consultation with P1 at least through the annual shareholders’ meetings arranged by P1. 131.P1 denied the existence of those shareholders’ meetings alleged by D1. He also denied having ever received financial statements or reports of P2 from D1 annually as alleged. This was corroborated by Lam and Wong. As mentioned, the suggestion that P1 was hands on in the running of the joint venture business does not align with the P1’s actual entrusting of the operation and management to D1 solely or P1’s own pattern at the time. In line with the assessment mentioned above, I find the evidence of P1 and Lam in these aspects to be relatively more credible. 132.As to the alleged resolution in respect of D1’s consultancy fee, P1 said that it was during his attempt to retrieve the accounting documents of the joint venture business in 2009 when he came to notice the HK$8,000 director’s fee paid to D1. There was then discussion regarding that, which involved D1 and Jacky Liu. However, P1 and Lam were against that, and the email correspondence between the parties in October 2009 also contained P1’s statement of such stance. What the correspondence suggested did not align with what D1 alleged. 133.As to Wong, P1’s brother in law, P1 said he had seen him only once at the office of Hui Guang after the latter started to work for the joint venture business. The evidence revealed that Wong had worked in the joint venture business for less than a year, and he passed away prior to the trial. The factual basis for imputing knowledge on the part of Wong to P1 was flimsy. 134.As to why the staff of P2 were not hired by P2 but came to employed by D3, which D1 used to hold D2, Lees in his report stated his understanding obtained from D1. Lees was given to understand that there was concern about the lack of steady income or cash flow in P2 to support the payment of staff salaries. This is surprising, because the undisputed understanding behind the joint venture when conceived was for P1 to secure the orders from Everbest that ensure the income of Hui Guang and thus profit of P2 when it commenced operation. 135.The fact was that the financial statements of P2 for the years ended 2005 up to 2009 did not record any disclosure of the payment by P2 to D3 management fees as reimbursement of the salaries paid by D3 to the staff. These were transactions of related parties, which ought to have been disclosed under normal accounting practice. In court, D1 eventually had to admit that he had not informed the other shareholders of P2 and to obtained their endorsement of the arrangement for D3 to pay the staff salaries and for D2 to reimburse D3 in the form of management fees. G2. The staff and D1 136.D1’s case is that the staff employed by D3 were all deployed to station at the office of Hui Guang 6 days a week. Documentary evidence, which P1 did not accept, and Tam, the manager assistant and cashier of Hui Guang, confirmed the arrangement. I am impressed that she was a generally truthful witness. On balance, I find the stationing of the staff in Hui Guang was fact. However, P2 raises the query on the basis of the actual operation in Hui Guang’s business which involved D2. In a sense, such query may still be raised, even assuming that the members of staff mentioned above were employed by P2 under D1’s de facto control for deployment to Hui Guang. 137.The stance of P2 is that the defendants may be exonerated, if it can be shown that Wong, Kung and Kwok Chi Yim (who was employed in succession of Kung) were seconded by D3 to serve P2 and Hui Guang exclusively so that D2 and D3 received no benefit other than in the form of reimbursement of the staff salaries that D3 had paid for P2. In that case, it may be that the court may consider the management fees were justified. Mr Chiu submits that the circumstances suggest the contrary. In this context, the business operations leading to the subcontracting fees, which is another item of complaint discussed below, become relevant. Essentially, the subcontracting fees came about as a result of D2’s own contracts with its Mainland customers. 138.In explanation of the subcontracting fees that D1 caused P2 to pay D2, D1 alleges that he caused D2 to import semi-finished goods into the Mainland for Hui Guang to carry out sub-processing work, and after which the finished goods were delivered by Hui Guang directly to D2’s Mainland customers. Hui Guang would issue unified involves to D2’s Mainland customers for the entire contract price charged by D2 (inclusive of the processing fees charged by Hui Guang) and collect payments from them. D1 would then cause P2 to pay subcontracting fees on behalf of Hui Guang to D2, representing the part of the contract price received from its Mainland customers that D2 was entitled to. This is what is defined as the “Disputed Arrangement” when this item of subcontracting fees is discussed below. 139.Subject to the dispute in respect of such arrangement, and for the present purpose, such arrangement so caused by D1 to be conducted by Hui Guang such as liaising with D2’s Mainland customers, delivering the finished goods to them, issuing unified invoices, collecting payments, transferring the payments collected to D2 and the subsequent working out of the account undeniably involved the utilization of the staff of Hui Guang for the business of D2. Such business contracted between D2 and its Mainland customers indeed benefited Hui Guang in terms of the material processing fee that Hui Guang would be entitled to keep as its income. However, the bulk of such business remained that of D2, which was conducted largely by the staff seconded to Hui Guang whose salaries paid by D3 were made to be reimbursed by P2 in the form of management fees. Mr Chiu describes this as “piggyback ride” on Hui Guang by D2. 140.One may query how P1 would complain about undisclosed self-interest of D2 in the subcontracting fees arrangement mentioned above, as, according to P1, he was a 40% beneficial interest holder of D2. Could it be said that the conflict is more perceived than real or sensible? However, the question of fiduciary duty owed by D1 has to be viewed from the perspective of D2, to which the duty was owed. In the circumstances, the self-interest of D1 and D2 in this arrangement is real. So was the conflict between D1 and P2. 141.D1 could supposedly have accounted by factoring in the element of the extent of utilisation of such resources of Hui Guang in fixing Hui Guang’s share of the payments collected from D2’s customers with a view to ensuring that Hui Guang or P2 is properly indemnified to the extent of the cost of D2’s use of Hui Guang or P2’s resources. There is however no suggestion or evidence of that. Coupled with the lack of evidence of that sort from the staff, this attributes to the practical difficulty in the alternative case which D1 also seeks to run, namely to seek equitable allowance in recompense for the effort, skill and enterprise in making those profits. This is also the non-agreed issue under this item which will be discussed below. 142.D1 himself also received what according to him used to be consultancy fee but later also incorporated into management fees from P2. To begin with, D1 acknowledged his difference in position from the other employed staff. Hence the original distinction between his consultancy fee from the staff’s salaries. As far as such fee was director’s emolument, his evidence that this was resolved to be payable in the shareholders’ meeting in late 2004 mentioned above was not documented and also nowhere to be disclosed in the financial statement of P2 until that for 2009. As mentioned above, I do not find there was such disclosure as a matter of fact. Further, such financial statement recorded HK$96,000 for 2008 and HK$80,000 for 2009 as his such fees, and his charge for consultancy fee was not consistent according to his alleged monthly rate even according to his accounting expert. There was record of payment of HK$16,000 by P2 for 2004/2005, HK$32,000 by D3 for 2005/2006 and HK$104,000 for 2006/07 and 2007/08, which varied from the monthly fee of HK$8,000 allegedly resolved in 2004. The email correspondence dated as late as October 2009 mentioned above suggests that P1 and Lam did not have prior knowledge about such fees. 143.The fundamental difficulty for D1 is that under the JV Agreement, D1 was entrusted with the responsibility to operate and to manage Hui Guang and P2 that was set up to implement it. It was already the agreement between the parties to the JV Agreement that D1 would be entitled to 40% beneficial interest and thus entitlement to share profits of Hui Guang in consideration of his such contribution and service. Therefore, the lack of specific contrary or additional agreement that would have entitled D1 to remuneration should be the end of the matter. It is argued that the monthly fee of HK$8,000 claimed by D1 was modest, but subjective greed is irrelevant in this context. Unlike the case of the other employed staff, who were employed to provide their service and reasonably expected to be paid for that, it would not be inequitable for D1 without such fees as if he were deprived of remuneration for his service. As to the practical difficulty of assessment of any equitable allowance, the discussion above refers. G3. Equitable allowance 144.Mr Ng argues that where there was a breach of fiduciary duty on D1’s part and D1 is found liable to account for profits to P2, D1 and/or D3 is nevertheless entitled to equitable allowance for the provision of human resources and rendering printing management services to Hui Guang for P2. 145.Equity recognizes that the equitable remedy available to the party injured by the fiduciary is non-penalising in nature, so that allowance may be given to the fiduciary for the time, energy, skill and financial contribution he has made: see Kao Lee & Yip (above) at §143. 146.Mr Ng argues that the claim for equitable allowance in case of proven liability under this item of complaint is purely a question of law that his client may run without pleading in the present case. I refer to the discussion of the facts that would be relevant to any assessment of reasonable equitable allowance for the staff’s service for Hui Guang. Had this question been raised by pleading, such relevant facts would have been investigated and pleaded, and evidence thereof adduced, for the assessment. At least, P2 would have been entitled to the opportunity to do so. Now for the reason already explained above, there is no fair or meaningful way of making the assessment. G4. Findings 147.All considered, including those matters specifically discussed above, I come to the following findings in respect of this item:
H. TRANSPORTATION EXPENSES PAID TO D2 H1. The issue 148.According to Table 3 in Lees’ Report (which set out the findings in the Yeung 1st Report), a sum of HK$719,158 was found to have been settled by P2 as transportation cost invoiced to and settled by D2 between 2005 and 2008. P2 claims there is a lack of information regarding how it came to have paid such expenses for D2. The ultimate question is whether this item is justifiable. Though the parties differ slightly in respect of the premise for this question, they are ad idem that it depends on all the circumstances of the case. 149.The case of the defendants, and the evidence of their witnesses including Tam, was that such transportation expenses formed part of the invoiced price that Hui Guang had charged D2 for material processing work. Hui Guang would pay the transportation company directly for deliveries to Hui Guang in the Mainland. However, for those return deliveries to D2 in Hong Kong, the transportation companies would instead invoice D2 upon delivery, and D2 would then settle the invoices. D1 would then cause P2 to reimburse D2 the transportation cost that Hui Guang should have paid. 150.Yeung observed what he considered to be a roundabout way of charging transportation cost adopted by Hui Guang. I agree with Mr Ng that such observation perhaps straddled across expert and personal opinion as to manner of conducting business, and such opinion is neither here nor there. However, Lees was unable, for the lack of working papers of the auditor, to comment if the auditor of P2 has sought sufficient and appropriate audit evidence of the transportation expenses so paid for a related third party, ie D2. No further light may be cast, when Jacky Liu was not a witness. In his further report in 2018, Lees was able to match 49 cash memo/vouchers with 55 delivery notes, representing a total sum of HK$146,615.00. 151.During the trial, reference was made to invoices of Hui Guang which did not charge the customers transportation cost. Tam explained that where goods were delivered by way of effectively hitch-hiking on the delivery of another batch of goods for which transportation cost was charged, transportation cost will not be further charged on the goods. I was impressed that Tam was generally credible in respect of her evidence concerning the stationing of staff at Hui Guang mentioned above. However, she somehow failed herself when it came to actual accounting. Mistake in her entries was pointed out. Whilst Tam suggested that there should be records of the actual transportation charge arrangement, such records were never disclosed. Nor were all the relevant delivery notes. The existence and the extent of such practice could not be verified either as a general or specific justification for the transportation expenses in question. I am not surprised by the query raised on behalf of P2 as to whether it has been caused to pay what was said to be transportation cost for Hui Guang when it in fact fell into the category of those entailing no such cost. After all, Lees only managed to verify just a quarter of the amount of this item. 152.Consistently, Mr Ng submits that at the end of the day, D1 caused P2 to settle the transportation fees only on behalf of Hui Guang. Such payment, entered as receivables from Hui Guang in the balance sheet section of the general ledgers of P2, would have been reimbursed by the sales income collected by P2 for and on behalf of Hui Guang. Any wrong and complaint should have to do with Hui Guang, not P2. As mentioned, this will be the common theme in the argument on behalf of D1 in respect of the other items of complaint as well. 153.The notion of incidence of loss and its relevance will be further discussed below. However, I do not agree that this is the answer to D1’s duty to account to P2 in respect of what he caused P2 to pay, when the documents do not add up for the necessary verification. H2. Finding 154.There is a balance of the transportation expenses in the sum of HK$572,543 (HK$719,158 - HK$146,615) that could not be verified. I. SUBCONTRACTING FEES PAID TO D2 155.This item is both problematic, and significant both in terms of amount and its bearing on the true financial picture of P2. 156.The vouchers of P2 revealed that subcontracting fees were paid by Hui Guang to D2 in the total sum of HK$7,319,715.62, of which HK$2,305,477.37 (or HK$2,290,160.14 according to the defendants) were settled by P2 for and on behalf of Hui Guang during the period between 2004 and 2008. Worth noting from the outset is the admitted fact that the subcontracting fees came about as a pure invention for accounting purpose. Such fees paid to D2 were not consideration for work contracted by D2 from Hui Guang (or P2), but so paid pursuant to the Disputed Arrangement already mentioned in the discussion in respect of the management fees. I1. The Disputed Arrangement 157.How did the Disputed Arrangement surface? In the course of preparing Yeung 1st Report (2010) and Yeung 2nd Report (2012) based on the Accounting Documents, Yeung discovered that D2 charged the total sum of HK$2,305,477.37 mentioned above against Hui Guang for subcontracting fees. P2 settled this amount on behalf of Hui Guang. However, there was no supporting documentation of such subcontracting by Hui Guang to D2 or record in the financial statements of P2. This was significant, as the subcontracting fees so paid to D2 was a major component of the direct cost in the financial balance of Hui Guang. According to the Yeung 2nd Report, the joint business of P2 and Hui Guang already deteriorated since 2005 and came to a loss in 2006, which was attributable to the significant subcontracting fees paid by P2 to D2. In any event, such fees paid by Hui Guang (partly through P2) to D2 were related party transactions which ought to have been disclosed to and approved by the shareholders of P2, P1 contends. 158.This caused the plaintiffs to seek discovery of the financial statements of D2, which were subsequently produced not without argument. Those further financial statements were studied in Yeung’s expert report in 2016. Both the expert and the plaintiffs found the charging of subcontracting fees by D2 against Hui Guang differed from the understanding behind the joint venture that Hui Guang would perform sub-contracting work for customers, including D2, and for that Hui Guang would be paid. It was finally revealed in Lees’ expert report in 2016 the letters from Messr Ng To and Tse, CPA (“NTT”) dated 27 April 2016 setting out the Disputed Arrangement as the plaintiffs are given to understand currently. Such cases were also added to the parties’ pleadings as they are now. 159.D1 apparently had customers in Guangdong which required what are known as unified invoices (廣東省商品銷售統一發票). D2, a foreign entity, was not in a position to issue such invoices. Hui Guang however was. Therefore, in fulfilment of the contracts between D2 and its Mainland customers, goods under those contracts would be delivered by Hui Guang, after the sub-processing part done by it, to these Mainland customers. Hui Guang would then issue the unified invoices for D2’s contract price to the Mainland customers. Hui Guang would collect the payments from these Mainland customers. D2 would retrieve the bulk part of such contract price from Hui Guang by way of the charge of subcontracting fees payable by Hui Guang. As such, D1 also caused P2 to pay such amount on behalf of Hui Guang. As mentioned, the total sum of such payments to D2 from 2005 to 2008 was HK$7,319,715.62, of which HK$2,305,477,37 (as Yeung managed to verify) were paid by P2 on its behalf. 160.The NTT letter also explained that from the perspective of the sales income of Hui Guang being overstated in the statutory account to the extent of the entire price of the contracts between D2 and its Mainland customers, the repayment had been included in the profit and loss account of Hui Guang in such form of subcontracting fee in order to mitigate the effect of making such entries in the accounts of Hui Guang. 161.Apparently, the plaintiffs are prepared to accept the explanation for what happened at the time. That said, they consider that that still distorted the true financial picture of P2 and not without prejudice to P2. Mr Chiu also expressed reservation about the alleged fact that the entire sum of HK$HK$7,319,715.62 had booked as sales income in the statutory account of Hui Guang and thus wholly accounted for. The reservation, if indeed exists, would add to such prejudice to P2 in real terms. I2. Conflict of interest 162.It is readily apparent that the predominant purpose of the entire design was to facilitate D2’s own business with its Mainland customers which required the issuance of the unified invoices. D2 effectively borrowed Hui Guang’s legal capability to issue unified invoices. This differed from D2 introducing its Mainland customers to become Hui Guang’s customers or D2 subcontracting material processing work to Hui Guang. As mentioned in the discussion in respect of the management fees, this also involved the defendants’ utilisation of the resources of Hui Guang primarily for D2’s business, notwithstanding the existence of some benefit to Hui Guang in the form of income from the material processing part. The sales income from these contracts so booked in the (statutory) account of Hui Guang attracted tax liability in the Mainland, which would be for P2 to defray pursuant to the JV Agreement. 163.As mentioned, the plaintiffs dispute whether the entire sum of HK$7,319,715.62 from those sales contracts between D2 and its Mainland customers was in fact booked as sales income in the statutory account of Hui Guang. Either way would have bearing on P2. If it was not fully entered, that on the one hand would mitigate the tax implication on Hui Guang, and thus responsibility of P2 to foot that; on the other hand, that would mean reduced net profits to Hui Guang and impact on the remaining profits to P2 distributable amongst its shareholders. 164.I do not agree with Mr Ng that the conflict of position was not real. I3. Disclosure 165.The defendants contend that the arrangement was known to the shareholders of P2. As to the alleged knowledge on the part of the shareholders, the pleaded case of the defendants is not readily understood, as this court pointed out during the trial. The reason is that the context of what it literally says differ from the understanding of the directions of business flows among the entities so far. Literally, it says that in 2004, P1 suggested that Hui Guang might replace Everbest as the subcontractor of material processing work from D2. The suggestion is that D2 used to subcontract material processing works to Everbest too, and now P1 suggested that D2 should subcontract the material processing works to Hui Guang instead. 166.In response, P1 could only relate what D1 suggested during their discussion over some social occasions in 2005 instead of 2004 about D2 also placing processing orders to Hui Guang. In that context, P1 described the alleged replacement of Everbest by D2 as the business source of Hui Guang to be suicidal. P1 addressed this allegation of D1 to the extent he understood what it might mean, which impresses me as not precisely what D1 appeared to try to assert in this respect. Notwithstanding P1’s evidence, D1 did not explain this direction of business flow or episode of the alleged suggestion by P1 in either of his two subsequent witness statements. His evidence under cross examination in this respect did not serve any purpose conducive to establishing D1’s assertion in this respect, especially when the same was not put to P1 at the trial. I4. Whether the entire sum of HK$7,319,715.62 was in fact booked as sales income in the statutory account of Hui Guang 167.This is the reservation Mr Chiu has about the explanation contained in the NTT Letter mentioned above. To recapitulate, the explanation was that HK$7,319,715.62 were booked as income in the statutory account of Hui Guang as a result of the Disputed Arrangement. Such sum represented the total sales income received from D2’s contracts with its own Mainland customers. 168.As I understand it, this is how Mr Chiu came to have his reservation about the truth of such booking of the sum into the statutory accounts of Hui Guang, to begin with. The statutory accounts of Hui Guang referred to, which were audited financial statements, were produced in 2016 upon demand of the plaintiffs to the defendants. Based on them, Yeung did his analysis in his expert report (2016). The total sales (in RMB) in the profit and loss account of Hui Guang consisted of 內銷業務收入，外銷業務收 and 其他收入 but did not include incomes collected in Hong Kong on Hui Guang’s behalf. In respect of each year, there was a breakdown of the sources of such income amongst “Everbest”, “Others” and “Best Tri 合同數” (or D2 contract sum) (except for 2004 when Everbest was literally the only source of business and income). For each year, there was a corresponding consolidated account prepared by the defendants showing on the top the accounts of P2 (in English) and the accounts of Hui Guang (in Chinese) with the moneys all converted from RMB to HKD. Yeung put together the yearly consolidated accounts and produced Appendix 3 to Yeung 2nd Report on the basis of these figures. Yeung in Table 4 set out the breakdown of the incomes he found in the profit and loss accounts of Hui Guang, and checked them against the total incomes in the audited financial statements of Hui Guang for the years 2005 to 2009 and found the figures for 2005 to 2007 tallied with each other. Table 4 set out the total RMB income under “Everbest”, “Others” and “Best Tri 合同數” to be RMB5,131,178.54, RMB4,597,831.75, and RMB2,313,6.1527 respectively. 169.In the breakdowns contained in the profit and loss accounts of Hui Guang, the “Best Tri 合同數” was added and then reversed, and was entered as a reverse entry under the income section. This reversal converted into HKD was also set out in the income section in the corresponding consolidated account for each year (except 2004 for the reason mentioned above). The total reversal occasioned by “Best Tri 合同數” was HK$2,291,882.10. Tse in the NTT Letter referred to this sum of HK$2,291,882.10 as “reversal of sales” to D2. Its nature was money remitted by D2 to Hui Guang which was booked as “extra sales” into Hui Guang. It was so booked to circumvent the exchange control in the Mainland China which would have caught such remittances by D2 in Hong Kong to Hui Guang. As a result, the profit of the group was overstated. In order not to allow this consequential distortion of the financial position, the reversal was carried out in the management accounts of the group by making a debit entry against the sales income. 170.In other words, the sum of HK$2,291,882 was not real sale but money remitted by D2 to Hui Guang disguised as sales. It follows that the “Best Tri 合同數” from which this sum of HK$2,291,882 came from were not part of the income of Hui Guang. It also follows that such sum was not the sales income from D2’s contracts with its Mainland customers, which Hui Guang collected and booked into its statutory accounts as its income mentioned above. So understood, the “Best Tri 合同數” would have to be excluded together with the income from Everbest. The remaining sum of RMB5,497,831.75 or HK$5,552,935.67 would be the sales income collected by Hui Guang in the Mainland and booked into its account. 171.That was still overstatement, as the NTT Letter explained, which necessitated the adjustment by way of “subcontracting fees” payable by Hui Guang to D2. But the amount was not quite HK$7,319,715.62. Even assuming that the sum of HK$5,552,935.67 represented part of that HK$7,319,715.62 from the Mainland customers of D2, there would still be the issue of the difference of nearly HK$1.8 million. On this basis, Mr Chiu submits that reversal by the “subcontracting fees” still distorted the financial picture of the group account to the prejudice of P2 being the parties booked to have paid that sum. 172.Insofar as P2 intends to take this issue further into formulating claim for such sum of HK$7,319,715.62, this court indicated during the trial the pleading constraint sets P2’s claim under this item squarely within that for the sum of HK$2,305,477.37 paid by P2 on behalf of Hui Guang as subcontracting fees to D2. I5. The legality of the issuance of the unified invoices by Hui Guang 173.The Disputed Arrangement also gives rise to the issue of legality of the issuance of the unified invoices by Hui Guang in the circumstances. This is raised as an additional dimension of considering the bona fide of D1 in causing P2 to facilitate such arrangement and in so doing, whether D1 could be said to be acting in the best interest of P2. 174.Both P1 and D1, from their experience, and the experts understood that goods shipped to the Mainland for processing with a view to their return as processed goods to Hong Kong (the so-called “來料加工”) would enjoy duty concessions, and therefore under close supervision by the Mainland authority. The experts, Ni and Zhang, also agreed that it would be illegal for D2 (or any foreign party) to issue unified invoices to its Mainland customers. They also agreed that the unified invoices issued by Hui Guang in the present case were all ordinary as opposed to special VAT unified invoices (the latter would be subject to more stringent regulations). 175.Ni produced his expert report first, which essentially advised that absence of a sale contract between Hui Guang and D2’s Mainland customers meant the absence of a real or actual transaction between them to support the issuance of the invoice by Hui Guang to that customer. It would have been different, had Hui Guang actually sold the products covered by the invoice to the customer. 176.Zhang in his expert report advised that the practice of Hui Guang in the present case might not be violation if the whole order price was truly reflected in the invoice from the Mainland customers’ perspective. From Hui Guang’s perspective, all the payments received from D2’s Mainland customers were recorded in the invoice as Hui Guang’s income and subject to the Mainland business income tax. 177.When the experts put together their joint report, Ni raised the additional concept of legal ownership in connection with a real or actual transaction that he mentioned in his first report. He opined that a real transaction generally means sale of goods or services; and that sale of goods means the transfer of ownership for a consideration. This, according to Ni, did not exist as a matter between the invoice issuing body, Hui Guang, and D2’s Mainland customers, as the legal ownership of the goods being sold remained with D2. The concept and the provisions relied on however were somehow not mentioned in Ni’s first report. 178.In the joint report, Zhang explained that the concept of legal ownership, as opposed to property ownership, was not clearly defined in Mainland. In his report, Ni did not actually define real transaction by reference to the concept of legal ownership of goods. They were indeed not the same. There was actual and real transaction in terms of goods and money changing hands between Hui Guang and D2’s Mainland customers. Zhang also explained the three kinds of situation where issuing the invoices would offend the law, namely where there was no real transaction or the invoice did not truly reflect the sum of the transactions or despite a real transaction, asking another party to issue invoice on the seller’s behalf with the intention of evading tax. Insofar as ownership was concerned, Zhang added his observation that dispute between D2 and Hui Guang in this respect was unrealistic. 179.When it came to his supplemental report after the joint report, Zhang added that Hui Guang was entitled to and should issue its own invoice to the Mainland customers for its own processing work because Hui Guang was an independent tax payer in connection with part of the total payment collected. If Hui Guang bought the materials from D2 and did its processing work and sold the final products to the Mainland customers, the sale price of D2 could be included in Hui Guang’s sale price as its cost. He opined that Hui Guang collected the whole payment owed by the Mainland customers to both Hui Guang and D2, and there was nothing unlawful in it as long as Hui Guang correctly recorded the whole sum collected from the Mainland customer. 180.I am not entirely impressed by the necessity for the analysis with reference to legal ownership of the goods in question or its passing in the present context as advanced by Ni, both in terms of how he brought up this concept and substance. As to the opinion of Zhang, his focus was on the correct reflection of the goods and their value in the invoice issued by Hui Guang, which it was in a position to issue because it did processing work to the goods. However, the last supplementary explanation of Zhang suggested that this was apparently premised on two scenarios: Hui Guang did processing work on the materials from D2 and issue its own invoices in respect of such work in its capacity as an independent tax payer or alternatively Hui Guang bought the materials from D2 for processing and sold the final products to the Mainland customers, in which case Hui Guang could issue invoices covering both the price charged by D2 as its cost and the processing costs. I therefore see the basis for Mr Chiu to question the lack of evidence in support of such dealing between D2 and Hui Guang in respect of the orders by D2’s Mainland customers. 181.D1 confirmed in court that most of the goods were shipped to Hui Guang on the basis of “來料加工”. There was no documentary evidence of one way or the other, namely, sale contracts between D2 and Hui Guang or payment of duties in respect of their import into the Mainland. There was also no documentary evidence of approval for the goods imported on the basis of “來料加工” but to be sold in Mainland China. 182.The reality is that nothing has happened insofar as the legality of the arrangement in the Mainland is concerned. That of course is not to be taken as verification of the legality of the arrangement. But the highest that could be pitched in the circumstances would be a risk. That said, one needs to return to consider the relevance of this issue of legality. In my judgment, a view formed as to the risk of illegality or actual illegality of the arrangement, without more, does not lead to the finding of lack of bona fide of D1 in discharge of his duties as director of P2. I6. The amount 183.P2 raises an issue in relation to the Disputed Arrangement, namely, if the Disputed Arrangement was true, whether the financial position of P2 was prejudiced so that D1, D2 and/or D3 should be held accountable to P2 for the whole sum of HK$7,319,75.62 paid by Hui Guang to D2 under the arrangement instead of just the part in the sum of HK$2,305,477.37 (or according to the defendants, HK$2,290,160.14) that was paid through P2. Mr Ng’s objection is essentially that this goes beyond P2’s pleaded case, which unequivocally confines this item of claim to the sum of HK$2,305,477.37. 184.I agree with Mr Ng. As there was also no application by P2 to amend the pleading, however slightly, to expand the claim in this manner, the question of prejudice to the defendants arising out of entertaining such claim of P2 does not set in. I7. Findings 185.I make the following findings:
I8. Material processing fees 186.This part of the claim arose out of the latest amendment of the claim in December 2016. It was put forward on the basis that the defendants’ case in respect of the subcontracting fees is proven. P2 says that in such event, there should be an outstanding amount of material processing fees receivable by Hui Guang for D2’s contracts with its Mainland customers. 187.Essentially, it is contended that (i) there was missing record of invoice value in the sum of HK$1,308,180.90 in the trade debtor account of Hui Guang’s ledgers for 2007; and (ii) there was still a sum of HK$3,664,319.63 collectable by P2 and remain unpaid. The total amounted to HK$4,972,500.53. Both were findings of Yeung, but the defendants did not seek to adduce further expert evidence to address this part of the plaintiffs’ latest case. 188.Mr Chiu tabulated the figures in the appendix to his written submissions, which shows:
189.The defendants deny that, and contend that the material processing fees HK$3,850,516.05 (as mentioned above) invoiced by Hui Guang to D2 had been paid by D2 to P2 on behalf of Hui Guang. Not much light on this contention was cast when D1 gave evidence. 190.On the one hand, P2 claims on the basis that it was the authorised collection agent of Hui Guang for the outstanding subcontracting fees. Mr Ng objects to that, on the basis that such cause of action, if at all, should belong to the disclosed principal, namely Hui Guang. On the other hand, Mr Chiu makes clear that this part of the claim differs not from the rest of this action against D1 for an account on the basis of his duty to provide a proper, complete and accurate account I9. Findings 191.I find that D1 has failed to discharge his duty to account for the discrepancy of HK$1,308,180.90 for the year 2006/2007 in the debtors ledger of FGPP, and failed to account as to why the receivables from Best Tri in the sum of HK$3,664,319.63 from 2004 to 31st March 2008 in the general ledger remain unpaid. J. THE SUPPLIERS INVOICE 192.There are suppliers’ invoices for the total sum of HK$4,174,751.98 issued to Hui Guang between 2004 and 2008 which P2 has settled for Hui Huang. P2 says there was no supporting document of the orders and delivery of materials, and the audit evidence also falls short of what is proper, according to Yeung 1st Report. Lees in his expert report managed to verify deliveries of materials accounting for HK$815,770.48. In his supplemental expert report, Lees, with 29 vouchers and supporting documents, was able to verify 4 more delivery notes accounting for an additional sum of HK$60,130.20. Apart from that, neither accounting expert managed to verify the balance of HK$3,298,851.30. 193.D1’s case is that there was a running account between Hui Guang and P2, and that the reimbursement by Hui Guang of P2 for what P2 had settled for it would have set off any balance of this item. There is therefore no good reason to order for an account, even in view of the lack of full record and documentation explaining the balance – again the “no loss” argument. 194.As seen, the situation was not that there was no document, but lack of full and complete account. There is per se question as to whether D1 has failed his duty to keep proper book and records of P2, and thus satisfaction of his fiduciary of account to P2. The contention that so long as the total balance shows no loss to P2, there would be no cause for ordering an account, is in my view putting the cart before the horse. 195.D1 has failed to discharge his duty to account for the sum of HK$3,358,981.50 said to be payment for the Suppliers Invoices. K. CASH WITHDRAWALS 196.22 cash withdrawals from P2 in the total sum of HK$800,000 between 20 June 2005 and 30 January 2008 said to be paid over to Hui Guang were identified in the Yeung 1st Report. There was admittedly no record of acknowledgment of receipt of such alleged cash payments by Hui Guang. 197.D1’s case is that the cash was withdrawn and brought across the border for the purpose of paying the salaries and expenses of Hui Guang at the instruction of P1 on the ground of saving of exchange cost. P1 denied such allegation. 198.The accounting experts were alert as to difficulty in audit of cash transactions. Yeung took the view that the documents in support in respect of these cash withdrawals fell far below the normal auditing standard. Lees felt unable to comment if the normal auditing procedure of verification was followed, but he managed to match 17 of the withdrawals with the general ledgers of Hui Guang in the total sum of HK$680,000. Lees in his supplemental report managed to identify 7 vouchers that could correspond with documents relating to salaries and other expenses/payments of Hui Guang. The amounts were oddly entered in Hui Guang’s general ledgers as amounts payable to D2. D1 explained that the description of entries was an accounting mistake of his staff. Tam corroborated that in her evidence. 199.It remains that the accounting experts were unable to verify from Hui Guang’s ledgers that the entries were recorded as salaries paid to the Mainland staff as D1 said. It requires some stretching of reasoning before one draws inference from the few documents that Lees managed to locate in favour of D1’s answer as a complete one in respect of all the withdrawals in question. From the perspective of the duty to render full and true account in fulfilment of the fiduciary duty to account for withdrawals from P2, this or reference to the overall balance of account, as Mr Ng repeats, does not suffice. 200.D1 has failed to give a satisfactory account in respect of the 22 withdrawals of the cash in the total sum of HK$800,000. L. THE 2 CHEQUES 201.The Accounting Documents revealed two cheque payments by P2. 202.The first cheque was dated 13 October 2004 for HK$232,960, of which HK$222,759 was debited to P2’s current account with P1, which P1 now accepts was payment for his purpose. The balance of HK$10,201 was debited to P2’s current account with D2, which P1 still takes issue about. D1’s case that the sum of HK$10,210 was used to offset the subcontracting fees owed by P2 to D2. Yet nothing much was said in evidence about this. 203.The second cheque was dated 14 August 2006 for HK$100,000 drawn by P2 in favour of D2, which was debited to P2’s current account with Hui Guang. D1’s case is that upon receipt of the cheque, payment of the sum was made by D2 to Hui Guang. The reason for the arrangement was that D2, but not P2, had the capacity, pursuant to a business contract with Hui Guang, to remit foreign currency to Hui Guang. D2 therefore acted on behalf of P2 on this occasion. It appears that P2’s complaint is not whether or not the amount was indeed received by Hui Guang, but what for. 204.I find that:
M. THE JOURNAL ENTRIES 205.Originally 6 journal entries in the current account of P2 with D2 and Hui Guang were questioned in Yeung’s 1st Report for the lack of accounting documents in explanation. After considering the explanation by the NTT Letter, P2 now decides to pursue only 2 of them. They are entries numbered JV0308005 (for HK$352,885.46) and JV0308004 (HK$691,739.96), which were recorded as bad debts. 206.The defendants pleaded no case in respect of this item. No further explanation was tendered, including by Tse, during the trial of these 2 items. 207.In the circumstances, I have no basis for accepting that satisfactory account has been provided in respect of these 2 journal entries. N. STATUTORY RELIEF 208.In respect of the Items, D1 seeks to run an alternative case in the event he is found to be in breach of his duty to P2 in respect of any or all of the Items. This is his reliance on section 358(1) of the CO[1], which reads:
209.The person to whom section 358 applies includes officers of a company, and hence D1 in the claim by P2 in the present case. 210.Application for relief under section 358 was not pleaded in the defence. Mr Ng argues that this is pure issue of law, which requires no pleading. I hesitate about the correctness of such contention, in view of the express wordings of the section. The court is expected to have regard to all the circumstances of the case in order to come to a view as to whether or not the director has acted honestly and reasonably. It is for the director being impeached to put forward the circumstances that he intends to rely on so that the company is in a position to deal with them. 211.Mr Ng relies on Re Kirbys Coaches Ltd [1991] BCLC 414. There section 727 of the Companies Act 1985, which was equivalent in terms to section 358 here, was actually pleaded in defence. In question was whether or not further and better particulars should be ordered in respect of such plea. Hoffmann J apparently had similar hesitation as this court does, but in view of another binding authority on the point, his Lordship decided that if such reliance on statutory relief did not need to be pleaded in the first place, its actual pleading would not have entitled the opponent to request for particulars of the facts and circumstances relied on for seeking such relief. 212.I am not bound to follow Re Kirbys Coaches Ltd, particularly in view of what drove the court there to come to his conclusion. However, if I follow Re Kirbys Coaches Ltd, it does not follow that D1 will have the liberty to proceed on the basis of any circumstances or evidence other than what has already been revealed and adduced for the purpose of the parties’ pleaded cases. There is no question of consideration of extra fact for the purpose gauging the honesty and reasonableness of D1’s conduct. This leads to the following observation of Mr Chiu. 213.Mr Chiu argues that in respect of items which infringed the conflict rule (ie the management fees and the subcontracting fees arrangement), there is no room for any relief or else the strictness of the conflict rule will be seriously watered down. In respect of the items which D1 is liable because he was unable to discharge his burden of giving an account, it is, Mr Chiu argues, difficult to see how such ground is made out for discretionary relief be granted. It is not that the court finds that there was any reasonable ground given for the non-production of the supporting documents or account such as causes beyond his control or genuine mistaken belief. 214.The manner of D1 in producing documents, Mr Chiu argues, is evident. D1 had waited after mid-2016 before producing a large quantity of documents of Hui Guang and the NTT Letters in an attempt to explain the accounts, but still failed to produce at least 6 schedules which were attached to those letters, as Tse confirmed in her evidence. Important witnesses such as Jacky Liu and Jacky Chan, who are expected to be able to explain the accounting arrangements and circumstances, were not called, while D1 was admittedly unable to explain the treatment of the accounts. It was during closing submission that Mr Ng suggested for the first time that Jacky Chan had passed away. To, auditor for D2 and D3 at the material times was called, but his evidence concerned a specific scope. 215.As the authorities suggest, insofar as P2’s entitlement to an account is concerned, it is not here to prove breach and loss that would entitle it to damages. Rather, once it is found that the accounts are doubtful, it will be for D1 to make good his explanation and justification for the items complained about. All circumstances considered, I agree with Mr Chiu that this is not an appropriate case to grant the statutory relief. O. THE QUESTION OF RELIEF O1. No loss 216.As mentioned, Mr Ng emphasizes that no loss was suffered by P2, if one refers to the accounting treatment in its financial statements and the general ledgers. Except for the management fees, which were P2’s own expenses, the other items of complaint share what Mr Ng describes as a common thread, namely they were accounted for by corresponding entries in Hui Guang. Further, a table was prepared to show that the income collected by P2 on behalf of Hui Guang, ie what P2 owed to Hui Guang, exceeded the expenses it paid on behalf of Hui Guang, ie what Hui Guang owed to P2. The net result was no loss to P2. 217.As to that, Mr Chiu submits that the alleged no real loss is not an answer to the discharge of the duty in the circumstances of this case. In principle, loss is not the basis of equitable relief. The relevant equity is primarily to ensure an agent or trustee would observe his fiduciary duties instead of recouping the loss for the beneficiaries as can be proved. In reality, reference is made to the need to scrutinise the very basis of the accounting treatment in the present case which, as mentioned, was geared in accordance with the understanding of D1 (who was in sole control of the business) which differed from that of P1. The results as the accounts apparently showed will have to be viewed in this light. I tend to agree. 218.As far as the figures set out in the defendants’ table, Mr Chiu also points out discrepancies between those figures according to the general ledgers and the figures set out in the Yeung 2nd Report (which came from the figures in the consolidated accounts of P2 and Hui Guang, and were confirmed by Tse) throughout 2005 to 2008. Unless these can be satisfactorily explained, reliance on those documents now in support the defendants case is put on an uncertain footing. O2. Account and equitable compensation 219.Mr Ng submits that the taking of an account and an award of equitable compensation are inconsistent remedies requiring and entitling P2 to make an election between the two. As to that, both counsel refer to the following explanation by Millet NPJ in Libertarian Investment Ltd v Hall (2013) 15 HKCFA 681:
220.The question is never one of inconsistency per se between a claim for an account and equitable compensation. O3. Relief sought in respect of the Items 221.Whether or not order an account and enquiry is made is a matter of discretion. A central theme of the defendants is that it would not be beneficial to order an account on the basis of the “no loss” argument, except in respect of the management fees. The contrary view, as discussed above, refers. P2 has established its entitlement to account and enquiry. Whilst Mr Chiu submits that the consequence of equitable compensation in the amount of most of the items should follow, he acknowledges the complication such as the uncertainty of element of equitable allowance, which may entail further enquiries. He therefore suggests further direction to be given in respect of submission on the relief on the basis of the findings made in this trial. P. THE COUNTERLCLAIMS 222.The pleaded case is that D1 paid a sum of HK$1,149,798.64 with a view to salvaging Hui Guang, which was spent pursuant to an alleged oral agreement between D1 and P1 over the telephone in October or November 2007. Under the alleged oral agreement, P1 is said to have agreed to pay D1 back 60% of such expenses. This is denied by P1. 223.The evidence of D1 as per his witness statement was but a verbatim repetition of his pleaded case mentioned above. No explanation was given during the trial as to how the sum was arrived at, and what documentary evidence, if any, made up such sum. No further light was cast during the trial. 224.The other counterclaim is for HK$637,360.63 being alleged outstanding management fees payable by P2 to D3. In view of the above discussion of the management fees, the validity of the basis for the claim is questionable. The documentary support of this item of counterclaim came from an audit confirmation of P2 which was signed by D1 on 10 February 2010 on the eve of his being ousted as a director and some account ledger report of D3. It is said that the sum represented the amount paid as salaries to D1 and Kwok. However, in the trial D1 did not adduce evidence as to how the sum was calculated. 225.All considered, I am not satisfied that the counterclaim is proved, and would therefore dismiss it. Q. ORDER 226.In respect of P1’s claim against D1 and D3 for declaration and transfer of shares, I give an order in terms as claimed in the plaintiffs’ pleading. 227.In respect of P2’s claim against the defendants, the parties shall submit within 14 days joint written proposed directions for the purpose of further submissions on the relief on the basis of the findings in this judgment, including whether or not this should be disposed of on paper only or by way of oral hearing. 228.The counterclaims of D1 and D3 are dismissed. 229.I also make a nisi order that the plaintiffs should have their costs of this action (including any costs reserved). Such costs shall be taxed, if not agreed.
MR SIMON CHIU, INSTRUCTED BY KAM & FAN, FOR THE PLAINTIFFS MR NG MAN SANG ALAN, MS JANE HO, INSTRUCTED BY PHILIP TAM & CO, FOR THE DEFENDANTS | |||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under HCA 1439/2012