Emagist Entertainment Ltd v. Nether Games (Hong Kong) Ltd and Others
Read the full judgment text of HCA 1659/2012 on BabelCite. This High Court CFI judgment.
1. This is a case where a start-up business became the victim of its own success. A few young men were involved in the development of a profitable online role playing game (“RPG”) called “Ninja Saga”, with 3 versions to be played on different platforms including Facebook, iOS and Android (“the Game”). Unfortunately, these young men had not given a lot of thought as to the structure of the business and their positions in the business venture. When the Game became successful, disputes developed be
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HCA 1659/2012 [2022] HKCFI 899 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 1659 OF 2012 _____________
(By Original Action) _____________
(By Counterclaim dated 3 May 2013 as amended on 14 July 2015) _____________
(By Re-Amended Counterclaim dated 24th December 2018) _____________ Before: Hon Lok J in Open Court Dates of Trial: 20-23, 27-29 October, 5 November 2020 Judgment: 28 March 2022 ___________________ JUDGMENT ___________________ 1.This is a case where a start-up business became the victim of its own success. A few young men were involved in the development of a profitable online role playing game (“RPG”) called “Ninja Saga”, with 3 versions to be played on different platforms including Facebook, iOS and Android (“the Game”). Unfortunately, these young men had not given a lot of thought as to the structure of the business and their positions in the business venture. When the Game became successful, disputes developed between the parties which results in the present litigation. BACKGROUND (i) The parties 2.The background of the disputes has been set out in §§2-13 of the judgment of DHCJ Woo handed down on 7 January 2013 in this case.[1] Unless otherwise indicated, reference to the Plaintiffs and Defendants in this Judgment means the Plaintiffs and Defendants in the original action and not the counterclaims. Further, all the moneys referred to in this Judgment are in Hong Kong dollars unless otherwise stated. 3.Mr Boniface Lee Shiu Yin (“Boniface”) of the Plaintiff Emagist Entertainment Limited (“Emagist”), Mr Alvin Law Chi Man (“Alvin”) the 2nd Defendant, Mr Ryan Ip Chi Yung (“Ryan”) the 3rd Defendant and Mr Terry Man Chi Wai (“Terry”) the 5th Defendant were the four persons who were involved one way or another in conceiving, creating and developing the Game. 4.I shall refer Alvin, Ryan and Terry collectively as “ART” as they adopt the same position in this litigation. 5.Mr Eric Cheng Tak Kwong (“Eric”) the 4th Defendant was invited by Boniface to join Emagist for introducing capital investment or funding, and Mr Simon Lo Kwong Man (“Simon”) the 6th Defendant also joined Emagist at the invitation of Boniface to be an administrator who was, inter alia, responsible for human resources, accounts and administration of Emagist. At all material times before the activities of the Defendants complained of and more specifically described below, Eric and Simon, together with Boniface, were the only 3 directors of Emagist. 6.Emagist was incorporated on 25 March 2009 under a different name and it changed into the present name on 19 May 2009. It has been running a business of developing and publishing online games, social games on the web and mobile platforms. The Game to be run on Facebook (“the Facebook Game”) was officially released in July 2009. “Ninja Saga” on App Store under the iOS system (“the iOS Game”) as well as on Google Play under the Android system (“the Android Game”) were also launched by Emagist as separate and distinct games respectively in May 2011 and around April 2012. Emagist had also in a joint venture with Mr Dary Lee, its Chief Technology Officer (“Dary”), developed a multiplayer war game under the title of “Age of Heroes” (“AOH”), although the game had not yet been published. (ii) The Plaintiff’s original claim (“the Original Claim”) 7.The Facebook Game became a success bringing huge profit to Emagist. While Boniface was on a business trip to Germany from 8 August 2012, planning to return on 22 August 2012, it is alleged that ART and Eric removed the source codes of the Game from the workstations in the office of Emagist and “migrated” them to the office of the 1st Defendant Nether Games (Hong Kong) Limited (“Nether”) which was incorporated at their behest only a short time before on 10 August 2012. Boniface received an email on 19 August 2012 from a staff of Emagist which informed him that there was an unscheduled shutdown of the Game. This shutdown was unusual and the informer was unable to find out the reason. Boniface cut short his trip and returned to Hong Kong, arriving at Emagist’s office at about 8 am on 20 August 2012. There, he saw Alvin, Ryan and a staff Gary Leung working on something. He also noticed that there was an external disk connected to a notebook. When he enquired, they did not tell him what they were doing. When Boniface was not paying attention to them, they left. Simon and separately Eric with a solicitor also showed up for a time. Then Boniface saw Ryan and Alvin packing up their personal belongings and left. Ryan removed the said external disk earlier seen to be connected to a notebook before leaving. All data in this notebook were later found to be deleted. 8.After initial checking by Dary, it was discovered that:
9.After leaving Emagist’s office, ART, Eric and Simon met with a number of Emagist’s employees or ex-employees at Nether’s office, informing them that Emagist would not be able to pay their wages while they were welcome to join Nether. 10.In the following days, Boniface claims that some of Emagist’s documents, such as the company kits of Funracing Investment Limited (a company wholly owned by Boniface)(“Funracing”), the employment contracts and non-disclosure agreements (“NDAs”) of Ryan, Alvin and some other employees of Emagist, were missing. These documents were locked in cabinets to which only Simon had a key. The remaining company documents were all mixed up making it very difficult to trace documents such as the employment contracts and NDAs with employees. 11.Upon further checking, it was found that:
12.In the Original Claim, Emagist claims to be the copyright owner of the Game and complains that ART, Eric and Simon, in the period between 4 and 20 August 2012, committed, inter alia, torts of infringement of copyright, trespass to chattels, conversion, detinue, breach of employment contracts, breach of confidentiality, breach of fiduciary duty and acts injurious to Emagist. Nether was also added as a defendant in the Original Claim. 13.Emagist applied successfully before DHCJ Woo for an interlocutory injunction to restrain the Defendants from continuing the alleged wrongful acts. In the judgment handed down on 7 January 2013, the judge made some serious criticisms against the Defendants, in particular ART, for taking the law into their own hands and taking advantage of a situation created by their own fault or blameworthy conduct.[2] 14.It is common ground that because of the dispute between the parties and the interruption caused by the “migration” of the sources codes, the Game lost its popularity amongst its users. Emagist estimates its loss of revenue to be about $3.8 million in the period between 15 August 2012 and 9 January 2013. (ii) The defence to the Original Claim and the Defendants’ case about the operation of the game business 15.The Defendants, in particular ART, do not dispute that they had copied (not removed) the source codes of the Game and associated databases but claim that they were entitled to do so. According to them, the game business running under Emagist (“the Game Business”) was actually operated by all of them in the form of partnership. The copyright associated with the Game belonged to the partnership. Due to Boniface’s alleged wrongful conducts, including misappropriating the funds of Emagist and excluding them from the management of the Game Business, ART, Eric and Simon, being partners of the Game Business, were entitled to take steps to protect the partnership assets by “migrating” the source codes and databases to Nether. I refer this as “the Partnership Asset Defence”. 16.As an alternative plea, ART and Simon claim that ART were the co-authors of these works. It was they who licensed Emagist to publish the Game. However, Boniface did not keep his promise of giving them the “agreed shares” in Emagist, and so they terminated the licence of allowing Emagist to operate the Game. They say that Emagist had repudiated the licence agreement and they merely took steps in the way they did to terminate the licence in August 2012. I refer this as “the Licence Defence”. 17.According to the case as pleaded by ART and Simon, the partnership agreement to develop the Game Business was made orally between ART and Boniface in a meeting in early February 2009 at the Sun Chiu Kee Restaurant in North Point (“the Sun Chiu Kee Meeting”). Under the agreement (“the Sun Chiu Kee Agreement”):
18.According to their case:
19.Relying on the Partnership Asset Defence and the Licence Defence, the Defendants deny that Emagist is entitled to bring the Original Claim against them. (iii) The counterclaim brought by ART and Simon 20.There are two counterclaims in the present case. The first one is brought by ART and Simon against Boniface, Eric, Emagist and Emagist Group Limited which is a Cayman Islands company (“Emagist Cayman”). For easy reference, I just refer this as “the ART Counterclaim” though Simon is also a plaintiff in this counterclaim. 21.The ART Counterclaim is made on the basis that the Game Business was operated by the relevant parties in the form of partnership and ART and Simon were all partners of the Game Business. 22.According to the ART Counterclaim:
23.The Game Business was operated initially in the temporary office at North Point, and ART worked on developing the source codes of the Game. Emagist later moved its office to Cyberport (“the Cyberport Office”). 24.Since about late May 2009, Eric assumed the de facto role of the chief executive officer of Emagist. Eric purchased and paid by himself a computer server for use by ART at the Cyberport office in the development of the Game. The source codes and server application of the Game set up by Ryan in his home computer were moved to such new server after moving into the Cyberport Office. 25.The Facebook Game was launched in July 2009. The Game became a success starting from the end of 2009 to early 2010. 26.In early 2011, Eric introduced a Taiwanese company Cherubic Ventures Partners, Inc (“Cherubic”) and its owner Mr Matt Cheng (“Matt”) to Emagist who expressed an interest in investing in Emagist and the Games Business. After some discussions, Matt indicated that he wished to invest in Emagist’s business. Boniface and Eric eventually agreed to sell 2.5% interest of Emagist’s business in the sum of US$1 million to Cherubic (“the Cherubic Transaction”). 27.The Cherubic Transaction was effected in the following way. Instead of obtaining 2.5% shares in Emagist, Cherubic would acquire the shares of a Cayman Islands company which would in turn own Emagist. Emagist Cayman was such Cayman Islands company. In May 2011:
28.According to the ART Counterclaim, the 1st Cherubic Agreement executed in May 2011 could not be valid because Emagist Cayman was only incorporated on 1 June 2011 and the purchase price was not paid to Emagist as a private placement to increase capital but to Boniface and Eric. In order to rectify the 1st Cherubic Agreement and to serve as a record of the purported sale of 750 shares in Emagist Cayman from Eric to Funracing, Boniface as sole director of Emagist Cayman and as a shareholder of Funracing as purchaser, signed the 2nd sale and purchase agreement dated 11 October 2011 with Eric as seller (“the 2nd Cherubic Agreement”) which provided that: (i) Funracing agreed to purchase from Eric 750 ordinary shares of Emagist Cayman at the price of US$500,000; (ii) all parties confirmed that Funracing had paid the purchase price in full and it had been registered in the Registrar of Member of Emagist Cayman as a shareholder holding 750 shares out of 30,000 issued shares. 29.In conducting the Cherubic Transaction, ART and Simon claim that there was unauthorised seizure of partnership assets on the part of Boniface:
30.As the shares transferred to Cherubic were partnership assets, ART and Simon claim that Boniface and Eric had wrongfully shared the sale proceeds of the Cherubic Transaction, which should have been part of the partnership assets. 31.They also claim that the purported allotment of the 9,800 Emagist’s shares to Emagist Cayman was void or invalid because:
32.ART and Simon also claim that: (i) Boniface had wrongfully misappropriated funds in the total sum of $4,707,869.13 held by Emagist as part of the partnership’s assets;[4] and (ii) Boniface had wrongfully excluded the other partners from running the partnership business, i.e. the Game Business. 33.ART and Simon therefore seek, inter alia, the following relief in the ART Counterclaim:
(ii) The counterclaim brought by Eric 34.The second counterclaim is one brought by Eric against Emagist and Boniface (“the Eric Counterclaim”). 35.According to Eric, Boniface introduced him to join the Game Business in May 2009. Eric would contribute his know-how in the IT business mainly on matters relating to raising capital, contacting fund managers and preparing business proposals. Boniface had agreed with Eric that he would receive a 20% shareholding in the Games Business and 20% of its profits. 36.According to Eric, Emagist was a shelf company purchased by Simon in May 2009. By that time, Simon and Eric each held 50 shares of Emagist. Eric claims that they both were holding the shares on trust for the partners of the Game Business including Boniface, ART, Eric and Simon. In May 2010, Emagist allotted 100 shares to Boniface, but the shareholders were still holding the shares on trust for the said parties. 37.Regarding the discussions leading to the Cherubic Transaction, Matt by that time indicated that he wished to invest US$1 million to buy 2.5% interest of Emagist’s business. Boniface asked Eric if he wished to sell his 2.5% shareholding in the business to Cherubic for US$1 million. Eric agreed. Subsequently, Boniface changed his mind, saying that he wanted to get 50% of the money from Matt but he did not want to sell any of his own shares. After further discussions, Boniface and Eric orally agreed that:
38.According to Eric, Boniface paid him the US$500,000 in 3 instalments but not the agreed salary. 39.On 25 June 2011, Boniface, without informing others, caused Emagist to issue 9,800 shares to one Emagist Cayman, with the result that the shareholdings of Emagist were as follows: Emagist Cayman (9,800 shares), Boniface (100 shares), Eric (50 shares) and Simon (50 shares). 40.On 3 October 2011, Boniface and Simon transferred their shares in Emagist to Emagist Cayman. There was a purported transfer of Eric’s shares in Emagaist to Emagist Cayman, but Eric disputes the authenticity of the relevant sold note and instrument of transfer dated 3 October 2011. 41.Eric also complains that Boniface had misused or misappropriated the funds of Emagist, including the payment of his own personal expenses, the making of unauthorised cash withdrawals and payment of substantial director’s fee. 42.So far as the Original Claim is concerned, Eric alleges that Emagist is not the owner of the copyright associated with the Game. ART were the authors of the copyright works and they were not working as employees for Emagist. 43.Despite the making of all these allegations, the Eric Counterclaim is narrowed down to one breach of contract claim the substance of which can be found in §119 of his pleading:
44.In the prayer, Eric claims for damages for breach of contract. The only agreement pleaded in the Eric Counterclaim is the agreement made in May 2009 when he joined the Game Business, under which he would receive 20% shareholding in the Games Business and 20% of its profits. Eric now claims for 17.5% of the profits apparently because he had sold 2.5% shares to Cherubic. 45.Looking at the formulation of the Eric Counterclaim, Eric is not seeking to challenge the allotment of the Emagist’s 9,800 shares to Emagist Cayman and the transfers of the 200 Emagist’s shares from Boniface, Eric and Simon to Emagist Cayman. In other words, Eric is acknowledging the propriety of these transactions. Obviously, Eric was more involved in the Cherubic Transaction than ART and Simon, and so it is difficult for him to challenge the allotment and transfers of shares. After all, these allotment and transfers were made to effect the Cherubic Transaction to which he agreed in substance, i.e. the sale of his 2.5% interest to Cherubic with the retainment of the 17.5% interest in the Game Business (in term of his shares in Emagist Cayman which now wholly owns Emagist). 46.Eric’s position in this litigation is far from clear. On the one hand, he seems to support the case of ART and Simon by saying that he was holding his shares in Emagist on trust for the other partners of the Game Business, yet it is difficult to understand why: (i) Eric was able to agree with Boniface alone that he would obtain 20% interest in the Game Business; and (ii) Boniface and Eric could conduct the Cherubic Transaction by themselves as if they were the only beneficial owners of the shares of the Game Business. In my judgment, the Eric Counterclaim is full of contradictions. 47.I also do not quite understand what Eric is actually claiming for in the present case. According to the pleading, he is claiming against Boniface for failure to distribute his 17.5% share of Emagist’s profits? But what are these profits? Eric is not claiming for an account of the Game Business, and so how can he know that there are profits to be distributed? Unless there is an order for split trial, assessment of damages (unlike the order for an account of the partnership business) would also be conducted at the main trial, and yet the court is not able to know what damages Eric is actually claiming for. Furthermore, assuming that the Game Business was operated by way of partnership, Cherubic is now a partner of such business. How can the court order for an account when one of the partners is not a party to the proceedings? In my judgment, all these problems are sufficient for the court to dismiss the Eric Counterclaim. In any event, even if the court has to go into the merits, I will demonstrate in the latter part of this Judgment that the Eric Counterclaim has no merit at all. 48.Based on the pleadings, the parties have agreed that there are 5 main issues which require the adjudication of the court. Before addressing these issues, I will first deal with the evidence presented at the trial. WITNESSES AT THE TRIAL 49.At the trial, Boniface, Dary and one Mr Hong Chen (“Hong”) give evidence in support of the case of Boniface and Emagist. Simon and ART give evidence for their case, together with Ms Tesla Tsang Man Wai (“Tesla”) who was at one stage the company secretary of Emagist. Eric also testifies at the trial. (i) The evidence of Boniface, Dary and Hong Chen 50.Boniface is obviously the most important witness in support of his case and that of Emagist. He provides the court with his background in the IT industry and how he became involved in the business of creation, design, development, marketing, operation and publication of online games, in particular RPGs. According to him, he was the one who conceived the idea of “Ninja Saga” themed RPG, and he also provides the court with his account about the events leading to the development and the launch of the Game. 51.Originally, Boniface used his two companies, Keyvalue Business Limited (“Keyvalue”) and Puffin Hong Kong Limited (“Puffin”) to run his business together with his business associate Mr Anthony Ip (“Anthony”). He employed ART to work on the online games through Keyvalue. Sometime in 2009, he explained to ART the concept of “Ninja Saga” and asked them to develop the game as a RPG for Facebook. In November and December 2008, Boniface, through Puffin, commissioned a team of Filipino illustrators to design and produce concept designs and digital graphics for the Ninja Saga characters. He also registered the domain name “www.ninjasaga.com” through “godaddy.com” in his personal name on 1 December 2008. The background music for Ninja Saga was commissioned from Infinity Sound Production who acknowledged that Emagist is the owner of the copyright of the music. 52.Anthony decided to withdraw from the online game business, and so Emagist was acquired to continue the operation of the Game Business. ART were formerly working as employees for Keyvalue. As Keyvalue was going to cease operation, sometime in late 2008, Boniface told ART that he intended to incorporate a company to develop a series of RPGs with the completed work of the Game as the pioneer project. He said he would employ them in that corporate vehicle with plans to expand the workforce to speed up the development of the Facebook Game. He said he would give them an equity interest in the company at an appropriate time “as a reward for their contribution”, but he never agreed what those proportions would be. 53.According to Boniface, ART became employees of Emagist in about late March 2009. As he was busy running the Game Business by that time, he did not pay attention to formalities such as the signing of employment contracts and NDAs with ART. 54.Before March 2009, Keyvalue had already started the preparation work for the Game. After the acquisition of the new company (i.e. Emagist), Boniface transferred the whole Game Business to Emagist. 55.In March 2009, he told ART that they would be paid about $5,000 per month until the launch of the Facebook Game. Due to the tight cash flow, their salary payments from March 2009 to February 2010 were irregular, and the first salary payments were only made in June 2009. Eventually they were paid at their market level by March 2010, i.e. $30,000 for Alvin, $20,000 for Ryan, and $15,000 for Terry. By January 2011, they were paid the wage differences owed to them for the period between June 2009 and March 2010, i.e. using the annual wage of $150,000 (as reported to the Inland Revenue Department) as the baseline. 56.Boniface gives evidence on the operation of the Game on the different platforms and how the source codes were stored in the computer servers. He also explains how the Game generated profits for the Game Business, and how the Game became successful. 57.According to Boniface:
58.Before profits could be generated from the Game, Boniface paid the operational expenses of the Game Business. ART did not make any financial contribution to the Game Business. According to Boniface, ART were not required to work from home or purchase their own equipment other than for their own convenience. In fact, Boniface and Emagist bought laptop computers for their use from time to time. 59.Boniface denies that the Sun Chui Kee Meeting had ever taken place. ART were only the employees of Emagist, but he promised them and Simon (who was in full-time employment unrelated to Emagist and had paid about $99,000 for expenses of Emagist at the early stage of the development) to give them shares in the company at appropriate time as a discretionary reward for their contributions. In fact, they got other discretionary rewards such as the use of company cars, housing allowances and year-end bonuses. 60.In support of his case that ART were Emagist’s employees, Boniface produces the employer’s tax returns, ART’s MPF documents, auto-pay documents and Emagist’s general account ledgers to show that they were employees who received salaries from Emagist from time to time. 61.On the other hand, Simon and Eric were not Emagist’s employees. Simon was Boniface’s friend and he assisted Boniface in dealing with some of the administrative matters of Emagist. He also agreed to be a nominal shareholder and director for Boniface from May 2009 onwards. In July 2012, Boniface offered him a job in Emagist with a monthly salary of $20,000. Boniface also knew Eric. He agreed to help Boniface to move his business operation to the Cyberport Office to enjoy rent-free premises as part of its incubation programme. He also agreed with Boniface to raise capital for the Game Business in return for 20% interest in the Game Business. 62.Boniface also testifies on the following matters:
63.In response to the allegation of misappropriation of funds, Boniface claims since he was the substantial owner of Emagist, he had the power to use the funds of Emagist for his personal purposes. In any event, most of the “misappropriations” complained of by ART, Simon and Eric were actually proper business expenses of Emagist and repayments of the loans he previously advanced to Emagist. 64.Boniface also gives his version about the Cherubic Transaction. According to him, it was Matt who suggested that a Cayman Islands company should be acquired to hold the Game Business, both for reducing tax liability and facilitating the possible listing of the Game Business. 65.Boniface is a person with some sophistication, and he has had considerable experience in the computer gaming industry. He knows how to make a computer game attractive to the users, how to manage a team to develop a computer game and how to attract investors to invest in such kind of business. The fact that he could persuade Cherubic to invest US$1 million for just 2.5% interest in the Game Business speaks for itself. 66.Though one may take the view that he was not rewarding ART well enough, given the efforts made by them in developing the Game and their sacrifice in not able to obtain their “monthly payments” regularly in the early stage of the Game Business, I accept that Boniface genuinely believed that the Games Business was his own business and he therefore ran the business as the only “boss”. In fact, Boniface was prepared to honour his promises to his other business associates. Even though there was no written supporting document, Boniface was prepared to accept that Eric had 20% interest in the Game Business. For the Cherubic Transaction, he gave Eric a substantial sum of US$500,000 for the sale of his 2.5% interest to Cherubic, and he allotted the remaining 17.5% shares of Emagist Group to Eric upon the completion of the Cherubic Transaction. At least Boniface honoured his promise to Eric, though there is a dispute as to whether Boniface had also promised to give him the agreed salary of US$120,000. 67.There are some attacks on the credibility of Boniface’s evidence:
68.I do not accept that these challenges undermine the credibility of Boniface’s evidence. At the trial, Boniface frankly admits that ART were not receiving their wages on a regular basis at the early stage of the business. Further, whether Boniface was the sole owner of Keyvalue is quite irrelevant, as there is no serious dispute that ART were the employees of Keyvalue at the time and Boniface was the “boss” to them when they were working in Keyvalue. Given that there would be a lot of works for ceasing an operation and starting a new one, the actual timing as to when ART officially started to work for the new business is not a material consideration here. As to whether there were employment contracts and NDAs signed between Emagist and ART, it is again not a main consideration as the court has to look at the substance and not the form of the relationship. 69.Boniface disputes that the Sun Chiu Kee Meeting had ever taken place. According to him, he only talked about ART’s positions in the new business in the end of 2008 and March 2009, and not February 2009 as alleged by ART. I will resolve this important factual dispute in the latter part of this Judgment when I address the question as to whether the Game Business was a partnership business. 70.Dary and Hong also testify in support of the case of Boniface and Emagist. They testify on matters relating to the operation of the Game Business and the duties and the works of all those involved in Emagist. They confirm that Boniface was the “boss” running the business of Emagist. Since they were not privy to the discussions between Boniface, ART and Simon, their evidence cannot offer direct assistance to the court in deciding the true relationship between the said parties. (ii) The evidence of ART, Simon and Tesla 71.I would deal with the evidence of ART together, as they adopt the same position in this litigation and their evidence is more or less the same. The main part of their evidence is about the Sun Chiu Kee Meeting. 72.According to them, in that meeting:
73.After some discussions, Boniface and ART agreed on the following:
74.There is a dispute as to whether ART did make any subsequent enquiries with Boniface relating to the share distribution of the partnership. According to them, Boniface had spoken to them (and later even to Simon) individually on different occasions on matters such as the valuation of the Game Business and the possible distribution of shares or share certificates to them. Valuation of the Games Business in the sum of US$50 million was mentioned, and Boniface also told Ryan and Terry that they would be given about US$5 million and US$3 million worth of shares respectively. After learning that Boniface, Eric and Simon were the directors and shareholders of Emagist, they did not object. They consider it an interim measure and the shareholders of Emagist were holding the shares on trust for all the partners including themselves. 75.ART later learned about the possible investment by Cherubic in the Game Business. However, there is no evidence to suggest that ART and Simon had taken any active or serious steps to find out more information about the Cherubic Transaction. 76.Being persons who are more interested in computer codes than business operation, it seems quite clear to me that ART (and indeed Simon though he was not involved in developing the Game) had not given much thought about their positions in case that the Game Business became a success. As to whether ART had made the Sun Chiu Kee Agreement with Boniface, I will deal with such issue in the latter part of this Judgment when I address the question as to whether the Game Business was operated in the form of partnership. 77.However, I must say here that, with all the sympathy I have with these young men, the problem with their case is that they were quite contended for Boniface and Emagist to run the whole Game Business without their involvement. More importantly, they were quite happy for Boniface to decide what they were entitled to in term of remunerations or rewards for their work. This was the case even when there was investor joining the Game Business after the Game became successful. Their conducts throughout the years have seriously cast doubt on their evidence as to whether the Sun Chiu Kee Meeting did in fact take place, or if there were indeed such meeting, whether the terms of the Sun Chiu Kee Agreement were the ones as alleged by them. The objective facts of this case are certainly more compatible with Boniface’s case that the Game Business was his own business, with promises given to these young men that rewards (including shares of the Game Business) would be given to them in the case that the business was successful. The facts do not support that the Games Business was a joint enterprise involving these young men as partners. 78.Tesla also testifies in support of the case of ART and Simon. She knew Boniface for quite some time. She operated an accounting business. In about May 2010, Boniface invited her to assist Emagist in the filing of statutory documents with the Companies Registry. She only worked with Boniface and not the others, and she had reminded Boniface about the requirement of holding AGM for Emagist. Boniface subsequently invited her to be a consultant checking and advising him on the books and accounting records of Emagist. In March 2011, she was formally appointed as the company secretary of Emagist. 79.Tesla testifies on the accounting records of Emagist in particular the funds allegedly misappropriated by Boniface. She had not seen any board resolution authorising these payments. She also tells the court the works she did in the Cherubic Transaction, including assisting Boniface in setting up Emagist Cayman and preparing the relevant documents for execution by the parties. In March 2012, she ceased to be the company secretary of Emagist. She was not happy with the way that Boniface conducted the business operation of Emagist, treating the company as his own without bothering to consult the other shareholders or directors. 80.When arrangements were made for the setting up of Emagist Cayman, she heard Boniface mentioning something like he, ART and Simon were cooperating together to make a game, and to create or run a company (“搞一間公司”); and that he used the word “partner”. 81.Tesla is a more independent witness. I accept her evidence that Bonfire had run the Game Business as if it was his own business and that he did not pay attention to some of the formal requirements for the operation of Emagist which is a limited company. However, since she was not privy to the discussions between the relevant parties, her evidence is of limited assistance. Further, one may use the term “partner” loosely without having much thought about its legal meaning, and so one cannot just rely on the label used by the parties to determine the legal relationship between them. After all, the court looks at the substance rather than the form. (iii) The evidence of Eric 82.Eric is a strange witness. In fact, I am not clear about his stance in the whole case. On the one hand, he stands on the side of ART and Simon and agrees that: (i) the Game Business was operated in the form of partnership; and (ii) ART, Boniface, Simon and Eric were all the partners of the Game Business. On the other hand, he dealt with the Games Business as if he and Boniface were the only owners. According to his evidence, Boniface agreed to give him 20% interest in the Game Business. Yet, he did not bother to check whether the other “partners” agreed to such arrangement. What alarms me is that he and Boniface just negotiated the whole Cherubic Transaction without consulting ART and Simon and pocketed the proceeds of sale of his 2.5% interest in the Game Business to Cherubic. Further, if that was a sale of only his 2.5% interest to Cherubic, why was Boniface entitled to half of the proceeds? Even if Boniface were entitled to half of the proceeds, why didn’t he and Boniface account to the other “partners” for the proceeds? 83.The whole Cherubic Transaction was conducted with the eyes open on the part of Eric, and he cannot provide any satisfactory explanations to all these questions. I therefore have serious reservation about the truth of his evidence. It is clear that he has grudges against Boniface and that is why he is prepared to stand on the side of ART and Simon, whereas in fact he conducted the Game Business and the Cherubic Transaction as if he and Boniface were the only owners of the Game Business. (iv) The unexplained features of the Cherubic Transaction 84.There are also many doubts about the Cherubic Transaction itself. Cherubic was investing a substantial sum of US$1 million in order to obtain a tiny share (2.5%) of the Game Business. Based on such purchase price, the valuation of the whole Game Business should have been US$40 million at the time of the transaction. Yet, there is nothing to indicate or support such substantial valuation at the time of the transaction. Furthermore, for an investment of such scale, there should have been due diligence carried out to investigate the value of the Game Business. The most important asset of the Game Business was obviously the Game itself, and yet there was nothing done to ensure that Emagist was the proper owner of the copyright of the Game. In fact, the investor should have demanded written documents, such as agreements between Emagist and the original authors of computer codes, music and other drawings associated with the Game, to confirm that Emagist was the owner of the copyright of the Game, which was the most important asset of the Game Business at the time. At the trial, even Boniface and Eric cannot provide a satisfactory explanation as to why they were able to persuade Cherubic to invest such a huge sum of money without the supply of these basic documents. Imagine that Cherubic were to demand for the proper due diligence documents, which should have been the case, the differences between the parties might have been resolved much earlier without resulting in legal proceedings. 85.Having addressed the evidence at the trial, I now deal with the 5 agreed issues which require the determination by the court. ISSUE 1: RELATIONSHIP BETWEEN THE PARTIES AND THE FORM OF BUSINESS ENTITY OPERATING THE GAME BUSINESS 86.Obviously, the first and indeed the most important issue to be determined is the legal relationship between the parties and whether the Game Business was operated in the form of partnership. All the other issues depend on the finding in this first issue. 87.Under s 3(1) of the Partnership Ordinance (Cap 38), a partnership is the relation which subsists between persons carrying on a business in common with a view of profit. 88.In the case of partnership:[5]
89.Subject to any contrary agreement, s 26 of the Partnership Ordinance provides some rules governing the interests and duties of partners. For our present purposes, the relevant ones are:
90.The evidence of Boniface, ART, Simon, Eric and other related persons has been summarised above. 91.Obviously, different persons may have different perceptions about their business relationships with others. But in considering this particular question, the court has to look at all the circumstances of the case, in particular the objective conducts of the parties, in deciding whether the business in question is operated by the relevant parties in the form of partnership. 92.In answering the question in the present case, I do not consider that the employer’s tax return, the MPF documents, the auto-pay documents or the account ledgers are of much relevance here. The court will look at the substance and not the form of the relationship. As I see it, these documents were executed and prepared by the parties (or the supporting staff) without giving much thought to the exact legal relationship between them. After all, a partner can be both a partner and employee at the same time, and so I do not find that these documents can shed much light on the true legal relationship between the parties. 93.Neither would I attach much weight on the documents relied on by ART and Simon such as the application form and press release for the IncuTrain Programme. Given the purpose of these documents (i.e. made for the purpose of applying for rent-free premises in Cyberport), there might be exaggeration in the description of the roles of ART in the Game Business. 94.I also would not place too much weight on the following matters: (i) Boniface was the one who was in control of the bank accounts; or (ii) Boniface made most of the business decisions relating to the daily operation of the Game Business. As shown in the facts of Purdon v Muller[9] and Chahal v Mahal[10], it is quite possible for some younger and less experienced partners to rely on the skill and experience of other partners in running the partnership business and making most of the business decisions. These factors alone are not determinative of the true relationship between the parties in the operation of the business. 95.Since there were documents to support the payments of regular salaries to ART from Keyvalue and there was at least contract of employment between Keyvalue and Terry, there is no serious dispute that ART were working as employees for Keyvalue before joining Emagist. In fact, it would be quite impossible for ART to argue that they were running the business operated by Keyvalue together with Anthony and Boniface as partners. If the parties were to continue the same relationships after the transfer of the game business to Emagist, then they were employees of Emagist. 96.According to the ART, the relationship between the parties changed after the making of the Sun Chiu Kee Agreement. Hence, the first question I have to decide is whether the parties had made the Sun Chiu Kee Agreement. On the balance of probabilities, I have to find that the parties had made no such agreement. The reasons for me in saying so are as follows. 97.First, if one is to join a business as a partner, I would imagine that, even for a lay person, the first thing that person would ask is the percentage of shares they would get in the partnership or the joint venture business. According to ART, they would not get anything until profit was generated from the business. Under such circumstances, one of their main concerns should have been the shares they would get in the business. This would have been a very relevant factor for them to decide whether it was worth for them to work without remuneration making their contributions to the business. Further, given that Boniface was their former “boss” and “employer” and his experience in running online game business, they would not have seriously expected that they would be equal partners with Boniface all obtaining the same shares. This was highly unlikely given the particular circumstances facing the parties by that time, and so it made it more important for them to have ascertained their shares before deciding whether to join such business venture. One cannot simply justify ART’s behaviour by putting forward a lame excuse that they are simple and naïve young men. The fact that they had not done so certainly supports Boniface’s case that the rewarding of shares would only be part of the employees’ incentive scheme which was to be made at the sole discretion of their employer. 98.According to ART, they could discuss this matter later when they had a clearer picture about the prospect of the business. Further, ART and Boniface were friends and so they trusted that Boniface would allot shares to them in due course. Alvin and Ryan were also the administrators in the Game’s Facebook account, and so they had something to hold on to if Boniface were to refuse to discuss the matter with them. In any event, further discussions would have to be carried out when there were investors joining the partnership at a later time. 99.However, even this cannot explain why ART did not bother to find out more about the shareholding of the partnership when Simon and Eric later joined the Game Business. It is even more absurd when ART and Simon did not take any serious or positive steps to find out more about the shareholding of the alleged partnership when a substantial investor, Cherubic, joined the Game Business. ART may be naïve and simple persons and they might not be interested in the daily operation of the Game Business, yet it cannot explain why they did nothing and just allowed Boniface to run the Game Business as if it was his own business and to make all the commercial decisions relating to the new investment which would have a significant impact on their alleged interests in the business venture. In particular, Simon was partly responsible for taking care of the administrative matters in the office. It is trite law that these subsequent conducts cannot be used as an aid to the construction of any agreement made in the Sun Chiu Kee Meeting or otherwise, but they can assist the court in deciding whether agreement on a certain point had in fact been made. 100.Ryan says in his testimony that Boniface made a promise to him sometime in May 2010 that he would receive 9% shareholding in Emagist, whilst Alvin, Terry and Simon would get 14%, 7% and 5% respectively. Alvin and Simon also confirm the making of such promise. But if these conversations had indeed taken place (which I do not accept), why were they prepared to accept such allotment suggested by Boniface without any question? It is as if Boniface was the only person who could decide such issue. Such arrangement is certainly consistent with Boniface’s case that the allotment of shares he promised to ART was only discretionary and was part of the work incentive scheme. 101.Second, if ART had made the Sun Chiu Kee Agreement with Boniface, it is hard to explain why they had not pressed Boniface for distribution of profits from time to time after the Game became successful. 102.Though it is faintly mentioned in the supplemental witness statement of Alvin that they did raise such matter with Boniface[11], the fact shows that they did not take any active steps to pursue the matter for quite a period of time and all they got were some “monthly payments”. Even if these “monthly payments” were not made on a regular basis at the early stage of the Game Business, Boniface increased the “monthly payments” to ART after the Game became successful and paid back all the outstanding “monthly payments” to them. Boniface also provided them with some additional bonuses and fringe benefits, such as the use of company cars and the provision of housing allowances, when the Game became more successful. 103.Some observations can be made about these arrangements:
104.The second observation is more telling when, according to ART’s case, Boniface told Ryan and Terry that the valuation of the Game Business was US$40 million, and yet the evidence shows that ART and Simon were quite contended with what they got even if there were allegedly partners of such profitable and valuable business. 105.In my judgment, what happened between the parties support Boniface’s case that he had only promised to give ART and Simon incentive bonuses including allotment of company’s shares when they made contributions to the Game Business and the same became profitable. There is nothing unreasonable or insensible about such kind of arrangement, in particular when there was great uncertainty about the prospect of the Game Business back in early 2009 and Boniface, as further elaborated in the latter part of this Judgment, had to bear the commercial risk of the business operation alone. 106.There is also another inconsistency in the formation of the ART Counterclaim. In their pleading, it is alleged that none of the co-authors of the copyright works of the Game had received any remuneration or reimbursement of expenses from any person for the creation of the Game.[12] That may be an allegation forming part of the Licence Defence. But if that was the case, how can one explain these “monthly payments” to ART? If these were distributions of profit, it is difficult to see why the other partners were not involved in deciding whether these payments should be made or not. 107.Third, though the sharing of losses is not a necessary ingredient for a partnership, it is a factor to be considered in determining whether there is indeed a partnership. 108.It is clear that there were costs associated with the operation of the Game Business, for examples: (a) the wages of Stephanie, Leung Ting and Cheung Pok Yin, who all joined Emagist in about June or July 2009, adding up to about $26,500 a month; (b) the cost of the Filipino team adding up to about $57,000 in 2009; (c) the monthly management fee for the Cyberport Office in the sum of $2,000; and (d) the advertising costs for the Game. One must also not forget that when the Sun Chiu Kee Agreement was allegedly made in February 2009, there was no plan, or at least no guarantee, that Emagist would be able to move into the rent-free Cyberport Office. If not, rental expenses would be a very substantial burden on the Game Business. 109.There is a dispute as to whether Boniface had personally paid as much as $910,885.93 for the expenses of the Game Business from March to December 2009. I am not prepared to conduct a microscopic examination of the Emagist’s account in order to decide whether it was true or not. For the purpose of the present case, it suffices for me to say that there was a real risk in early 2009 for the Game Business to be operated at a substantial loss. It does not appear to me that ART and Simon, given the uncertainties and their limited financial means and experience in running business operations, were prepared to bear the financial risk of running the Game Business. There was no guarantee that the Game would succeed. In fact, previous experience of the parties clearly demonstrates the difficulty in establishing a successful business venture in such competitive field. 110.Mr Chau, counsel for ART and Simon, submits that for ART, instead of making financial contribution as capital, working without remuneration was their contribution to the partnership.[13] This is what Eric describes as the “bootstrapping” model, relying on the low operation costs to sustain the development of the Game. In particular, there was some income from the previous game that they were working on, i.e. “鬥地主” (the Landlord Game), which might be used to support the early operation. 111.Nevertheless, one cannot judge the situation with the benefit of hindsight. One must have to assess the parties’ intentions given the circumstances facing them at that time. It is also not the task of the court to revise the agreed arrangement between the parties in case that the arrangement subsequently turns out to be unfair to a particular party. Based on the facts of the present case, it is more likely that ART and Simon were prepared to work with low and unsteady salaries at the early stage of the operation, with the expectation of getting shares in the Game Business if it turned out to be successful. That also explains why they were so submissive to Boniface and indifferent to the arrangements for the admission of new investors. 112.Fourth, the system of work adopted at Emagist suggests that ART were more likely working as employees rather than partners of the Game Business:
113.Undoubtedly, it is possible for a partner to be an employee of the partnership at the same time. But if ART and Simon were indeed equal partners, why did they have to obtain leave from Boniface for their absence from work? It is one thing for a junior and inexperienced partner to rely on a more experienced partner to make business decisions for the partnership, it is another for a person to work like an employee seeking permission from their employer for their absence from work and taking instructions like a staff of a company. In particular, the evidence shows that, given the nature of their works, it was not necessary for ART to work at Emagist’s office at fixed hours. Though the court would look at the substance and not the form in determining the legal relationship between the parties, the system of work and ART’s position in Emagist’s office are more consistent with the case of Emagist and Boniface that ART were just employees with the prospect of getting bonus shares in the future. 114.Fifth, the shifting positions of ART and Simon as shown in their pleading also undermine the credibility of their claim. 115.Their pleading had been substantially amended in mid-2015. Prior to the amendments, their evidence (as adduced in the earlier affirmations and their first set of witness statements) was that Boniface promised to give them the “agreed shares” in the “new company” to be formed, i.e. Emagist.[14] At best, they claimed they were “consultants” who were not paid anything (in some cases, very small sums of money) until 2010 or after; and they did not become shareholders until 2011. Their contention was that ART were the true authors of the Game and had every right to take it away from Emagist; that they were not given the “agreed shares” in the “new company” that they were promised; and that Boniface was using Emagist’s funds for his personal expenses. 116.In the amendments made in 2015, they claimed, for the first time, that they were actually partners since at least February 2009 resulting from a discussion in the Sun Chiu Kee Meeting. But even on their case, the terms for the establishment of the partnership are unclear. As only ART and Boniface were at the meeting, it is also not clear how such terms of the alleged partnership agreement were conveyed to Eric or Simon. 117.It is certainly unclear in the ART’s pre-amended case as to whether Boniface had made a promise to give them specific percentages of shares in the corporate vehicle. At the trial, ART maintain that their respective shareholdings in the partnership had not been discussed in the Sun Chiu Kee Meeting. 118.As I see it, the pre-amended case was formulated very much based on the Licence Defence. ART maintained that they were only consultants. Being the original authors of the sources codes, they were the owners of the copyright of such works. However, it was unclear whether the Licence Agreement was made in the Sun Chiu Kee Meeting or not. If it was indeed so made in the meeting, what was actually the relationship between Boniface and ART after the meeting? Were they partners? Or were ART independent contractors or employees? Or were Boniface and ART two separate group of entities engaging in a joint venture? 119.Though the Partnership Asset Defence and the Licence Defence are alternative pleas to the Original Claim, the two defences are in substance inconsistent. In the case that the parties had made the Sun Chiu Kee Agreement and that the Game Business was a partnership, then the copyright of the Game, being its most important asset, must belong to the partnership. However, it is a completely different story under the Licence Defence. As mentioned above, it is also their case that ART were the owners of the copyright of the source codes of the Game. They granted the licence to Emagist to run the Game for free. However, as they were not given the “agreed shares” as promised, they claim that they had the right to terminate the licence. This is different from the contention that Boniface and ART were running the Game Business together as partners. Furthermore, if Emagist had only a licence to operate the Game, Emagist had no valuable asset at all. Under such circumstances, what was Emagist actually selling to Cherubic in return for US$1 million? 120.It is legitimate for parties to plead alternative cases. However, there are only one set of true facts. What were actually discussed and agreed in the alleged Sun Chiu Kee Meeting? Was the word “partnership” mentioned? Was the term “licence agreement” used? In my judgment, there is no detail in ART’s evidence on these issues, and such confusion and alternative pleas certainly undermine the credibility of their case. 121.There are also uncertainties as to how Simon later joined the alleged partnership. There is no dispute that Simon paid for some of the expenses of the Game Business in the early stage from April to August 2009 in the sum of $99,154.10, mainly for the fees paid to the Filipino team for the creation of the drawings of the characters of the Game. It is the case of ART and Simon that there was an agreement between Boniface and Simon for the latter to join the partnership, and the expenses he paid would be his capital contribution. That was also why Simon agreed to work part-time in Emagist taking care of some of the administrative works. But according to Boniface, Simon only attended Emagist’s office on a part-time basis, once every two weeks, until July 2012. 122.Despite the assertion of ART and Simon, I cannot quite understand how Simon was able to join the alleged partnership without consulting the other “partners”. Furthermore, it is quite clear that the “contribution” of Simon was quite minimal in the term of the overall scheme. One would not have expected him to be an equal partner like Boniface, and so it begs the same question as to why he had not discussed the shareholding of the alleged partnership when he joined the Game Business. Furthermore, in one of the emails Simon sent to the accounting staff of Emagist, Simon himself described the sums he paid as “disbursement”. Though there is some confusion as to whether Emagist had repaid such “disbursement” to Simon, one wonders why he would have described these expenses as “disbursement” and not capital contribution. 123.In support of the partnership plea, ART rely heavily on the effort and time they had spent in developing the Game. Even on the Boniface’s case that they would only get $5,000 a month before the launch of the Game, such payments were not made on a regular basis. With the terms of employment allegedly offered by Boniface, ART would not have agreed to help Emagist to develop the Game. They would only have agreed to do so if they were partners of the Game Business. According to Mr Chau, no fixed monthly salary is a strong indicator that the ART were partners of the Game Business. Coupled with the fact that Boniface had little control over the actual works performed by ART, ART could not be employees of Emagist. 124.ART and Simon also rely on some minor points:
125.I do not see how the contents of these documents can advance their case any further. As I have mentioned many times before, these documents may not reflect the true relationship between the parties and the court would look at the substance and not the form in deciding the legal arrangement through which the parties operated the Game Business. Furthermore, lack of control over the works of ART is not material consideration here. For example, someone can be working as an independent contractor for another person who has no control as to how the contractor performs their works, but that does not make that contractor a partner of a joint venture business. Cases such as Poon Chau Nam v Yim Siu Cheung[16] and Ready Mixed Concrete (South East) Ltd v Minister of Pensions & National Insurance[17] are therefore of limited assistance in this case. In any event, I have already explained above as to why I say that the system of work and ART’s position in Emagist’s office do not support that they were partners of the Game Business. 126.What is now left is the allegation that ART and Simon would not have made such contributions to the Game Business if there were not partners. With all the sympathy I have with them, getting a much larger share in the Game Business (as they had already obtained some shares in Emagist Cayman which now owns the Game Business) may only be their wishful thinking. They expected that, given their efforts made to the development of the Game, they should have obtained more shares in the Game Business. That did not materialize and so they turned their back against Boniface and took the Game away from him. 127.As I have mentioned before, one cannot judge the parties’ earlier intentions by reference to the results. The Game Business was an uncertain if not risky business in the initial stage of the development in early 2009. There was no guarantee that the Game would be a success. In fact, most of the start-up operations may not even be able to get off the ground. No matter how small was the initial operation costs, there would still be expenses that need to be borne by the Game Business. Liabilities would have to be incurred. If one were to turn the clock back to early 2009, I do not think that ART would have agreed to bear the risks and liabilities associated with the operation of the Game Business. Hence, they agreed to accept lower salaries at the outset, perhaps even not paid punctually at the end of each month, with a view to get bonus shares in the future. The opportunity costs to them might not be that high as suggested by Mr Chau. They expected Boniface would have treated them better, but that may not always happen in real life. 128.Boniface may be a very good “sweet talker”, as shown by his ability to convince Cherubic to invest such substantial sum of money in the Game Business. He must have given some expectations to ART and Simon (whether in the casual meeting in Sun Chiu Kee Restaurant or elsewhere), but judging from the objective facts of the present case, I have to find that the promise was nothing more than one agreeing to give them discretionary bonus shares in case that the Game Business was successful. 129.In my judgment, the Game Business was very much Boniface’s business. He had to operate and bear all the responsibilities and liabilities associated with the Game Business. Despite the promise to give ART and Simon discretionary bonus shares, Boniface was still the “boss”, and it was only he who could determine various important matters relating to the ownership of the Game Business, such as the allotment of discretionary shares to employees, the introduction of new investors and shareholders into the Game Business and the corporate structure for the operation of the Game Business. That also explains why ART and Simon were so submissive to Boniface and were indifferent to the details of the Cherubic Transaction. For all these reasons, I find that the Game Business was not operated in the form of partnership as alleged by ART and Simon and they were not partners of such business. 130.Shortly before the trial, there was a late application by Emagist to adduce some new documents in support of its case which was opposed by the other Defendants. As I do not need to rely on these documents in making the above finding, the late application now becomes academic. ISSUE 2: OWNERSHIP OF THE COPYRIGHT OF THE GAME 131.There is no serious dispute that ART were the ones who wrote the source codes and the database materials of the Game. Despite that, I find that the copyright of these works belongs to Emagist. 132.First, s 14 of the Copyright Ordinance (Cap 528) provides that the employer is the first owner of any copyright in the work of its employee made in the course of the latter’s employment, subject to any agreement to the contrary. As I find that ART were employed by Emagist when they wrote the sources codes and the database materials for the Game, it follows that such works were made by ART in the course of their employment. 133.S 15 of the Copyright Ordinance also provides for the ownership of commissioned works. So even if ART were working as “consultant” or independent contractor for Emagist, which I do not find it to be the case, the copyright of the source codes and database materials still belongs to Emagist because these were commissioned works. For the copyright relating to the music and the graphic drawings of the Game, it belongs to Emagist as it was the entity which commissioned the works. The original authors of these works also acknowledged the same. 134.Second, ART raised no issue when the investors subsequently joined the Game Business. The Game was the most important and valuable asset of the Game Business. ART should have known that whoever invested in the Game Business was also purchasing the copyright of the Game, otherwise there would have been no point in making the investment. If ART were to consider themselves the owners of the copyright of the Game, they should have demanded their participation in the transaction or requested for rewards resulting from the new capital injected by the new investors in particular Cherubic. In my judgment, their inaction or indifference was an implied acknowledgement by them that the copyright of the Game actually belonged to Emagist. 135.As I see it, the purported justification of ART and Simon to “migrate” the source codes and databases will still run into difficulties even if the Game Business were initially operated in the form of partnership and ART were the partners concerned. 136.Mr Chau has referred me to the following cases with a view to establish various propositions:
137.As I see it, there is a serious confusion in the formulation of ART’s defence and counterclaim. On the one hand, they seem to suggest that the partnership still retains the ownership of the assets of the Game Business. That is why they say that the copyright of the Game and the money misappropriated by Boniface from Emagist still belong to the partnership. On the other hand, they seem to accept that the assets of the partnership have already been passed to Emagist, and that is why they claim that Boniface, Eric and Simon were holding the Emagist shares on trust for them. Being the beneficial owners of the shares, ART and Simon claim that they have the right to ask the court to make orders relating to the internal affairs of Emagist such as the allotment of shares. 138.Such confusion would have serious implication as to the relief which is to be granted by the court if there were indeed a partnership. Assuming that the court were to order an account of the partnership, should the court treat the assets of the partnership such as copyright of the Game as belonging to the partnership or Emagist? That may have a lot of implications as to issues such as: (i) whether ART and Simon would have a valid defence to the Original Claim even if there were a partnership; and (ii) whether ART and Simon would have the locus to bring a claim against Boniface for the account of Emagist’s money allegedly misappropriated by Boniface. Unfortunately, the legal team of ART and Simon have not given a lot of thought on this particular issue. 139.In my judgment, on the facts of the present case, it is quite impossible for ART and Simon to argue that the partnership (even there were one) still retains the ownership of the copyright or that the Game Business had not been fully transferred to Emagist. One of the material distinctions between the facts of the present case and those in the authorities cited by Mr Chau is that there is a new investor in the Game Business. In acquiring the interests of the Game Business, the new investor Cherubic was acquiring the shares of Emagist, though indirectly through Emagist Cayman. Although the Cherubic Transaction was effected without much of their involvement, ART and Simon should have known that the Cherubic Transaction involved the transfer of Emagist’s shares. Under such circumstances, how can they now say that Emagist is not the owner of the copyright of the Game? Are they seriously suggesting that the investor was purchasing the Game Business without the copyright of the Game? By reason of their conduct, ART and Simon must have accepted that Emagist is the copyright owner. 140.It is therefore clear that the Partnership Asset Defence has no merit. Since I find against the existence of partnership, Emagist is the copyright owner of the Game. Even in the case of a partnership, the copyright of the Game must have belonged to Emagist and not the partnership. At most, it may be argued that the shareholders of Emagist are holding the shares on trust for the partners, but it cannot provide ART with a defence to the Original Claim. 141.In his submissions, Mr Chau further argues that there is an implied term in the partnership agreement for ART to take reasonable steps to protect the partnership assets. Since Boniface had wrongfully excluded ART and Simon from the management of the Game Business and failed to account to them for their shares in the Game Business, they claim that there had the right to take away the partnership asset from the control of Boniface. 142.However, even if there were a partnership agreement which I do not accept, there is simply no room for the court for implying such term. There may be many ways (for example through instituting legal proceedings) for ART and Simon to protect their rights, and there is no business efficacy for them to do something to hurt the alleged partnership as a whole. Further, apart from ART, Simon and Eric, Cherubic is also arguably one of the partners of the alleged partnership. How could they do something which adversely affected the interests of Cherubic? Hence there is no defence whatsoever to the Original Claim even if ART and Boniface had made the Sun Chiu Kee Agreement back in February 2009. 143.Again the Licence Defence has no merit. In the case of a partnership, the copyright of the Game must belong to the partnership. As submitted by Mr Chau himself in his written opening submissions[22], software developed for the purposes of the partnership business is likely to be regarded as a partnership asset. Even in such scenario, as I have explained above, the copyright must have been transferred to Emagist after it was acquired to operate the Game Business. Indeed in the source codes prepared by ART themselves, it was expressly acknowledged that the copyright of the Game and the source codes belonged to Emagist.[23] 144.Further, if ART were still the owner of the copyright, it begs the question as to: (i) why Terry had to sign a NDA with Emagist relating to the use of confidential information; (ii) why ART, equipping with the powerful weapon of revoking the licence at any time, had not exerted more pressure on Boniface for the allotment of shares, distribution of profits or payment of licence fees after the Game Business became profitable in the end of 2009 or early 2010. In fact, Ryan admits in his oral testimony that there was no such licence agreement, and so the Licence Defence is doomed to fail. 145.There is a faint suggestion that the copyright of the Game owned by Keyvalue had not been properly transferred to Emagist as there was no written assignment of copyright as required by s 101 of the Copyright Ordinance. However, such argument would only have substance if Keyvalue at one stage owned the copyright of anything which formed part of the final version of the Game. There is simply nothing to substantiate such speculation. It is clear that the Game was published in July 2009 when the whole Game Business was operated by Emagist. In fact, it is the ART’s own case that substantial parts of the work were done by them after the Sun Chiu Kee Meeting in February 2009. 146.I have also considered the question as to whether Simon, Eric or Nether is also liable for the Original Claim, in particular in respect of tort of conspiracy to injure. However, Simon and Eric maintain that they did not know about the “migration” of the source codes and the databases beforehand. Further, I do not accept that the email messages or the fact that Eric was one of the founding members and directors of Nether are sufficient to show that Eric knew about or was involved in the wrongful act of the “migration” of the source codes and databases. Without knowing how Nether was functioning and who were the directing minds behind its operation, there is also no sufficient basis for the court to find liability on the part of Nether. Hence, only ART are liable for the wrongs complained of by Emagist in the Original Claim. ISSUE 3: DAMAGES OF THE ORIGINAL CLAIM 147.For the quantum of the Original Claim, Emagist claims the following:
148.In the interlocutory injunction application before DHCJ Woo, the judge ordered Ryan to pay the sum of US$479,871.98 from the Facebook revenue account into court. However, credit would be given to the sum of US$110,000 for the purpose of covering all the server hosting fees. Ryan therefore paid the balance in the sum of US$369,871.98 into court on 2 January 2013. The judge also ordered Ryan to pay into court any further revenue received by him up to the time when Emagist regained full control of the Game, and so Ryan paid such sum in the amount of US$86,056.41 into court on 25 January 2013. Hence the total amount paid by Ryan into court is US$455,928.39. 149.In quantifying the loss of revenue, Boniface listed out the monthly revenues for the 6 months both before and after the “migration” of the source codes and databases. The average monthly revenue for the 6 months before 15 August 2012 was $1,627,838, whilst that for the 6 months afterwards was $837,985. Emagist therefore seeks a difference of the two figures (i.e. $789,853) on a monthly basis, and it claims for the loss of revenue for the period from 15 August 2012 up to 9 January 2013, i.e. the sum of $3,796,390. 150.ART does not dispute the revenue paid into Ryan’s Facebook account in the period from August 2012 to January 2013. 151.Alvin had also opened an account in his name in “CPM Star” to receive revenue from the Game. He received the sum of US$85,445.51 in the period from July to December 2012. According to Alvin, part of this sum was used to pay for expenses required to operate the Game and related office administration and server expenses, though the exact amount is not clear. 152.In my judgment, Emagist cannot claim for both loss of revenue and the account of profit at the same time. In most intellectual property infringement cases (as it is for other cases), the plaintiff has to make an election for either assessment of damages or account of profits, for the simple reason that there would be double recovery if the plaintiff can claim for both at the same time. 153.Emagist has not made the election in the present case. But fortunately, either option would produce more or less the same result. For the loss of revenue claim, the quantum is $3,796,390. However, the figures relied upon by Emagist are only the revenues. It has not taken into account the saving of the operating costs during the period of which Emagist lost control of the Game such as the salaries of ART. On the other hand, the quantum for the account of profit claim would be more or less the same as the revenue of the Game paid by Ryan into court, i.e. US$455,928.39. Apparently, this sum of money has not included the money sitting in the CPMStar account. However, I accept that certain costs would have to be incurred for the operation of the Game to generate such revenue, though the court does not know the exact amount of such operating costs. 154.As there are some unknowns in the present case, i.e. the exact amount that could be saved during the period when Emagist lost control of the Game and the costs actually incurred by ART in operating the Game during the “migration” period, I decide to adopt a broad brush approach and assess the quantum of the Emagist’s claim as the same amount that ART have paid into court. Assessment of damages can never be an exact science, but I believe that such quantum (i.e. US$455,928.39) would more or less reflect the actual loss suffered by Emagist in the present case taking into account that some costs could have been saved during the “migration” period. Obviously, the payments into court together with the interest accrued thereon would be paid out to Emagist to satisfy the judgment for the Original Claim. 155.As ART and Simon felt that they had been ill-treated by Boniface, there might be a chance that they just left Emagist on a short notice even without “migrating” the source codes. If they had done so, Mr Chau points out that Emagist would have suffered some loss of revenue in any event even if there were no wrongful acts on the part of ART. However, since ART were Emagist’s employees, they owed a duty of fidelity to Emagist. They had to offer the necessary cooperation for the smooth transition of the operation to the new team if they were to left. There is no basis for the court to speculate that any new team could not have continued the operation or Emagist would suffer any loss of revenue if ART were to observe the duty of fidelity. Hence I will not reduce the quantum of the claim by reason of such speculation by Mr Chau. 156.There is also no room for the court to award additional damages to Emagist for the breach of copyright claim. The loss of revenue assessed above is made based on all the wrongful acts of ART as pleaded in the Original Claim, and it would be most difficult for the court to isolate the quantum for the breach of copyright claim or to say that all the loss of revenue was caused by the breach of copyright claim. For this reason alone, I refuse to award any further additional damages to Emagist. ISSUE 4: ALLEGED MISAPPROPRIATION OF THE FUNDS OF EMAGIST 157.As ART and Simon were only employees and not partners of the Game Business, they have no locus to make a counterclaim in respect of the complaint of misappropriation of funds. 158.No derivative action has been commenced in the present case. It is clear that the funds allegedly misappropriated belonged to Emagist. Though ART, Simon and Eric were allotted some of the shares of Emagist Group, they had no standing to sue in their own names for the loss suffered by Emagist. Simon and Eric were at some stage shareholders of Emagist, but it is trite that such kind of reflective loss is not recoverable by the shareholders. Furthermore, they had transferred their shares in Emagist to Emagist Group, and so they are not even existing shareholders of Emagist which entitle them to bring derivate action in the name of Emagist against Boniface. Hence, the counterclaims for misappropriation of funds brought by ART, Simon and Eric have to be dismissed. 159.Mr Chau has referred me to cases such as Marex Financial Ltd v Sevilleja[24] and Hamid Naghshineh & Ors v Harold Percy Chaffe & Ors[25] with a view to show that the shareholders may have a separate course of action against Boniface. But as I have analyzed above, even if there were a partnership, the Game Business had been subsequently taken over by Emagist and hence these cases cannot assist ART and Simon in their counterclaim. 160.Further, there is no reason for me to doubt the following:
161.After all, it was Boniface who was ultimately responsible for the daily operation of Emagist at the material time. Though he operated Emagist as if it was his own company, there is no reason for the court to doubt his explanations about the purposes for the withdrawals of the funds. 162.I would also make the following observations about the alleged misappropriations. 163.First, the alleged expenses and remunerations were recorded openly in the ledgers and financial statements of Emagist which were made available to at least Eric and Simon, and yet no complaint had been made by the parties throughout the years. The delay in the making of such complaint also makes it more difficult for Boniface to provide detailed particulars about these payments. 164.Second, Boniface was not the only person who had received remunerations or other fringe benefits from Emagist. Eric, Ryan and Alvin had vehicles provided by Emagist for their own use and Terry had received housing allowances. ART had also received year-end bonuses. The point to note is that it was Boniface who decided on these discretionary remunerations and benefits, which is consistent with the fact that the Game Business was Boniface’s business with promises given to ART and Simon that they would receive discretionary bonuses and benefits if the business was successful. 165.Nevertheless, I would not make any specific findings on the propriety of these Boniface’s withdrawals. If ART, Simon and Eric want to pursue the matter, proper derivative action has to be commenced which is missing in the present case. For such derivative action, another main party Cherubic has to be involved in the investigation of the account of Emagist. Even if the court proceeds to make specific findings on the propriety of these withdrawals, there is nothing to stop Cherubic from coming back to court to start the whole process again. Hence, there is little point for the court to conduct this exercise now, and I prefer to dismiss the misappropriation claim solely on the ground that Emagist should be the only party to sue for such losses and no proper derivative action has been commenced in the present case. ISSUE 5: ALLEGED WRONGFUL ALLOTMENT AND TRANFERS OF SHARES OF EMAGIST 166.The last issue relates to the complaints that Boniface had wrongfully caused the allotment of 9,800 Emagist’s shares to Emagist Group and the transfers of 200 Emagist’s shares from Boniface, Eric and Simon to Emagist Group. 167.Based on my finding that the Game Business was not operated in the form of partnership as alleged by ART and Simon, there is very little substance left in these complaints. Boniface was the main shareholder of Emagist which in turn owned the Game Business. Boniface had made an agreement with Eric for him to get 20% interest in the Game Business. For that, Boniface honoured his promise by paying US$500,000 for the sale of Eric’s 2.5% interest to Cherubic and allotting 17.5% shares of Emagist Group to Eric. Furthermore, Eric had never challenged the allotment of shares in the winding-up petition he lodged against Emagist, and so it is not open for him to say now that the allotment was unlawful. In fact, in dismissing Eric’s petition for winding-up, To J made some adverse comments against Eric saying that he all along knew about the accounts of Emagist[26] and the details of the Cherubic Transaction[27], and so there was no basis for him to complain that Boniface was doing something behind his back. For the share transfers, both Eric and Simon signed on the share transfer documents. Coupled with the related emails, it is quite impossible for them to say that they did not know the documents that they were signing at the time. To J also observed that there was overwhelming evidence to show that Eric knew about the share transfers.[28] It is also worth noting that Eric is not actually challenging the allotment and his transfer of shares as he claims no related relief in his pleading.[29] Hence, there is no substance in the wrongful allotment and transfers claims and the same have to be dismissed. 168.Further, based on my analysis above, even if there were a partnership between Boniface and ART, the Game Business had been fully taken over by Emagist. The most ART and Simon can say is that Boniface and perhaps Eric were holding the shares of Emagist on trust for them. In such case, even if there were irregularities in the allotment and transfers of shares, ART have no locus to intervene in the matter. Simon was a shareholder, but I do not accept that he did not know what he was doing when he signed on the share transfer documents. There is also doubt as to whether Simon, not being the existing shareholder of Emagist, would have the locus to challenge the allotment of shares. But even if he has the locus and there were indeed irregularities, there is no reason for the court to set aside the allotment of shares as Simon was only holding the shares in Emagist on trust for Boniface. 169.That again brings up the question as to why Cherubic has not been joined as a party to the present proceedings. Cherubic certainly has a serious interest as to propriety of the allotment and transfers of shares, as these matters were done as part of the Cherubic Transaction. In my judgment, even if the Game Business was operated in the form of partnership, the court cannot make any order relating to the allotment and transfers of shares without hearing Cherubic. 170.Further, ART and Simon are asking the court to order Boniface to account to them for their share of the proceeds of sale of 2.5% interest to Cherubic. In other words, their case is premised on the basis that Cherubic was a new partner of the Game Business and the Cherubic Transaction was a proper one. The problem then arises is how can they ask Boniface to account to them for the profits arising from the transaction, whilst at the same time trying to do something which would vitiate the transaction itself? Even worse, ART and Simon are asking the court to adjudicate on these matters without hearing Cherubic. In my judgment, ART and Simon have not given a lot of thought to these inconsistencies and problems when formulating their counterclaim. No matter how the court would approach the issue, the court should not grant the relief as sought by ART and Simon under Issue 5. 171.There may be some confusion in the evidence as to why there was an allotment of 100 Emagist shares to Boniface in May 2010. However, this is certainly a non-issue in the present case, given that: (i) Boniface was the substantial beneficial owner of the Game Business (subject to the 20% interest he agreed to give it to Eric); and (ii) ART and Simon were contended for Boniface to make all the decisions relating to structure for the operation of the Game Business. FINAL ORDER AND CONCLUDING REMARKS 172.For the above reasons, I grant judgment in favour of Emagist in the Original Claim against only ART in the sum of US$455,928.39, or Hong Kong dollars equivalent, together with interest accrued on the payments into court. The parties are at liberty to apply for the payment out at a later stage. I also dismiss both the ART Counterclaim and the Eric Counterclaim. 173.I also make the following costs order nisi which shall be made absolute 14 days after the date of the handing down of this Judgment:
174.This case provides a classic lesson to all those who are enthusiastic in setting up their own start-up operations, in particular in the information and technology sector. They may have a lot of dreams when they start to work on their project, but they may not give a lot of thought as to the structure of their operation and what happens when the business becomes a success or a failure. Whilst I appreciate that some of the matters encountered at the outset of their journeys may be technical and costly, such as the making of the necessary applications to protect their intellectual property rights, it would not be too much of a trouble if they just sit down and discuss about their business operation and their rights and liabilities in case of success or failure. In the absence of these discussions or confirmations, it is just part of human nature that different persons may have different expectations as to the business operation and their rewards and liabilities. Spending sometime in the early stage to discuss and agree on these details will help to manage the expectations of the parties, which would in turn reduce the risk of having much more serious confrontations and disputes in the end. It would be very unfortunate if a business becomes a victim of its own success. The facts of this case speak volume of this lesson.
Mr Jimmy Ma, Mr Jacky Lam and Mr Owen Kun, instructed by Or & Lau, for the Plaintiff by Original Action, the Defendants by Counterclaim dated 3 May 2013 as amended on 14 July 2015 and the 1st, 3rd and 4th Defendants by Re-Amended Counterclaim dated 24 December 2018 Mr Ian Chau, instructed by Wong, Hui & Co, for the 1st to 3rd, 5th to 6th Defendants by Original Action and the Plaintiffs by Re-Amended Counterclaim dated 24 December 2018 Ms Janine Cheung, instructed by T C Wong & Co, for the 4th Defendant by Original Action, the Plaintiff by Counterclaim dated 3 May 2013 as amended on 14 July 2015 and the 2nd Defendant by Re-Amended Counterclaim dated 24 December 2018 [1] Emagist Entertainment Ltd v Nether Games (Hong Kong) Ltd [2013] 1 HKLRD 898 [2] Emagist Entertainment Ltd v Nether Games (Hong Kong) Ltd, supra, at §§34-36 & 46 [3] Eric and Simon were the initial shareholders but allotment of shares was made subsequently to Boniface in May 2010 [4] see §18(2) above [5] see Lindley and Banks on Partnership (20 ed) at §2.14 [6] s 26(a) [7] s 26(g) [8] s 26(h) [9] 1961 (2) S.A. 211, at 223G-H [10] supra, at §§8, 79 & 82 [11] at §20 [12] Re-Amended Defence and Counterclaim at §2.5 [13] Mr Chau has also referred to cases such as M. Young Legal Associates v Zahid [2006] 1 WLR 2562 (CA), at §33 and Chahal v Mahal [2004] EWHC 2859 (Ch) at § 82 [14] see Ryan’s 1st affirmation at §§23-25 [15] see §93 above [16] [2007] 1 HKLRD 951 [17] [1968] 2 QB 497 [18] [2013] EWHC 1292 (Ch) [19] [2012] EWHC 169 (QB) [20] (2017 WL 00368986, 26 January 2017) [21] supra [22] at §24 [23] see: the witness statement of Boniface at §36 [24] [2020] 3 WLR 255 [25] [2003] EWHC 2107(Ch) [26] Re: Emagist Entertainment Ltd, unreported, HCCW 306/2012 (16 May 2013), at §50 [27] ibid, at §§6, 7 & 12 [28] ibid, at §§27, 28 & 33 [29] see §§43-45 above | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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