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HCA 2478/2017
[2022] HKCFI 163
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 2478 OF 2017
____________________
| BETWEEN |
|
|
| |
CREATIVE PROPERTY SERVICES CONSULTANTS LIMITED
(創毅物業服務顧問有限公司) |
Plaintiff |
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and |
|
| |
THE INCORPORATED OWNERS OF KING MING COURT
(景明苑業主立案法圑) |
Defendant |
____________________
Before: Madam Recorder Rachel Lam, SC in Court
Date of Hearing: 10-11 & 16 November 2021
Date of Judgment: 17 January 2022
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JUDGMENT
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A. INTRODUCTION
1.This was the trial of the Plaintiff’s action against the Defendant for the recovery of unpaid invoices totalling HK$6,025,724.92 in respect of property management services rendered by the Plaintiff to the Defendant between 1 February 2016 and 30 November 2017 (the “Outstanding Management Fees”).
2.In the lead up to the trial, the parties had included a number of issues in their Agreed List of Issues (annexed below). By the time of the trial proper, it has become relatively clear that there can no longer be any serious dispute as to the Defendant’s liability to settle the Outstanding Management Fees. This is explored further below.
3.In truth, the central issues between the parties turn upon whether the Defendant can make out its defence and/or counterclaim that the Plaintiff is liable to account to the Defendant in respect of: (i)certain books and accounts which are allegedly in the Plaintiff’s possession and (ii) sums held in a bank account operated by the Plaintiff; and if so, the appropriate relief to be granted by this Court.
4.At trial, the Plaintiff was represented by Counsel Mr Lau Ka Kin, and the Defendant was represented by Counsel Mr Alexander Cheung.
B. BACKGROUND
5.I set out below the relevant background which is either undisputed or indisputable.
6.The Plaintiff was the property management company of King Ming Court since 1 February 2011 until it tendered its resignation on 30 November 2017.
7.The Defendant is the Incorporated Owners of King Ming Court.
B1. Outstanding Management Fees
8.By a service agreement dated 9 November 2012 (the “2013-2016 Agreement”), the Plaintiff was engaged by the Defendant to provide property management services for King Ming Court during the period between 1 February 2013 and 31 January 2016.
9.Pursuant to the 2013-2016 Agreement, the Defendant agreed to pay the Plaintiff remuneration, fees and expenses in accordance with Clause 30(D) in return for the Plaintiff’s property management services. Clause 30(D) provides:-
“在2013年2月1日至2013年4月30日期內，應付予經理人的每月酬金（以下簡稱「經理人酬金」）、總部員工行政費用和直接聘用駐屋苑管理、維修人員及管理員費用（包薪制）應分別為每月【10,500.00】元、【5,250.00】元及【258,740】元、在2013年5月1日至2014年1月31日期內，則為每月【 10,500.00】元、【5,250.00】元及【263,751】元，在2014年2月1日至2015年1月31日期內，則為每月【10,500.00】元、【5,250.00】元及【275,626】元，在2015年2月1日至2016年1月31日期內，則為每月【10,500.00】元、【5,250.00】元及【289,407】元，詳見附件一所載的管理計劃書。從本協議起，上述費用連同屋苑日常管理的一切其他有關職員費用，均由營運基金帳戶支付。”
10.Due to a renovation project in King Ming Court in 2015, the parties further agreed that the Plaintiff would employ extra staff and the Defendant would settle the invoices issued by the Plaintiff for this purpose (the “Extra Staff Agreement”).
11.There is no dispute that the invoices issued by the Plaintiff pursuant to both the 2013-2016 Agreement and the Extra Staff Agreement have all been duly settled by the Defendant.
12.On 31 May 2015, prior to the expiration of the 2013-2016 Agreement, the Defendant resolved, at an owners’ meeting, to retain the Plaintiff as the manager of King Ming Court.
13.Following such resolution, the Plaintiff delivered a new agreement (the “2016-2019 Agreement”) to the Defendant, which contained substantially the same terms as those in the 2013-2016 Agreement.
14.The key provision relevant to the issues at hand, namely Clause 30(D) of the 2016-2019 Agreement, is likewise couched in similar terms as Clause 30(D) of the 2013-2016 Agreement, although upward adjustments have been made in respect of the sums payable. It provides as follows:-
“在2016年2月1日至2017年1月31日期內，應付予經理人的每月酬金（以下簡稱「經理人酬金」）、總部員工行政費用和直接聘用駐屋苑管理、維修人員及管理員費用（包薪制）應分別為每月【12,000.00】元、【6,000.00】元及【313,054.00】元、在2017年2月1日至2018年1月31日期內，則為每月【 14,100.00】元、【7,000.00】元及【338,098.00】元，在2018年2月1日至2019年1月31日期內，則為每月【16,300.00】元、【8,250.00】元及【365,145.00】元，詳見附件一所載的管理計劃書。從本協議起，上述費用連同屋苑日常管理的一切其他有關職員費用，均由營運基金帳戶支付。”
15.It is common ground that the 2016-2019 Agreement has never been formally signed by the Defendant and returned to the Plaintiff.
16.The 2013-2016 Agreement expired on 31 January 2016.
17.However, notwithstanding the expiry of the 2013-2016 Agreement, and although the 2016-2019 Agreement was never signed by the Defendant, during the period between 1 February 2016 and 30 November 2017 (the “2016-2017 Period”):-
(1) The Plaintiff continued to provide property management services to the Defendant, which the Defendant accepted.
(2) The Plaintiff also continued to employ extra staff for the Defendant until March 2017 when extra staff was no longer necessary.
18.Further:
(1) The Plaintiff issued monthly invoices in respect of property management services provided by it to the Defendant during the 2016-2017 Period (the “Services Invoices”). There is no dispute that the amounts claimed under these Services Invoices accord with the payment terms under Clause 30(D) of the 2016-2019 Agreement.
(2) The Plaintiff also issued monthly invoices to the Defendant for expenses incurred by the Plaintiff in employing extra staff (the “Staff Invoices”).
19.Over the course of the 2016-2017 Period, the Defendant settled some, but not all, of the Plaintiff’s Services Invoices and Staff Invoices on an intermittent basis. There is no dispute that:-
(1) The Defendant duly settled the Services Invoices for the period between February and April 2016 and the period between June and August 2017. The Defendant also duly settled the Staff Invoices for the period between February and April 2016.
(2) The Defendant confirmed its agreement to settle the Plaintiff’s invoices for the period between February and July 2016, and the period between June and August 2017.
20.The Defendant has, however, failed to settle all of the Services Invoices and Staff Invoices. To date, the following Outstanding Management Fees remain unpaid:-
Services Invoices
|
Period |
Defendant’s Signed Confirmation to Pay |
Paid or Due |
|
February 2016 |
Yes |
Paid |
|
March 2016 |
Yes |
Paid |
|
April 2016 |
Yes |
Paid |
|
May 2016 |
Yes |
Due |
|
June 2016 |
Yes |
Due |
|
July 2016 |
Yes |
Due |
|
August 2016 |
Yes |
Due |
|
September 2016 |
Yes |
Due |
|
October 2016 |
Yes |
Due |
|
November 2016 |
Yes |
Due |
|
December 2016 |
Yes |
Due |
|
January 2017 |
N/A |
Due |
|
February 2017 |
N/A |
Due |
|
March 2017 |
N/A |
Due |
|
April 2017 |
N/A |
Due |
|
May 2017 |
N/A |
Due |
|
June 2017 |
Yes |
Paid |
|
July 2017 |
Yes |
Paid |
|
August 2017 |
Yes |
Paid |
|
September 2017 |
N/A |
Due |
|
October 2017 |
N/A |
Due |
|
November 2017 |
N/A |
Due |
Staff Invoices
|
Period |
Defendant’s Signed Confirmation to Pay |
Paid or Due |
|
February 2016 |
Yes |
Paid |
|
March 2016 |
Yes |
Paid |
|
April 2016 |
Yes |
Paid |
|
May 2016 |
Yes |
Due |
|
June 2016 |
Yes |
Due |
|
July 2016 |
Yes |
Due |
|
August 2016 |
Yes |
Due |
|
September 2016 |
Yes |
Due |
|
October 2016 |
Yes |
Due |
|
November 2016 |
Yes |
Due |
|
December 2016 |
Yes |
Due |
|
January 2017 |
N/A |
Due |
|
February 2017 |
N/A |
Due |
|
March 2017 |
N/A |
Due |
21.On 9 October 2017, the Plaintiff’s solicitors sent a formal demand requiring the Defendant to settle the Outstanding Management Fees. Follow-up demands were made by the Plaintiff on 19 October, 23 October and 25 October 2017 respectively.
22.Given the Defendant’s continued failure to settle the Outstanding Management Fees, the Plaintiff, by an Amended Writ of Summons (the “Writ”) dated 1 February 2019, sought recovery of the same from the Defendant.
B2. Bank Account
23.The Plaintiff, as King Ming Court’s manager, also opened and maintained a bank account with Hang Seng Bank Limited (the “Bank Account”) for the purpose of keeping funds and meeting payments on the Defendant’s behalf for the management of King Ming Court.
24.In this regard, Clause 30(C) of the 2013-2016 Agreement provides as follows:-
“關於管理費帳戶的運作：
(i) 經理人須鼓勵住宅單位業主利用自動轉帳系統，把管理費存入由經理人運作的法團名下銀行帳戶。
(ii) 在本協議開始生效之日，經理人可代表法團持有 *【750,000.00】港元，作為設立法團營運基金的首筆款項。此基金將用以支付妥善管理屋苑所需的一切月費。經理人須在每月第28天之前就上一月的盈餘向管理委員會報帳，並把該筆盈餘轉入管理委員會所指定的法團名下銀行帳戶。經理人須向法團提交一份 *【750,000.00】港元的銀行保證書。
(iii) 經理人須以屋苑名義為法團營運基金開設獨立的銀行帳戶，並為屋苑設存獨立的分類帳。”
25.It is also common ground that Schedule 7 to the Building Management Ordinance (Cap. 344) (“BMO”), by virtue of s.34E of the same, is impliedly incorporated into the Deed of Mutual Covenant, and therefore implied into the 2013-2016 Agreement and the 2016-2019 Agreement pursuant to Clause 2 of the same.
26.For present purposes, Clause 2 to Schedule 7 of the BMO provides, inter alia:-
“2. Keeping of accounts
(1) The manager shall maintain proper books or records of account and other financial records and shall keep all bills, invoices, vouchers, receipts and other documents referred to in those books and records for at least 6 years.
(2) Within 1 month after each consecutive period of 3 months, or such shorter period as the manager may select, the manager shall prepare a summary of income and expenditure and a balance sheet in respect of that period, display a copy of the summary and balance sheet in a prominent place in the building, and cause it to remain so displayed for at least 7 consecutive days.
(3) Within 2 months after the end of each financial year, the manager shall prepare an income and expenditure account and balance sheet for that year, display a copy of the income and expenditure account and balance sheet in a prominent place in the building, and cause it to remain so displayed for at least 7 consecutive days.
...
(5) The manager shall— (a) permit any owner, at any reasonable time, to inspect the books or records of account and any income and expenditure account or balance sheet; and (b) on payment of a reasonable copying charge, supply any owner with a copy of any record or document requested by him.
(6) If there is a corporation and the corporation decides, by a resolution of the owners, that any income and expenditure account and balance sheet should be audited by an accountant of by some other independent auditor as may be specified in that resolution, the manager shall without delay arrange for such an audit to be carried out by that person and —
(a) permit any owner, at any reasonable time, to inspect the audited income and expenditure account and balance sheet and the report made by the accountant or auditor in respect of the income and expenditure account and balance sheet; and
(b) on payment of a reasonable copying charge, supply any owner with a copy of the audited income and expenditure account and balance sheet, or the report made by the accountant or auditor in respect of the income and expenditure account and balance sheet, or both, as requested by the owner...”
27.Meanwhile, Clause 3, which requires the manager to maintain and use an interest-bearing account exclusively for the management of the building, provides as follows:-
“3. Manager to open and maintain bank account
(1) The manager shall open and maintain an interest-bearing account and shall use that account exclusively in respect of the management of the building.
(1A) Without prejudice to the generality of subparagraph (1), if there is a corporation, the manager shall open and maintain one or more segregated interest-bearing accounts, each of which shall be designated as a trust account or client account, for holding money received by him from or on behalf of the corporation in respect of the management of the building.
(1B) The manager shall display a document showing evidence of any account opened and maintained under subparagraph (1) or (1A) in a prominent place in the building.
(2) Subject to subparagraphs (3) and (4), the manager shall without delay pay all money received by him in respect of the management of the building into the account opened and maintained under subparagraph (1) or, if there is a corporation, the account or accounts opened and maintained under subparagraph (1A).
(3) Subject to subparagraph (4), the manager may, out of money received by him in respect of the management of the building, retain or pay into a current account a reasonable amount to cover expenditure of a minor nature, but that amount shall not exceed such figure as is determined from time to time by a resolution of the owners’ committee (if any).
(4) The retention of a reasonable amount of money under subparagraph (3) or the payment of that amount into a current account in accordance with that subparagraph and any other arrangement for dealing with money received by the manager shall be subject to such conditions as may be approved by a resolution of the owners’ committee (if any).
(5) Any reference in this paragraph to an account is a reference to an account opened with a bank within the meaning of section 2 of the Banking Ordinance (Cap. 155), the title of which refers to the management of the building.”
28.Against such background, the Bank Account was operated in the following manner:-
(1) Monthly management fees contributed by owners of King Ming Court were directly deposited into the Bank Account, and held by the Plaintiff on behalf of the Defendant pursuant to Clause 30(C)(i). During the period between September 2016 and June 2017, the total amount of management fees payable by owners of King Ming Court was around HK$513,049 per month, and around HK$590,940 per month since July 2017 after an increase in management fees.
(2) Conversely, payments which the Defendant is liable to make to the Plaintiff, including those payable under the Services Invoices, were settled out of the funds held in the Bank Account in accordance with Clause 30(D).
29.It is common ground that the Bank Account is still being maintained by the Plaintiff to date.
30.There were disputes, however, as to the accuracy and completeness of the ledgers of the Bank Account (the “Ledgers”), an issue discussed in greater detail below.
31.Consequently, a joint expert report (the “Joint Expert Report”) dated 25 September 2020 was prepared by the parties’ experts on this issue.
32.By an Order dated 15 May 2020, Master Kot, upon the Defendant’s application, granted leave to the parties to adduce expert evidence in accounting on liability and quantum on the following issues:-
(1) Whether the items/transactions in the bank statements of the Bank Account from April 2016 to November 2017 have been completely and properly recorded in the Ledgers;
(2) To identify items not properly recorded in the ledgers for the period from April 2016 to November 2017, if any and to propose proper accounting treatments for such items; and
(3) Whether the unaudited income and expenditure statements for the periods from April 2016 to March 2017 and from April 2017 to November 2017, and the unaudited balance sheets for the period from April 2016 to October 2017 have been properly prepared from the Ledgers.
33.There is no dispute that the joint experts shared the following opinion in their Joint Expert Report:-
(1) §1 of the Joint Expert Report provides that “[s]ubject to the limitations as noted in paragraph 6 below, the transactions in the bank statements from April 2016 to November 2017 have been completely recorded in the ledgers by reference to their amounts and the transactions are properly recorded based upon the description of the ledgers”.
(2) §6 of the Joint Expert Report, which contains the “limitations” alluded to above, provides inter alia that:-
(a) “Except for the invoices issued by [the Plaintiff], there are no other evidential documents available to us for checking the nature and validity of the transactions as recorded in the ledgers” (§6(a)).
(b) Moreover, the experts noted that they “do not have information to substantiate the opening balances of the balance sheet items” (§6(b)).
(c) In light of the foregoing, as “the procedures we performed do not constitute an assurance engagement made in accordance with Hong Kong Standards on Auditing, Hong Kong Standards on Review Engagements or Hong Kong Standards on Assurance Engagements, we do not express any assurance on our opinion. Had we performed additional procedures or had we performed an assurance engagement of the financial statements in accordance with Hong Kong Standards on Auditing, Hong Kong Standards on Review Engagements or Hong Kong Standards on Assurance Engagements issued by the Hong Kong Institute of Certified Public Accountants, other matters might have come to our attention that would have been reported to you” (§6(c)).
34.By an Order dated 15 July 2021, Keith Yeung J directed, inter alia, that the attendance of expert accountants as witnesses be dispensed with. The parties were also directed to lodge an Agreed List of Issues for this trial.
C. THE PARTIES’ RESPECTIVE CASES
C1. The Plaintiff’s Case
35.The Plaintiff’s case is simple and straightforward. The thrust of it is that the Defendant has, by conduct, agreed to make payments of the Outstanding Management Fees to the Plaintiff, which it has failed to. As such, the Plaintiff is entitled to recover the same from the Defendant:-
(1) Whilst the 2016-2019 Agreement was never formally signed by the Defendant, the parties have agreed, by their conduct, that the Defendant would settle the Services Invoices and Staff Invoices issued by the Plaintiff in accordance with the terms of Clause 30(D) of the 2016-2019 Agreement (the “Agreement by Conduct”).
(2) The existence of such an Agreement by Conduct is evidenced by the fact that the Defendant has already made part settlement of certain Services Invoices and Staff Invoices during the 2016-2017 Period in a manner wholly consistent with the payment terms under Clause 30(D) of the 2016-2019 Agreement.
(3) Indeed, there is no dispute that the Defendant has signed multiple confirmations to pay the Services Invoices and Staff Invoices during the 2016-2017 Period. This, the Plaintiff submits, further fortifies the existence of the Agreement by Conduct.
(4) Since the Defendant has failed to pay the Plaintiff the Outstanding Management Fees in accordance with their Agreement by Conduct, the Plaintiff is entitled to recover the same from the Defendant.
(5) Alternatively, the Plaintiff argues that the Defendant is, by reason of its repeated signed confirmations to pay, estopped from refusing to settle the Outstanding Management Fees (Agreed List of Issues §2). However, given that the Defendant no longer seriously disputes its liability to pay the Outstanding Management Fees, this is not truly a live issue.
36.In relation to the Defendant’s Document Claim (see Section D1 below), the Plaintiff submits as follows:-
(1) The Defendant has no basis for seeking an account or delivery up of the Defendant’s Documents from the Plaintiff. Neither Clause 4(ii) nor Clause 17 of the 2013-2016 Agreement is applicable in the present case. Nor is the Defendant entitled to rely upon agency principles as a basis for seeking an account.
(2) In any event, the Defendant’s Documents have (i) already been passed to the Defendant when the Plaintiff resigned in November 2017, and are therefore no longer in the Plaintiff’s possession; or (ii) they simply did not exist.
37.Finally, as regards the Defendant’s Bank Account Claim (see Section D2 below):-
(1) The Plaintiff does not dispute that it has opened the Bank Account for the purpose of keeping funds and meeting payments in respect of King Ming Court’s management.
(2) However, the Plaintiff originally denies that it owes any fiduciary duty in respect of the funds therein.
(3) In any event, even if the Plaintiff is under such a duty, the Plaintiff alleges that there was no breach of duty on its part as it has already informed the Defendant of the position of the Bank Account.
(4) Further or alternatively, the Plaintiff avers that the Defendant has not suffered any loss or damage by reason of any alleged breach.
38.In light of the foregoing, the Plaintiff argues that the Defendant has no valid defence and/or counterclaim against it. The Outstanding Management Fees should be settled by the Defendant immediately, with no excuse for further delay. In particular, the Plaintiff points to the absence of any agreement between the parties that the Defendant need not pay the Outstanding Management Fees unless and until the audited accounts and/or other Defendant’s Documents have been delivered to the Defendant.
C2. The Defendant’s Case
39.Insofar as the Outstanding Management Fees is concerned, the Defendant submits as follows:-
(1) As seen from the parties’ Agreed List of Issues (§1), the Defendant originally sought to deny its liability to settle the Outstanding Management Fees on the basis that the Plaintiff has failed to provide a sufficient number of security guards and management personnel.
(2) Such allegation was, however, never pleaded by the Defendant. At the trial before me, Mr Cheung sensibly confirmed that the Defendant would no longer pursue such defence.
(3) Mr Cheung also essentially confirmed that the Defendant is no longer able to seriously dispute that it is liable to settle the Outstanding Management Fees by reason of the parties’ Agreement by Conduct.
40.Instead, the Defendant’s case is essentially twofold.
41.The first strand of the Defendant’s case consists of its defence and/or counterclaim against the Plaintiff for an account and delivery up of all documents belonging to the Defendant (as pleaded in §§4(b) and 31 of its Amended Defence and Counterclaim) (the “Defendant’s Documents”) which the Defendant says are currently in the Plaintiff’s custody and/or possession (the “Document Claim”):-
(1) Without access to the Defendant’s Documents, the Defendant argues that it has been kept in the dark regarding King Ming Court’s true financial position, and is simply not in a position to verify the amount of Outstanding Management Fees claimed by the Plaintiff,
(2) If, however, the Defendant’s Documents are accounted for and duly delivered up by the Plaintiff, it may transpire that the Plaintiff owes the Defendant certain sums, which the Defendant is entitled to counterclaim for and/or set-off against the Outstanding Management Fees claimed by the Plaintiff.
42.The second strand of the Defendant’s case is concerned specifically with the funds held in the Bank Account (the “Bank Account Claim”). In short, the Defendant avers that:-
(1) The Ledgers of the Bank Account appear to be incomplete and potentially inaccurate. Certain bank statements, vouchers and supporting documents in relation to the Bank Account are missing.
(2) The Plaintiff, as the sole operator and controller of the Bank Account, is the only party which is in possession of the foregoing documents.
(3) The Defendant, therefore, seeks delivery up from the Plaintiff of all relevant bank statements, accounts and other documents specific to the Bank Account during the period between 1 February 2013 and 30 November 2017.
(4) After the foregoing documents are made available to the Defendant, a proper account can then be taken to enable the Defendant to ascertain the total amount of funds which should have been held by the Plaintiff with Hang Seng Bank on the Defendant’s behalf. These funds, according to the Defendant, should then be returned to the Defendant and/or used to set-off the Outstanding Management Fees owed to the Plaintiff.
D. DISCUSSION
43.As I have noted above, Mr Cheung confirmed at trial that the Defendant is no longer able to seriously dispute its liability to pay the Outstanding Management Fees. Therefore, the only issues before me are whether the Defendant can make out its (1) Document Claim and (2) Bank Account Claim, and the appropriate relief to be granted.
44.At trial, the Court heard evidence from the following witnesses:-
(1) Mr Chan Kwok Ching Paul (“Paul Chan”), the Plaintiff’s Area Manager; and
(2) Mr Cheng Chi Hung (“Cheng”),one of the members of the Defendant’s Management Committee (“MC”) at the material time.
D1. Defendant’s Document Claim
Document Claim – A Live Issue?
45.At the outset, I note from §3 of the parties’ Agreed List of Issues that the Defendant apparently expressly confirmed, at one point, that it believes that the issue of whether the Plaintiff is in possession of the Defendant’s Documents is “no longer a live issue in view of those pleaded in §29 of R&DCC.” The Defendant’s continued pursuit of its Document Claim at trial was therefore met with queries from the Court and a string of objections from the Plaintiff:-
(1) The Plaintiff contends that it would be unfair if the Defendant is now allowed to withdraw its express concession that the Document Claim is no longer a live issue.
(2) The Plaintiff, in particular, argues that it has prepared the trial on the basis of the Defendant’s express concessions that the Plaintiff does not retain the Defendant’s Documents and the Document Claim ceases to be a live issue.
(3) The Plaintiff also drew my attention to the correspondences between the parties, which seem to suggest that Counsel was involved in the drafting and finalisation of the Agreed List of Issues. This appears to contradict the Defendant’s suggestion that §3 of the Agreed List of Issues merely contains an unintended mistake by its handling solicitors.
(4) The Plaintiff further relies on the observations of Kwan JA (as she then was) in Re Ng Wai Jing [2016] 2 HKLRD 1460 regarding the court’s exercise of its discretion in determining whether or not to permit the withdrawal of an admission made by a party after an action was commenced. In this regard, the Plaintiff emphasises the lateness of the Defendant’s departure from the Agreed List of Issues, which occurred only on the second day of trial when the Defendant delivered its oral opening submissions.
46.In response, the Defendant explains that it does not intend to concede, withdraw or abandon its Document Claim. What was said in §3 of the Agreed List of Issues was rather a slip and mistake on the part of the Defendant’s handling solicitors.
47.I appreciate that matters have taken an unfortunate turn when it comes to the drafting of §3 of the Agreed List of Issues. Taking into account the circumstances as a whole, however, I consider that the Defendant should not be taken to have abandoned or withdrawn its Document Claim:-
(1) The Document Claim was pleaded by the Defendant in its Amended Defence and Counterclaim (at, inter alia, §§4(b) and 31). It appears to me to be quite unfair to dismiss the entirety of the Defendant’s Document Claim solely on the basis of what was said in the Agreed List of Issues.
(2) In any event, I observe (as will be further discussed below) that the Plaintiff has conducted extensive cross-examination of Cheng, the Defendant’s witness, regarding his knowledge of the whereabouts of the Defendant’s Documents and matters relating to the Document Claim more generally. As such, I do not consider there to be any real prejudice to the Plaintiff even if the Defendant were allowed to proceed with its Document Claim.
(3) For these reasons, notwithstanding what was set out in the Agreed List of Issues, I will consider the substance of the Document Claim.
(4) As to the scope of the Defendant’s Document Claim, I consider it appropriate to define the Defendant’s Documents as encompassing all the documents as pleaded at §§4(b) and 31 of the Defendant’s Amended Defence and Counterclaim, although the Defendant’s Documents could have been defined with greater precision.
The Document Claim
48.Having so decided, I now proceed to consider the Defendant’s Document Claim on the basis of the Defendant’s Documents as defined above.
49.In a nutshell, the Defendant’s Document Claim comprises:-
(1) A more general claim for an order against the Plaintiff for the account and delivery up of all of the Defendant’s Documents (the “General Document Claim”); and
(2) A more specific claim for an order against the Plaintiff for the account and delivery up of bank statements, entries and/or other documents which relate specifically to the funds kept in the Bank Account (the “Funds”) in support of its Bank Account Claim (the “Specific Document Claim”).
General Document Claim
50.By its General Document Claim, the Defendant seeks an account and delivery up from the Plaintiff of all of the Defendant’s Documents as pleaded in §§4(b) and 31 of the Amended Defence and Counterclaim. These documents, according to the Defendant, belong to the Defendant and are currently in the Plaintiff’s possession. In support of its argument, the Defendant relies on contractual and agency duties which it says are owed by the Plaintiff.
51.The Defendant first prays in aid Clauses 4(ii) and 17 of the 2013-2016 Agreement:-
(1) Under Clause 4(ii) the 2013-2016 Agreement, the Plaintiff, as the manager of King Ming Court, is under an obligation to use its best efforts to co-operate and facilitate the handover to the Defendant of the accounts and all other books and records relating to the management of King Ming Court within 14 days from the date of termination of the Agreement.
(2) Likewise, the Plaintiff is required under Clause 17 of the 2013-2016 Agreement to hand over to King Ming Court’s MC all books, accounts, records and other materials and documents relating to the management of King Ming Court within 2 months from the date of termination of the Agreement.
(3) The Defendant further references Clause 2 to Schedule 7 of the BMO, which contains provisions relating to the manager’s duty to keep and maintain books and accounts. These provisions are implied into the DMC (BMO s.34E), and therefore incorporated into both the 2013-2016 and 2016-2019 Agreement (and hence the Agreement by Conduct) by virtue of Clause 2 of the same.
52.The Defendant, in addition, avers that the Defendant’s Documents are properties belonging to it, which were created by the Plaintiff as the Defendant’s agent. Thus, relying on Pont on Law of Agency (2nd Edn, 2008) at §§13.2-13.3, the Defendant submits that it, as principal, has a right to inspect the agent’s accounts, which is a right founded not only on contract, but on the principal’s entitlement to records of what has been done in its name. Consequently, termination of the agency should have no bearing on the agent’s continuing duty to provide pre-existing records pertaining to the period when the transactions were authorised.
53.However, notwithstanding the Plaintiff’s resignation on 30 November 2017, it is the Defendant’s case that the Plaintiff has acted in breach of its foregoing obligations:-
(1) The Plaintiff failed to hand over to the Defendant, and continued to wrongfully retain “certain books and accounts, bank statements, cheques, bills, invoices, vouchers, receipts, records and other documents belonging to the Defendant” despite the Defendant’s repeated requests (§4(b) of Amended Defence and Counterclaim).
(2) The Plaintiff has also, says the Defendant, wrongfully retained “documents and business records belonging to the Defendant in respect of the management and administration of [King Ming court] that are under the control of the Plaintiff or in their custody or possession” (§31 of Amended Defence and Counterclaim).
(3) The documents which have allegedly been wrongfully retained by the Plaintiff include, but are not limited to, the following (§31 of Amended Defence and Counterclaim):-
(a) Original Management Agreements dated 31 January 2011 and 9 November 2012;
(b) Bank statements of the Defendant’s account with Bank of China (Hong Kong);
(c) Bank statements of the Defendant’s account with Bank of Communications; and
(d) Recording, transcript and/or approved minutes of the meeting of the Plaintiff and Defendant on 3 April 2017.
(4) On the Defendant’s case, these documents would have enabled the Defendant’s auditor to prepare audited income and expenditure accounts, balance sheets, and audit reports for the financial years 2013 to 2015 and 2014 to 2017, and should therefore have been delivered to the Defendant. Only then would the Defendant be able to confirm the amount it actually owes to the Plaintiff, and only then should the Defendant be required to settle the Outstanding Management Fees.
(5) The Defendant further alleges that it has suffered loss and damage by reason of the Plaintiff’s foregoing breaches.
(6) The Defendant also seeks to advance a “proprietary claim for breach of fiduciary duty to account by the Plaintiff as an agent entrusted with the property of the Principal”.
54.On the contrary, the Plaintiff submits that:-
(1) Whilst the Defendant intends to rely upon Clauses 4(ii) and 17 of the 2013-2016 Agreement for its Document Claim, these two provisions would only bite in circumstances where there would be a handover (“移交”) from one manager to another upon the expiry of the 2013-2016 Agreement. However, since the Plaintiff continued to serve as King Ming Court’s manager upon the expiry of the 2013-2016 Agreement up until 30 November 2017, these two provisions are not engaged at all.
(2) Nor is the Defendant entitled to rely on agency as a basis for advancing its Document Claim. In the first place, agency was not specifically pleaded. In any event, it cannot be said that all documents created during the relevant period was part and parcel of the parties’ agency arrangement simply because the Plaintiff has acted as the Defendant’s agent in certain contexts.
(3) In any event, even if Clauses 4(ii) and 17 are engaged, and even if the Plaintiff has acted as the Defendant’s agent in respect of the creation of certain Defendant’s Documents, the Plaintiff denies that it is in possession of any of the Defendant’s Documents after it has ceased to be King Ming Court’s manager on 30 November 2017 – all of the Defendant’s Documents, including accounts and supporting documents, were left and stored at King Ming Court.
(4) In this regard, the Plaintiff draws extensively on Cheng’s evidence, who admitted during cross-examination that both he and the Defendant did not verify whether all of the Defendant’s Documents were stored at King Ming Court in November 2017, and that he has no knowledge of the same. Cheng, in his evidence, also denied that there was a complete lack of supporting documents of relevant expenses in the years 2013 to 2017, and admitted that neither he nor the Defendant knew which item of expense is supported (or not supported) by the relevant documents.
(5) The Plaintiff also points out that Cheng, in his re-examination, admitted that many documents are kept at King Ming Court as of today.
(6) The Plaintiff further emphasises that (a) Ms Tsang, who is the Defendant’s treasurer (the “Treasurer”)in charge of the Defendant’s finance and accounting at all material times, and (b) the Chairman of the MC, should have been in the best position to give evidence on issues relevant to the Document Claim, a point Cheng frankly admitted. Given the Defendant’s failure to call them as witnesses in these proceedings, the Plaintiff invites the court to draw every adverse inference against the Defendant in determining each and every disputed fact: Telings International Hong Kong Ltd v John Ho and Others (unrep., CACV 10/2010, 22 October 2010) at §81 per Le Pichon JA.
(7) Pulling the threads together, the Plaintiff argues that it no longer possesses or retains any of the Defendant’s Documents. Alternatively, some of the Defendant’s Documents sought by the Defendant did not exist at all. The Document Claim should therefore be rejected.
55.Having considered the parties’ submissions, the evidence given by the factual witnesses, as well as the available contemporaneous documents and circumstantial evidence, and having assessed their inherent probabilities, internal consistency and the entire history of events, I have come to the following decision.
56.In my view, Clauses 4(ii) and 17 of the 2013-2016 Agreement (which are identical to Clauses 4(ii) and 17 of the 2016-2019 Agreement) are engaged in the present case:-
(1) I do not agree with the Plaintiff’s suggestion that these two clauses do not bite simply because there was no “handover” between different managers upon the expiry of the 2013-2016 Agreement on 30 January 2016.
(2) Since it is the Plaintiff’s case, which the Defendant no longer disputes, that there was an Agreement by Conduct during the 2016-2017 Period on the basis of the terms as set out in the 2016-2019 Agreement, it must follow that Clauses 4(ii) and 17 of the 2016-2019 Agreement (which are identical to that contained in the 2013-2016 Agreement) are likewise implied into the parties’ Agreement by Conduct.
(3) The Plaintiff’s suggestions, on the contrary, would involve cherry-picking obligations to be implied to its favour, which I do not accept. Indeed, the Plaintiff was unable to give a clear answer when asked about the precise boundaries of the parties’ Agreement by Conduct at trial.
(4) I therefore hold that the Plaintiff is, at all material times, under the obligations imposed pursuant to Clauses 4(ii) and 17.
57.Likewise, I accept that the Defendant is entitled to argue for its Document Claim on the basis that the Plaintiff was its agent in creating some of the Defendant’s Documents. §7 of the Amended Defence and Counterclaim did spell out the Defendant’s plea that the Plaintiff is the “agent” of the Defendant, and therefore owes, inter alia, fiduciary duties and/or “duty of good faith” in respect of the keeping of the Defendant’s books and records.
58.That said, I consider that the Defendant’s General Document Claim should nonetheless be rejected for the following reasons:-
(1) What appears striking to me is the dearth of evidence adduced by the Defendant, quite apart from bare assertions, which tends to show that the Plaintiff still possesses any of the Defendant’s Documents as of today. Indeed, the Defendant has never pointed to any specific documents which it seeks from the Plaintiff and says are still in the Plaintiff’s possession.
(2) Likewise, Cheng was unable to spell out which of the Defendant’s Documents were missing throughout his entire cross-examination. Nor was he able to tell whether all or any of the Defendant’s Documents were stored at King Ming Court.
(3) Quite the contrary, Cheng’s evidence tends to support the Plaintiff’s suggestion that many of the Defendant’s Documents were in fact kept in King Ming Court and returned to the Defendant.
(4) The Defendant’s failure to secure the attendance of The Treasurer and/or the MC’s Chairman as witnesses, who are obvious candidates to speak to the Defendant’s financial affairs and its handling of books and accounts, is also telling. Not only was explanation for their absence lacking, Cheng himself also conceded that he did not consider himself well positioned to give evidence in support of the Defendant’s Document Claim.
(5) In these circumstances, I am not satisfied that the Defendant has discharged its onus in proving that the Plaintiff retains possession of the Defendant’s Documents, and/or was in breach of its duty to account or deliver up the Defendant’s Documents. Accordingly, I would reject the Defendant’s General Document Claim.
Specific Document Claim
59.I now turn to consider the Defendant’s Specific Document Claim.
60.While I appreciate that the Defendant’s Specific Document Claim is closely intertwined with its Bank Account Claim (discussed in Section D2 below), I also note that the Defendant’s claim in this regard is premised upon further documents being provided by the Plaintiff for the Defendant to ascertain the position regarding the Bank Account. I will therefore deal with the parties’ arguments in this regard under the Defendant’s Document Claim.
61.Essentially, the Defendant’s case is as follows:-
(1) The Defendant argues that the Ledgers concerning the Bank Account appear to suffer from gaps and inaccuracies, and alludes in particular to the following:-
(a) In a letter dated 5 June 2018 from Messrs. Sam Lai & Co, a certified public accountant, to the Defendant, Messrs. Sam Lai & Co confirmed its resignation as the Defendant’s auditor on the alleged basis that the Plaintiff has refused and/or failed to provide it with proper and sufficient accounting books and records to enable it to conduct a proper audit of the Defendant’s financial statements for the financial years 2014 and 2015.
(b) Likewise, the joint experts (at §6 of the Joint Expert Report) noted the lack of evidential documents, other than invoices issued by the Plaintiff, to enable them to verify the nature and validity of the transactions as recorded in the Ledgers.
(c) The “List of Documents/ Items to be Transferred” (“文件/ 財務移交清單”) (the “Transfer List”) dated 21 November 2017 did not include vouchers and supporting documents as items to be transferred by the Plaintiff to the Defendant either.
(d) Further, an accounting firm named Good Faith CPA Firm Company Ltd, upon examination of the financial reports and records provided by the Plaintiff for the period from 1 January 2016 to 30 November 2017, allegedly found around 500 bank statement entries in respect of, inter alia, the Bank Account which were not properly accounted for in the financial reports and records.
(2) As the Plaintiff was responsible for maintaining the Ledgers and producing financial statements prepared on the basis of these Ledgers, the Plaintiff is, so the argument goes, best positioned to produce the Defendant’s Documents, which would then enable the Defendant to verify all relevant transactions and accounting entries concerning the Bank Account.
(3) Indeed, under Clauses 18 and 30(A)(xix) of the 2013-2016 Agreement, the Plaintiff is required to, inter alia, (i) submit unaudited monthly financial statements within 28 days after the end of each accounting month; (ii) submit audited annual accounts within 2 months from the end of each accounting year for review by the MC; (iii) keep formal record of all expenditures; and (iv) display copies of audited monthly financial statements on the notice boards of King Ming Court.
(4) The Defendant further relies on Clause 15 of the 2013-2016 Agreement, which confers the MC the right, at any reasonable time, to inspect the books and accounts maintained by the Plaintiff in connection with the management of King Ming Court and to make copies of such books and accounts.
(5) The Plaintiff, as the trustee and/or agent of the Defendant in respect of Funds held in the Bank Account, and by reason of Clause 2 of Schedule 7 to the BMO, also comes under a duty to account for the Funds therein by inter alia reporting on the balance of the account.[1]
(6) However, notwithstanding such alleged problems with the Ledgers and bank statements of the Bank Account, the Defendant avers that the Plaintiff has, since around 15 April 2015, failed and/or refused to (i) account to the Defendant the amount of remaining Funds in the Bank Account in a timely manner; (ii) prepare and provide timely income and expenditure accounts as required by the 2013-2016 Agreement and Schedule 7 to the BMO; (iii) provide attendance time sheets, MPF and salary payment records of King Ming Court’s staff to enable the Defendant to ascertain the exact amounts to be deducted for the Lump Sum Fee each month; and (iv) provide employment contracts of extra staff it employed on the Defendant’s behalf for King Ming Court’s renovation project.
(7) It is also the Defendant’s case that the Plaintiff has refused to perform its duties to facilitate audit work by a letter dated 29 December 2017 from the Defendant to the Plaintiff.
(8) Further, whilst the Defendant’s MC requested the Plaintiff’s Managing Director to provide a complete set of up-to-date and accurate financial books and records, and income and expenditure accounts and balance sheets of the Defendant for the Plaintiff’s inspection on 3 April 2017, the Plaintiff has failed and/or refused to provide the same to the Defendant as of today.
(9) The foregoing documents are, however, essential for the Defendant to verify the financial position of the Bank Account, in particular the actual amount of Funds which should have been held by the Plaintiff for the Defendant in the Bank Account.
(10) In the absence of these documents, the existing Ledgers cannot, says the Defendant, be taken as conclusive of the true state of affairs of the Bank Account. The Defendant therefore avers that the Plaintiff must deliver to the Defendant all the Defendant’s Documents to enable an account to be taken, such that the Defendant can ascertain its true financial position.
(11) However, the Defendant fairly acknowledges that the Plaintiff did prepare vouchers with supporting documents including receipts, invoices, attendance sheets and registers, as well as maintained the Ledgers. The Defendant also acknowledges that the Plaintiff did “belatedly” prepare and present periodic financial statements to the Defendant, and had arranged for the annual financial statements for the years 2013 to 2016 to be audited by an audit firm approved at the Defendant’s AGM.
62.In response, the Plaintiff submits that:-
(1) The Defendant’s allegation that the Ledgers of the Bank Account are potentially inaccurate, and necessitates a further account to be taken, is groundless:-
(a) The Plaintiff, in particular, places great emphasis on the Defendant’s failure to pinpoint, from start to end, any single transaction or entry in relation to the Bank Account which it considers problematic, a point which Cheng conceded in his cross-examination. Cheng also admitted in his evidence that he never questioned any particular transaction of the Bank Account or any particular item of the Ledgers.
(b) However, absent any particulars and specific allegations in relation to the Bank Account, the Plaintiff argues that there is simply no basis for the court to order the Plaintiff to deliver further documents, or direct yet another account to be taken. This is especially so as the parties have already invited joint experts to prepare the Joint Expert Report based on the Ledgers.
(c) In this regard, the Plaintiff points to the Joint Expert Report, where the joint experts opined that “[s]ubject to the limitations as noted in paragraph 6 below, the transactions in the bank statements from April 2016 to November 2017 have been completely recorded in the ledgers by reference to their amounts and the transactions are properly recorded based upon the description of the ledgers.”
(d) Whilst the Joint Expert Report contains limitations (at §6), the expert directions given in response to the Defendant’s application for leave to adduce expert evidence expressly provide that the parties may provide “further documents and information”. As such, the Defendant could well have provided the experts with invoices or receipts to contradict the Ledgers, or provide information from the Treasurer or relevant MC members to challenge the bank transactions and/or Ledgers, but none of this was done.
(e) Furthermore, contrary to the Defendant’s allegation, the Plaintiff avers that Messrs. Sam Lai & Co never suggested that it was expecting any outstanding documents from the Plaintiff, nor did it suggest that its resignation was due to the lack of accounting documents from the Plaintiff (as opposed to the lack of these documents generally), a point Cheng conceded.
(f) Likewise, the Plaintiff submits that no weight should be attached to the one-page observation by Good Faith CPA Firm Company Ltd, which is not the firm engaged by the Defendant for auditing financial statements for the relevant financial years. The firm’s observations have never been verified by a Statement of Truth, the basis for them is entirely unclear, nor were representatives of Good Faith CPA Firm Company Ltd asked to give evidence in these proceedings.
(g) Furthermore, whilst Cheng, in his cross-examination, contended that the accounts prepared by the Plaintiff were “groundless”, he admitted that his opinion was merely based on what a person named Tang, who is not even a licensed accountant, has told him.
(h) Insofar as any of the foregoing suggestions involve allegations of false accounting on the Plaintiff’s part, the Plaintiff refutes such serious and unpleaded allegations.
(i) The Plaintiff also argues that Cheng’s statement that the Defendant merely had a budget deficit of around HK$800,000 for the period between April 2016 and March 2017 was incorrect. As the Treasurer reported during an owners’ meeting in June 2017, the relevant deficit was over HK$1.7 million. This was also the reason for the subsequent increase in King Ming Court’s management fees. In cross-examination, Cheng accepted that he never discussed his observations about the Defendant’s budget deficit with the Treasurer, nor was his witness statement considered or approved by the MC.
(j) Finally, the Plaintiff reiterates that Cheng, who was never responsible for the Defendant’s finance or accounting, only had extremely limited involvement in the Defendant’s financial and accounting affairs. As such, Cheng’s allegations against the Plaintiff regarding its financial state of affairs are hallow, unreliable and should be given little weight.
(k) In contrast, the Defendant’s MC was accountable to the owners, and the Defendant well knew its own financial position.
(2) In any event, whether or not the Ledgers of the Bank Account are complete and accurate, the Plaintiff argues that it has already tendered to the Defendant all relevant accounts and documents relating to the Bank Account, and therefore duly discharged its duty to account:-
(a) Monthly balance sheets of the Bank Account have already been provided by the Plaintiff to the Defendant and displayed in King Ming Court. The Plaintiff has also prepared and provided tables of deficit/ loss and liabilities to the Defendant, including the budget deficit for 2017/2018 which has been signed and confirmed by the Treasurer for the balance sheet as at 31 March 2017.
(b) There is likewise no dispute that the Plaintiff did provide income and expenditure statements to the Defendant.
(c) The Plaintiff further points to the Transfer List dated 21 November 2017, which confirmed that all monthly bank statements, pass books and cheque books in respect of King Ming Court have already been transferred to the Defendant. When asked about this during cross-examination, Cheng’s only response was that he was not sure. Nor did Cheng deny, when cross-examined, that all bank statements in relation to the Bank Account have already been provided to the Defendant during the handover in late November 2017.
(d) By a letter dated 29 December 2017 from the Plaintiff to the Defendant, the Plaintiff made clear that all purported requests for document transfer have already been dealt with. In particular, Ms Ng, the Defendant’s authorised representative, did not find any missing items.
(e) The Plaintiff further references various letters dated 2 November 2017, 29 November 2017, 20 December 2017 and 9 January 2018 issued by the Defendant at the time the Plaintiff ceased to be King Ming Court’s Manager and when the Plaintiff commenced the present action. One common thread which runs through these letters, says the Plaintiff, is that the Defendant never raised any queries or asked for any supporting documents from the Plaintiff.
(f) The Plaintiff also seeks to highlight the inherent improbability of the Defendant’s case by juxtaposing (i) the Defendant’s alleged attempt to locate documents requested by the auditor in early 2018 with (ii) the fact that the Defendant has never compiled a list of these required documents, a fact not disputed by Cheng in his re-examination. In such circumstances, the Plaintiff says that it cannot possibly be faulted for failing to provide something which the Defendant never asked for.
(g) Even on Cheng’s evidence, although the Defendant once complained about the unavailability of audited accounts for the years 2013 to 2016 and this issue was discussed at a MC meeting held in January 2018, he could not recall whether the MC had any discussion requiring the Plaintiff to provide any supporting documents.
(h) The Plaintiff further points to Cheng’s express admission during re-examination that the Defendant is itself in possession of voluminous documents, including the income and expenditure statements, balance sheets and general ledgers. The Defendant should therefore have been in a position to tell which documents are further required from the Plaintiff, but failed to do so.
(i) Further, as Cheng conceded at cross-examination, the Defendant could have asked the Plaintiff if it wished to see the Bank Account statements. It is therefore inaccurate for him to suggest that the Defendant was unable to examine the same.
(3) In light of the foregoing, the Plaintiff submits that the Defendant’s complaint, taken to the highest, is that the Plaintiff has since 15 April 2015 failed to report and provide various documentations to the Defendant “in a timely manner”, but not that the Plaintiff has failed to provide these documents at all.
(4) The Plaintiff argues that any alleged lateness is, however, water under the bridge. So long as these documents were provided to the Defendant at the end of the day, there is no longer any basis for seeking further delivery up of any of these documents from the Plaintiff.
(5) In any event, the Plaintiff denies any suggestion of lateness, and points in particular to Cheng’s inability to give any particulars of lateness and the length of any alleged delay. Paul Chan also gave evidence at trial that the income and expenditure statements were prepared and displayed in time, which was not challenged by the Defendant.
(6) As regards the Defendant’s complaint about the Plaintiff’s alleged refusal to facilitate audit work, the Plaintiff’s response is that it is no longer under any duty to assist the Defendant in its auditing matters after it has ceased to be King Ming Court’s manager since 30 November 2017. In any event, it is incumbent upon the Defendant to identify precisely what “books and records” are required from the Plaintiff to facilitate any such audit work, which the Defendant failed to.
(7) Likewise, the Plaintiff argues that it is under no duty to provide attendance time sheets, MPF and salary payment records and employment contracts of extra staff to the Defendant, as these documents concern the employment of the Plaintiff’s own employees.
(8) Finally, the Plaintiff points to the fact that the MC never alleged any breach of duty on the Plaintiff’s part or recommended another management company to the owners after 15 April 2015, which undermines the Defendant’s suggestion that the Plaintiff was in breach since around 15 April 2015. Quite the contrary, in late May 2015, 95% of owners of King Ming court voted in favour of the Plaintiff’s appointment starting from 1 February 2016. In cross-examination, Cheng also conceded that the Defendant was not aware of any breach on the Plaintiff’s part at the time.
(9) In light of the foregoing, the Plaintiff argues that the Defendant has no basis for alleging any breach of duty to account on the Plaintiff’s part and/or seeking further delivery up of the Defendant’s Documents from the Plaintiff.
63.Having considered all the circumstances, I would likewise reject the Defendant’s Specific Document Claim.
64.Insofar as the accuracy and completeness of the ledgers of the Bank Account is concerned:-
(1) I appreciate that the Ledgers of the Bank Account are not in the most satisfactory and complete state. Indeed, the joint experts expressed in their Joint Expert Report (at §6) that there are only limited supporting documents available to enable them to fully reconciliate the transactions as recorded in the Ledgers. There were also two specific entries which are not properly recorded in the Ledgers for the 2016-2017 Period (at §2).
(2) However, aside from these relatively minor discrepancies, the documentary evidence placed before me broadly supports the view that the Ledgers are largely consistent with both the bank statements during the 2016-2017 Period and the invoices issued by the Plaintiff.
(3) In any event, it appears salient to me that the Defendant has never pleaded or made any express allegations of false accounting. The Defendant has, likewise, never queried or challenged any specific items in the ledgers, or identified a larger amount which might have been included in the ledgers. Indeed, no suggestion of such kind has ever been put to Paul Chan during cross-examination to enable him to accept or refute allegations that certain accounting entries of the Bank Account are inaccurate.
(4) Cheng’s suggestion that the accounts are “groundless” is also no more than a bare assertion. His intended reliance on the evidence of an alleged person named Tang was also raised for the very first time in these proceedings. I would place no weight on it.
(5) I also agree with the Plaintiff’s submission that the letter dated 5 June 2018 from Messrs. Sam Lai & Co does not contain any suggestion that the Plaintiff has refused to provide sufficient books and records to enable it to conduct a proper audit of the Defendant’s financial statements for the financial years 2014 and 2015. However, I would not place great weight on this either, since the audit firm did point out its inability to access complete accounting books and records. The evidence in this regard is equivocal.
(6) I would likewise attach no weight to the alleged observation by Good Faith CPA Firm Company Ltd. The evidence in this regard is at best flimsy – it was never given under oath or tested in court.
(7) In these circumstances, absent any challenge to any specific items in the accounts or Ledgers of the Bank Account, I do not see any basis for ordering the Plaintiff to deliver up further documents and/or direct another account to be taken.
65.In any event, even if such accounting procedure is, contrary to my decision above, justified, I am not satisfied that the Plaintiff still currently possesses any of the Defendant’s Documents relating to the Bank Account, so as to justify an order for delivery up of documents being made against the Plaintiff.
66.In this regard, my observations above on the General Document Claim apply with equal force here.
67.I would also add the following observations:-
(1) First, even on the Defendant’s own case, the Plaintiff did prepare vouchers with supporting documents, maintained the Ledgers, and “belatedly” presented periodic financial statements, monthly balance sheets of the Bank Account, tables of deficit and loss and liabilities as well as income and expenditure statements to the Defendant. The Plaintiff has also arranged for King Ming Court’s annual financial statements for 2013 to 2016 to be audited.
(2) If, however, the bulk of Defendant’s complaint merely goes to the Plaintiff’s delay in providing the Defendant’s Documents, this affords no basis for seeking any further delivery up of documents from the Plaintiff – all that can be delivered has already been delivered.
(3) Indeed, Mr Cheung, in his oral opening submissions, admitted that most of the Defendant’s Documents as pleaded at §31 of the Defendant’s Amended Defence and Counterclaim have either already been provided to the Defendant, or proved to be non-existent. He submits, however, that other payment vouchers or supporting documents must still be returned to the Defendant to enable it to carry out audits of financial statements for the years 2013 to 2015.
(4) However, it is conspicuous to me that the Defendant has never asked for these supporting documents or vouchers from the Plaintiff throughout the years until the present litigation was commenced. Whilst one would expect the Defendant to compile a list of supporting documents required from the Plaintiff, that was never done by the Defendant either.
(5) Moreover, the Transfer List, which is contemporaneous documentary evidence, confirms that all monthly bank statements, pass books and cheque books of King Ming Court have already been duly transferred to the Defendant, a point not controverted by Cheng on cross-examination. In these circumstances, I do not see how it can be said that the Plaintiff still retains any of the documents sought by the Defendant, let alone unspecified ones.
(6) Finally, during the course of closing submissions, I asked Mr Cheung what court order the Defendant is minded to seek in relation to the Defendant’s Document Claim. In reply, Mr Cheung submits that the Defendant wishes to seek delivery up of the Defendant’s Documents, and insofar as the Plaintiff is unable to tender certain documents, to require the Plaintiff’s witness to state under oath that the Plaintiff does not possess these documents.
(7) I am not, however, persuaded that this is necessary or helpful. Paul Chan, in his viva voce evidence given on oath, has already reiterated the Plaintiff’s position that the Plaintiff no longer retains any of these documents. As such, I see no reason for making the proposed order.
68.In the premises, I am not satisfied that the Plaintiff was in breach of its duty to account. Nor am I satisfied that the Plaintiff still retains possession of the Defendant’s Documents relating to the Bank Account. Accordingly, I would also reject the Defendant’s Specific Document Claim.
D2. Defendant’s Bank Account Claim
69.I now turn to consider the Defendant’s Bank Account Claim.
70.In short, the Defendant seeks, by its Bank Account Claim, an account for “all sums received and all sums paid by the Plaintiff on behalf of the Defendant in respect of the [Bank Account] for the period from 1 February 2013 to 30 November 2017”.
71.Given my rejection above of the Defendant’s Document Claim, I do not consider there to be any basis for ordering the Plaintiff to further deliver up bank statements, accounts and/or any other supporting documents relating to the Bank Account for the purpose of enabling the Defendant to verify its past transactions.
72.I also note, pertinently, that the Defendant has never applied for an order for the taking of an account, whether in respect of particular transactions or transactions over any specified period, pursuant to Order 43 of the Rules of the High Court (Cap. 4A). This is therefore not the appropriate avenue for the Defendant to conduct any full-blown accounting procedure. Nor do I consider it appropriate for me to make any finding that the accounting entries of the Bank Account should be rectified in any particular way based on the materials before me.
73.I will thus proceed with the Defendant’s Bank Account Claim on a narrower basis, viz the Defendant seeks an account of the Funds currently standing in credit in the Bank Account, and an order for the same to be returned by the Plaintiff to the Defendant.
Basis for the Bank Account Claim
74.It is not entirely easy to pinpoint, from the Defendant’s pleadings and submissions, the precise basis upon which the Defendant is advancing its Bank Account Claim. The Defendant’s case in this regard is bound up with suggestions of contractual, agency and fiduciary duties allegedly owed by the Plaintiff, with scattered references to provisions under the BMO. It would appear that the crux of the Defendant’s case on the Bank Account Claim, when properly gathered, is as follows:-
(1) The Bank Account was opened by the Plaintiff, who was and is its sole operator and controller at all material times. The Defendant, in contrast, has no actual control over it.
(2) The salient features concerning the operation of the Bank Account include the following: (i) the Funds held in the Bank Account could only be used for strictly-defined purposes pursuant to Clauses 30(C) and (D) of the 2013-2016 Agreement, (ii) no mixing of the Funds with the Plaintiff’s own money was allowed, (iii) the Plaintiff was not allowed to spend the Funds at will, and (iv) management fees payable by owners of King Ming Court were collected by the Plaintiff as the Defendant’s agent, which would then be deposited into the Bank Account.
(3) In light of the foregoing, the Funds in the Bank Account should be treated as monies held on a Quistclose trust by the Plaintiff as trustee and/or agent for the Defendant for the specific purpose of managing King Ming Court.
(4) Such characterisation of the Funds as being held on a Quistclose trust is further reinforced by Clause 3 to Schedule 7 of the BMO (supra), which requires the Plaintiff, as manager, to maintain and use an interest-bearing account exclusively for the management of King Ming Court.
(5) In this regard, the Defendant relies on the observations of Master Bharwaney (as he then was) in Incorporated Owners of Million Fortune Industrial Centre v Jikan Development Ltd and Another (unrep., HCA 14915/1998, 26 June 2003) at §§17-18, where it was held that monies held in bank accounts opened in accordance with the requirement of Schedule 7 to the BMO, which are used exclusively for management of the respective buildings in question, are monies beneficially owned by the Incorporated Owners of the buildings which are held on either a Quistclose trust, or trusts which are analogous to Quistclose trusts such as was created in Typhoon 8 Research Ltd v Seapower Resources International Ltd [2002] 2 HKLRD 660.
(6) Additionally, the Defendant points to a letter dated 29 December 2017 from Paul Chan to the Defendant, which referred to the Bank Account as a “trust account” held on behalf of the Defendant (“管理公司信託法團銀行戶口”).
(7) Consequently, it is the Defendant’s case that the Plaintiff, as trustee and/or agent in respect of the Funds, comes under a fiduciary duty to account to the Defendant. These Funds, according to the Defendant, belong to it.
(8) However, the Defendant maintains that the Plaintiff was in breach of its fiduciary duty, which caused the Defendant loss and damage.
(9) Had accounts in relation to Funds in the Bank Account been properly rendered to the Defendant, it may transpire that outstanding sums are found due from the Plaintiff to the Defendant, which could then be used to set-off or diminish any claim the Plaintiff has against the Defendant in respect of the Outstanding Management Fees.
(10) In any event, the Funds currently held in the Bank Account should be returned to the Defendant.
75.In answer, the Plaintiff submits the following:-
(1) It is unclear what the precise basis for the Defendant’s Bank Account Claim is. There is no contractual term, whether express or implied, which requires the Plaintiff to report to the Defendant the remaining balance of the Bank Account within any particular time limit.
(2) Insofar as the Bank Account Claim is grounded upon a trustee’s duty to account for trust funds, the Plaintiff originally disputes the suggestion that the Funds are held on a Quistclose trust.
(3) Instead, the Plaintiff, relying on a passage in Building Management in Hong Kong (3rd edn) at §5.428, argues that the general principle at common law is that a person who makes payments under a contract to a company in return for future supply of services retains no proprietary rights in such payments. A contractual relation is much more likely to have been in the parties’ contemplation than a trust.
(4) The Plaintiff further argues that it is unnecessary to consider the capacity within which the Funds are held, since the parties’ contractual relationship already provides sufficient protection for the owners unless the owners need to establish a proprietary interest in the Funds: Building Management in Hong Kong (supra) at §§5.423, 5.425.
(5) In this regard, the Plaintiff prays in aid the following observations of Mason J in Hospital Products v United States Surgical Corp (1984) 156 CLR 41, which was cited by Tang PJ in Poon Ka Man Jason v Cheng Wai Tao (2016) 19 HKCFAR 144 at §15:-
“That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.”
(6) The Plaintiff also avers that it ceases to be bound by duties to account under Clauses 2 and 3 of Schedule 7 to the BMO once it has resigned as manager of King Ming Court in November 2017, as these BMO provisions are applicable only to a “manager”, which is defined under s.34D of the BMO as persons which manage the building “for the time being” and, therefore, excludes ex-managers: Universal Property Management Services Ltd v Incorporated Owners of Ying Ga Garden [1997] 4 HKC 349.
(7) In his oral closing submissions, however, Mr Lau clarifies that the Plaintiff does not object to the observations of Master Bharwaney (as he then was) in IO of Million Fortune Industrial Centre (supra). He also states that he no longer takes issue with characterising the Funds held in the Bank Account as monies held on a Quistclose trust “on a general level”.
(8) Nonetheless, Mr Lau invites the court to look at the reality of the matter. The Outstanding Management Fees, totaling roughly HK$6 million, are to be paid out of the Bank Account pursuant to Clause 30(D) of the 2016-2019 Agreement (and thereby the parties’ Agreement by Conduct). However, the sums currently standing in credit in the Bank Account add up to roughly HK$900,000 only. As such, an outstanding debt of around HK$5.1 million is liable to be settled out of the funds in the Bank Account. If so, there is no longer any sum in the Bank Account which is capable of being held on a Quistclose trust – all that remains are sums which the Plaintiff is entitled to deduct for itself for settling the Outstanding Management Fees (the “Debt Argument”).
(9) In any event, the Plaintiff denies any breach of duties in respect of the Bank Account, or that the Defendant has suffered any loss or damage as a result.
76.Upon consideration of the foregoing matters, I find that the Funds deposited in the Bank Account are held by the Plaintiff on a Quistclose trust for the Defendant:-
(1) First, there is no dispute that the Funds deposited in the Bank Account are held by the Plaintiff for the strict and specific purpose of keeping funds and meeting payments on the Defendant’s behalf for the management of King Ming Court, as required by Clauses 30(C) and 30(D) of both the 2013-2016 Agreement and the 2016-2019 Agreement (the terms of which are implied into the parties’ Agreement by Conduct).
(2) Therefore, these Funds were never intended to be given to the Plaintiff for its own use. Nor was the Plaintiff allowed to spend the same at its free will for any other purpose. In my view, these bear the very hallmarks of a Quistclose trust.
(3) Second, my view is reinforced by the terms of Schedule 7 to the BMO, which require the manager to use the bank account opened and maintained by it “exclusively in respect of the management of the building” (Clause 3(1) of Schedule 7), and “without delay pay all money received by him in respect of the management of the building into the account opened and maintained” by it (Clause 3(2) of Schedule 7).
(4) As Master Bharwaney (as he then was) observed in IO of Million Fortune Industrial Centre v Jikan Development (supra) at §§17-18, a bank account opened in accordance with these requirements further buttresses the view that the funds therein are held on a Quistclose trust.
(5) The Plaintiff, however, takes issue with the applicability of Schedule 7 of the BMO. In its submission, Schedule 7 applies only to a “manager”, which by virtue of s.34D does not include ex-managers such as the Plaintiff.
(6) However, Schedule 7 to the BMO is relevant for present purposes not because its provisions are to be directly transposed and imposed upon the Plaintiff even after its resignation in November 2017. Rather, Schedule 7 is relevant because it evidences the parties’ intention to create a trust at the time the Bank Account was opened in accordance with the requirements under the BMO, and therefore provides the crucial context against which the nature of the Funds is to be ascertained. These Funds, as reinforced by the terms under Schedule 7 to the BMO, are to be held by the Plaintiff exclusively for the specific purpose of managing King Ming Court. They are not intended to be at the Plaintiff’s free disposal. Nor can they be deployed by the Plaintiff for any other purposes. It is for these reasons that the Funds are regarded as being held on a Quistclose trust.
(7) Seen as such, any suggestion that the Plaintiff cannot be in “breach” of the terms under Schedule 7 after it has ceased to be the manager of King Ming Court is beside the point.
(8) Third, I do not consider the Plaintiff’s reliance on the passage in Building Management in Hong Kong (supra) (at §5.428) to be relevant. The Defendant’s claim regarding Quistclose trust is directed specifically to the Funds held in the Bank Account, not sums to be paid in return for the Plaintiff’s management services generally.
(9) I am satisfied that all of these, when taken together, point to the existence of a Quistclose trust over the Funds held in the Bank Account.
77.In my judgment, the foregoing conclusion is not affected by the Plaintiff’s Debt Argument (see §75(8) above):-
(1) First, the Plaintiff’s Debt Argument departs from the false premise that the Outstanding Management Fees must be settled by Funds currently held in the Bank Account, thereby resulting in an overall “debt” in the Bank Account. Whilst I note that Clause 30(D) of the 2013-2016 Agreement and 2016-2019 Agreement requires the Outstanding Management Fees to be paid out of the Bank Account (“由營運基金帳戶支付”), the Plaintiff’s claim in respect of these Outstanding Management Fees is not a proprietary one, but a pure contractual claim for the agreed sum.
(2) It follows that there is no strict requirement for the Defendant to settle any judgment debt in relation to such Outstanding Management Fees out of the Bank Account and, therefore, no necessary set-off of Funds held in the Bank Account which would have the effect of emptying any sums otherwise held on a Quistclose trust by the Plaintiff.
(3) Second, the mere fact that the Plaintiff has a right to make deductions from the Funds held in the Bank Account does not, without more, negate the existence of a trust: Joint and Several Provisional Liquidators of Hsin Chong Construction Co Ltd (Provisional Liquidators Appointed) v The Chinese University of Hong Kong and Others [2021] HKCA 1581 at §35 per Cheung JA (as he then was).
(4) I see no reason why the analysis should differ simply because the Plaintiff’s right to make deductions has accrued after it has rendered management services and issued the Services Invoices. The beneficial ownership of the Funds would not automatically vest with the Plaintiff the moment its right to make deductions accrues. Unless and until the Plaintiff has actually exercised its right to deduct sums from the Bank Account, which it has not, the Funds remain held on a Quistclose trust.
78.For these reasons, I would hold that the Funds in the Bank Account are held by the Plaintiff on a Quistclose trust for the Defendant.
79.It follows that the Plaintiff must, consistent with its fiduciary duties owed to the Defendant in respect of the Funds, (1) account for the Funds which currently stand in credit in the Bank Account; and (2) return the Funds to the Defendant (being the beneficial owner of the Funds) upon the Defendant’s demand: Typhoon 8 Research (supra) at §19.
E. CONCLUSION
80.Accordingly, I find that the Plaintiff’s claim against the Defendant succeeds, whereas the Defendant’s defence and counterclaim in respect of the Document Claim fails, but its Bank Account Claim for an account and return of the Funds currently standing in credit in the Bank Account succeeds.
81.In light of the foregoing, I propose to make an order for the grant of the following relief (subject to any submissions which parties may wish to make on the specific relief and form thereof):-
(1) The Defendant do pay the Outstanding Management Fees in the sum of HK$6,025,724.92 to the Plaintiff with interest on such sum at 1% above the prime rate of HSBC from the date of the Writ to the date of this judgment, and thereafter at judgment rate until payment in full.
(2) The Plaintiff do account for and return to the Defendant the Funds which currently stand in credit in the Bank Account.
82.As to costs, I make a costs order nisi as follows:
(1) The Defendant do pay the Plaintiff’s costs of the main claim, to be taxed if not agreed; and
(2) Insofar as the Defendant’s counterclaim is concerned, considering it was only partially successful, I will make an order that the Plaintiff pay 20% of the Defendant’s costs of the counterclaim, to be taxed if not agreed.
83.The parties are directed to file submissions on the final form of the orders to be made. The Plaintiff is to file submissions within 14 days of the date of this Judgment. The Defendant is to file any submissions within 14 days thereafter.
84.I thank Counsel for their assistance.
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(Rachel Lam SC) |
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Recorder of the High Court |
Mr Lau Ka Kin, instructed by Cheung & Yip Solicitors, for the Plaintiff
Mr Alexander Cheung, instructed by CMK Lawyers, for the Defendant
Annex
Summary of the Court’s Decision on the Parties’ Agreed List of Issues
dated 20 October 2021
AGREED LIST OF ISSUES
1. Is D liable to settle P’s invoices for (i) May 2016 to May 2017 and (ii) September to November 2017?
P states that insofar as the invoices are concerned it only disputes the sufficiency of number [of] security guards and management personnel.
P disagrees that that (sic) the sufficiency of number of security guards and management person[nel] has been pleaded.
Decision: D is liable to settle these invoices, viz the Outstanding Management Fees.
2. Is D estopped from refusing to settle P’s invoices?
Decision: in light of §1 above, this ceases to be a live issue.
3. Is P in possession of “the Defendant’s Documents” as defined in paragraph 31 of the Amended Defence and Counterclaim?
D believes that it is no longer a live issue in view of those pleaded in §29 of R&DCC.
Decision: D has failed to prove that the P remains in possession of “the Defendant’s Documents” as defined in paragraph 31 of the Amended Defence and Counterclaim.
4. Whether P has a duty to account as the management company of D, especially in respect of the trust account maintained and operated by D (sic)?
P’s position is that the so-called “trust account” should be referred to as the Hang Seng Account.
Decision: P is under a duty to account in respect of the Defendant’s Documents and Funds held in the Bank Account.
5. Had it rendered proper accounts to D if such duty is found to be owed to D to (sic) P? This included handing over of financial records and documents, allowing access to supporting documents for the verification and/or audit of financial statements prepared by P for D.
P’s position is that these have not been pleaded (or properly/adequately pleaded).
Decision: D has failed to prove any breach of duty to account on P’s part in relation to both the Document Claim and Bank Account Claim. However, P shall render an account of the Bank Account in respect of Funds which currently stand in credit therein.
6. Whether D is entitled to use the amount(s) found due to D in the accounting process to set off or diminish P’s contractual claims?
P’s position is that this has not been pleaded (or properly/adequately pleaded).
Decision: P is entitled to be paid in full the sum representing the Outstanding Management Fees, whereas D is entitled to the return of the Funds currently held in the Bank Account. In view of the different nature of these two claims, they are not to be directly set-off against each other.
7. Whether P is entitled to be paid separately, which is, not in the manner agreed (i.e. taken from the trust account) before rendering a proper account of the trust account maintained and operated by P?
P’s position is that these have not been pleaded (or properly/adequately pleaded).
Decision: P is entitled to be paid the Outstanding Management Fees from D from whatever source as D thinks fit. P’s entitlement in this regard is not dependent upon any further accounts being made.
[1] See Section D2 below.
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