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HCA 1873/2019
[2023] HKCFI 2833
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 1873 OF 2019
_______________
| BETWEEN |
|
|
| |
LONG SING UNION ENGINEERING LIMITED |
Plaintiff |
| |
(朗誠水務工程有限公司) |
|
|
and
|
| |
MA CHI KI (馬志棋) (also known as KEITH MA) |
1st Defendant |
| |
LONG SING PLUMBING LIMITED |
2nd Defendant |
| |
(朗誠水務有限公司) |
|
_______________
| Before: |
Hon Linda Chan J in Court |
| Dates of Hearing: |
11 – 14, 18, 25 July 2023 |
| Date of Judgment: |
2 November 2023 |
________________
J U D G M E N T
________________
1.In this action the plaintiff, Long Sing Union Engineering Limited (朗誠水務工程有限公司) (“Company”), claims against the 1st and 2nd defendants (“Ds”), Mr Ma Chi Ki (馬志棋) (“Ma”) and his company Long Sing Plumbing Limited (朗誠水務有限公司)(“LSP”):
(1) A declaration that the “Projects” and “LOAs” (as defined in §24 below) have been held by LSP on trust for the Company, and an account and inquiries of all the monies received by LSP as such trustee[1];
(2) A declaration that Ds are liable to account as constructive trustees for HK$37,264,426.13, being the amount received by LSP from the Company less the “Direct Expenses” (as defined in §36(1) below) and 50% of the “Indirect Expenses” (as defined in §36(2) below) paid by LSP on behalf of the Company (“Overpayments”), and all necessary account and inquiries in relation to the Overpayments and the income and benefits derived from the Overpayments[2];
(3) As against Ma, equitable compensation for breach of fiduciary duties or damages for breach of duty of care owed to the Company[3]; and
(4) As against LSP, payment or restitution of HK$37,264,426.13 or such other sum as may be found to have been overpaid by the Company to LSP and “equitable compensation for knowing receipt”[4].
2.The action was brought in the name of the Company as a statutory derivative action pursuant to leave given by Coleman J on 30 September 2019 upon the joint application of the parties in HCMP 860/2019[5], which were proceedings commenced by Mr Lee Kin Man (李建文) (“Lee”) against the Company under ss.732-733 of the Companies Ordinance (Cap. 622).
3.Although many causes of action have been pleaded in the Amended Statement of Claim dated 20 January 2023 (“ASOC”), they all depend upon the Company being able to prove the existence of the “JV Agreement” (as defined in §49 below) reached between Lee and Ds.
(1) If the Company fails on this main factual issue, Mr Ernst Koo (appearing with Mr Rex Yam), counsel for the Company, accepts that the claims against Ds must fail.
(2) On the other hand, Mr Norman Nip SC (leading Mr Eric Chung and Mr Roger Phang), counsel for Ds, contends that even if the court finds that the “JV Agreement” exists, the Company’s claims should still be dismissed given that no cause of action is vested in the Company.
A. BACKGROUND FACTS
4.The following facts are taken from the Statement of Agreed Facts or facts which are not in dispute at trial.
A1. Parties
5.The Company was incorporated on 23 October 2014. Lee and Ma have been its only directors and shareholders, and their shareholding is equal. The formation of the Company, and all its administrative and accounting matters were handled by Ma.
6.The Company’s registered office and place of business has always been the same as that of LSP:
(1) From 23 October 2014 to 14 June 2016, the office was at Mai Hing Industrial Building, 16-18 Hing Yip Street (“Old Premises”).
(2) From 14 June 2016, at Hing Yip Centre, 31 Hing Yip Street.
7.Lee is an engineer by training. He obtained a Higher Diploma in building services engineering in 1998, and a degree in facilities management in 2004. He has over 20 years’ experience in plumbing and drainage works in that:
(1) From 1998 to 2000, he was employed by WPK (as defined in §10 below) as assistant engineer, responsible for supervising and implementing plumbing and drainage installation works at construction sites. In 2005 to 2007, Lee re-joined WPK as project engineer, mainly responsible for project management of a prestigious project of WPK in Macau.
(2) After leaving WPK in 2000 and 2007, Lee worked in other plumbing and drainage contractors and consultants in Hong Kong.
(3) From March 2009 to April 2011, Lee was employed by Bespark Technologies Engineering Ltd (鎂燦科技工程有限公司) (“Bespark”), a plumbing and drainage contractor in Hong Kong, as project manager and subsequently senior project engineer, responsible for project management, site supervision and coordination with main contractors, consultants and sub-contractors.
(4) From May 2011 to the end of 2012, Lee worked at a building services company. Thereafter, he worked at the guest house business started by his wife as he wanted to spend more time with the family.
8.Ma is and has since 2000 been working in the field of drainage and plumbing works:
(1) He started working after completing his secondary education. Thereafter, he attended various part-time courses in civil engineering, building service engineering. In 2009, he became a Grade 1 licence plumber[6].
(2) He was employed by Bespark from mid-2007 to May 2011, responsible for supply of materials, personnel management and management of sub-contractors[7].
(3) In June 2011, he became the general manager of LSP.
(4) On 28 July 2012, he became the sole director of LSP.
(5) On 29 July 2012, he became the majority shareholder of LSP, holding 90.9% of its issued shares. On 10 December 2012, he became the sole shareholder of LSP.
9.LSP:
(1) was incorporated in November 2010 by Mr. Wong Tin Chung, the father-in-law of Ma, who was its sole director and shareholder until he was replaced by Ma in July 2012 and December 2012 respectively; and
(2) engages in drainage and plumbing installation works.
A2. Other relevant entities and persons
10.Wong Po Kee Limited (黃波記有限公司) (“WPK”) was (and still is) a renowned contractor in plumbing and drainage installation works in Hong Kong:
(1) It was incorporated in Hong Kong in 1979 to take over the business of plumbing and drainage works then carried on by the late Mr Wong Po Kee as sole proprietor since 1938.
(2) Since its incorporation, WPK has been wholly owned by Mr Wong Kwok Keung Alan Bruce (黃國強) (“Wong”) and his wife. Wong has been the Managing Director of and made all decisions for WPK[8].
(3) Mr Hung Shing Chuk (洪成竹) (“Hung”) joined WPK in 1989 and was its director from 2005 until he retired in July 2016. From January 2017 to December 2018, Hung was employed by LSP as part time project director.
(4) Mr Law Yu Ming Lawrence (羅汝明) was at the material times and still is a director of WPK.
(5) Ms Sunday Leung (“Sunday”) is a quantity surveyor employed by WPK.
11.Ms Yang Cuiying (楊翠英) also known as Carrie (“Carrie”) was formerly employed by Bespark where she came to know Ma. In April 2011, Carrie joined LSP and since then has been responsible for preparing and dealing with the accounting matters of LSP. Since the inception of the Company, Carrie has been dealing with its accounting matters.
12.According to the documents produced by Ds, the following persons were employed by LSP:
|
Name |
Position |
Period |
Mr Ma Chiu Pang
(馬釗鵬) (“Pang”) |
Engineer |
10/2014 to
8/2017 |
Ip Siu Ho
(葉肇豪) (“Ip”) |
Engineer |
8/2016 to
7/2019 |
Fong Kai Leung
(方啟良) (“Leung”) |
|
3/2014 to
3/2015 |
Hung Tak Hing Don
(熊德興) |
|
10/11/2014 to 30/6/2016 |
Ho Ngai Sum Sam
(何毅琛) |
|
4/2015 to
2/2017 |
Ma Chi Wai
(馬志偉) |
|
From
5/1/2015 |
Chan Hung San Carson
(陳雄燊) |
|
3/3/2015 to 7/8/2015 |
Liang Yuchao Ethan
(梁宇超) |
|
22/2/2017 to 11/8/2022 |
Mak Ka Ming Cammy
(麥家明) |
Clerk |
13/6/2016 to 9/2019 |
13.Intellect Corporate Services Co (睿智商務公司) was and still is the company secretary of the Company. Mr Tse Siu Sing (謝兆陞), a certified public accountant, handled the incorporation of the Company and advised it on tax return matters. He also assisted LSP in dealing with accounting matters.
A3. Dealings between Ma and Lee
14.Lee and Ma came to know each other in 2009 when they both worked at Bespark.
15.In February 2014, Ma contacted Lee and invited him to join LSP as project manager. Lee turned down the offer as he had been helping his wife’s business, and was not interested in joining a small contractor like LSP[9].
16.On 24 February 2014, Ma invited Lee to dinner. On 6 March 2014, Lee and Ma met for dinner at which they discussed opportunities for cooperation[10]. The parties differ as to what had been discussed and whether any agreement was reached:
(1) On the Company’s case, Ma (on behalf of himself and LSP) and Lee came to the “JV Agreement” on 6 March 2014; and
(2) On Ds’ case, no agreement was reached.
17.Thereafter, Lee began to attend the Old Premises and assisted Ds on various matters including preparing measurements and drawings for drainage and plumbing installation works for Ma to prepare and submit (1) a tender to Hip Hing for Conduit Road project in March 2014[11]; and (2) a tender to WPK for electrical conduit work for MTRC contract 1102 Hing Keng station on 11 June 2014. Both tenders were not successful.
A4. Ko Shan Road Project
18.In mid-June 2014, WPK wanted to find a new sub-contractor to undertake the plumbing and drainage installation works at the residential development at Ko Shan Road, Hung Hom (“Ko Shan Road Project”) in place of the original sub-contractor. The intention was to find a new sub-contractor which would be responsible for handling all matters independently including project management and supervision as well as supply of materials (the latter being financed by WPK)[12].
19.Against this background, Hung on behalf of WPK invited tenders from various sub-contractors including LSP. On 16 June 2014, LSP submitted a tender at the lump sum fixed price of HK$25,926,134[13]. The price was reduced to HK$23,922,983 in the revised tender submitted by LSP on 19 June 2014.
20.It is the unchallenged evidence of Wong that he was not inclined to award Ko Shan Road Project to LSP given that (1) WPK had never awarded any contract to LSP or Ma, (2) he did not know much about Ma; and (3) the revised tender price was higher than his expectation[14].
21.On 19 June 2014, Lee and Ma went to the office of WPK to discuss Ko Shan Road Project with Wong and Hung (“WPK Meeting”). There is a dispute as to who said what at the WPK Meeting. It is not in dispute that at the WPK Meeting, Wong agreed to award Ko Shan Road Project to LSP on the bases that the tender price was further reduced to HK$23,280,000 and that Lee would personally manage the Project.
22.On WPK’s side, all matters relating to the signing of the sub-contract was left to Hung. It was Wong’s intention that Ko Shan Road Project be awarded to the company of Ma and Lee, and if Lee was not a partner of Ma, WPK would not have awarded the Project to LSP or Ma[15].
23.After WPK Meeting, Lee and Ma began to discuss and work on the establishment of a new company to be owned by them equally and the preparatory work for Ko Shan Road Project[16] in that:
(1) On 20 June 2014, Ma texted Lee, “Need to start making the drawings, start working”.
(2) On 23 June 2014, Ma provided a profit forecast of Ko Shan Road Project to Lee which showed an estimated profit of HK$5.63 million[17] (“June 2014 Forecast”).
(3) On 24 June 2014, Ma texted Lee about his proposal to use “捷蕎工程有限公司 (Jet Engineering Limited)” as the name of the joint venture company, and Lee counter-proposed “Jetfast engineering ltd”[18].
(4) Lee and Ma discussed about recruitment of employees and sub-contractors for Ko Shan Road Project throughout June to December 2014 including:
(a) Sub-contractors’ quotations for works including “勇 (Yung)”[19];
(b) Lee proposed “Yip Keung” be one of the sub-contractors[20];and
(c) Recruitment of new employees and their salaries, including Leung, Pang, and “輝 (Fai)”.
(5) On 2 August 2014, Ma told Lee that he had been thinking about the details of their cooperation and would prepare a written agreement for that purpose. The actual words used are “我確切及詳細地諗緊大家的合作細節，及應為寫份協議項目內容，對大家長遠都好，希望今個月完成 (實在太忙，要慢慢)，但先說明大家的分數，有可能變化，因為我想寫時自由度可以大些而不被縛，同時我要考慮過往做緊嘅工作問題，不打緊留待我寫好先”.
(6) On 19 August 2014, Lee obtained a mortgage loan of HK$2 million using a property co-owned with his wife as security[21].
(7) In September to early October 2014, Ma and Lee both agreed that the name of their joint venture company should contain “Long Sing” and “朗誠”. Lee suggested the English name with “Engineering” to denote the nature of its business and “Union” to denote that the company is a union of Lee and Ma and their effort, while Ma suggested the Chinese name which then became the name of the Company[22].
(8) Lee proposed that each of him and Ma contributed HK$2 million as working capital for their joint venture business, and Ma agreed[23].
(9) On 20 November 2014, Ma informed Lee that WPK had made the first payment.
A5. Projects from WPK
24.The contractual documentation in respect of the 4 projects awarded by WPK are in the form of 4 Letters of Acceptance (“LOAs”), whereby WPK accepted the offers made by LSP (collectively “Projects”):
(1) By LOA dated 15 July 2014, WPK sub-contracted Ko Shan Road Project to LSP at HK$23,280,000;
(2) By LOA dated 12 May 2015, WPK sub-contracted the plumbing and drainage installation works at Cathay Pacific catering services at Hong Kong International Airport (“CX Project”) at HK$31,680,000;
(3) By LOA dated 18 November 2015, WPK sub-contracted the supply and installation of sump pump design and construction of Centre of Excellence in Paediatrics (“Kai Tak Project”) at HK$8,700,000; and
(4) By LOA dated 4 July 2016, WPK sub-contracted the supply and installation of plumbing and drainage system at Ocean Park Marriott Hotel (“Ocean Park Project”) at HK$76,000,000.
A6. HSBC Account
25.In January 2015, the Company opened a bank account at HSBC (“HSBC Account”) with Lee and Ma as its joint signatories[24].
26.At the request of Ma, on 13 March 2015, each of Lee and Ma paid HK$1 million into HSBC Account:
(1) On the Company’s case, the payments were Lee and Ma’s contributions to the working capital of the Company as required by the Projects[25];and
(2) On Ds’ case, the payments were in the nature of “security payments” paid pursuant to the “Security Agreement” (as defined in §60(1) below)[26].
27.On 16 September 2017 and 2 November 2018, two withdrawals of HK$500,000 each was paid out of HSBC Account to Lee[27].
A7. Payments from WPK
28.The first 2 sums of HK$662,000 and HK$487,000 payable under Ko Shan Road Project were paid into LSP’s bank account on 14 November 2014 and 10 February 2015 respectively (“First 2 Payments”).
29.By letter dated 25 February 2015 signed by Ma, LSP informed WPK that the “company payment account” was changed to HSBC Account; the “holder” of both LSP and the Company is the same (i.e. Ma); and the reason for changing the account is “management purpose only” (“Feb 2015 Letter”).
30.Pursuant to the Feb 2015 Letter, from 17 March 2015 to 15 February 2019, WPK paid all the amounts payable under the Projects into HSBC Account. According to the “Payment Information for Long Sing Union Engineering Ltd” prepared by WPK in respect of the Projects (collectively “Payment Tables”), WPK paid an aggregate amount of HK$122,456,775.08 into HSBC Account.
31.In respect of Ko Shan Road Project:
(1) WPK approved 18 Subcontractors Payment Certificates (承判商工程付款證明書), certifying the amounts payable for the works done. Amongst these Certificates:
(a) 2 of them stated LSP as subcontractor, 6 stated 朗誠水務as subcontractor while 10 stated朗誠水務工程有限公司 (i.e. Company) as the subcontractor;
(b) 12 bore the chop of the Company, one bore the chop of LSP, one bore the chops of both LSP and the Company and 4 did not bear any chop.
(2) WPK made 18 payments (including the First 2 Payments) in the total sum of HK$17,913,757.51 during the period from 7 November 2014 to 1 February 2018. These payments were listed in the Payment Table for Ko Shan Road Project.
32.In respect of CX Project:
(1) WPK approved 18 Subcontractors Payment Certificates (承判商工程付款證明書) certifying the amounts payable for the works done. Amongst these Certificates:
(a) 4 stated 朗誠水務 as subcontractor, 7 stated 朗誠水務有限公司 (i.e. LSP) as subcontractor while 7 stated 朗誠水務工程有限公司 (i.e. Company) as subcontractor;
(b) 15 bore the chop of the Company, 2 did not bear any chop, and one bore the chops of LSP and the Company.
(2) WPK made a total of 18 payments in the total sum of HK$25,557,521.63 during the period from 15 May 2015 to 17 November 2016. These payments were listed in the Payment Table prepared for CX Project.
33.In respect of Kai Tak Project:
(1) WPK approved 14 Subcontractors Payment Certificates (承判商工程付款證明書) certifying the amounts payable for the works done. Amongst these Certificates:
(a) 5 stated 朗誠水務有限公司 (i.e. LSP) as subcontractor while 9 stated 朗誠水務工程有限公司 (i.e. Company) as subcontractor;
(b) All of them bore the chop of the Company.
(2) WPK made 14 payments in the total sum of HK$7,989,214.00 during the period from 26 September 2016 to 25 May 2018. These payments were listed in the Payment Table for Kai Tak Project.
34.In respect of Ocean Park Project:
(1) WPK approved 18 Subcontractors Payment Certificates (承判商工程付款證明書) certifying the amounts payable for the works done. Amongst these Certificates:
(a) 2 stated 朗誠水務有限公司 (i.e. LSP) as subcontractorwhile 16 stated 朗誠水務工程有限公司 (i.e. Company) as subcontractor;
(b) All of them bore the chop of the Company.
(2) WPK made 18 payments in the total sum of HK$72,144,272.94. These payments were listed in the Payment Table prepared by WPK for Ocean Park Project.
A8. Payments from Company to LSP
35.Between 13 April 2015 and 26 February 2019, the Company issued 64 cheques in the aggregate amount of HK$121,300,000 in favour of LSP. All the cheques were co-signed by Lee and Ma.
36.During the period when the Projects were ongoing:
(1) All the direct expenses incurred in relation to the Projects were paid by LSP (“Direct Expenses”); and
(2) All the indirect expenses including office rent, administrative expenses and salaries of employees were paid by LSP (“Indirect Expenses”).
37.So far as Direct Expenses are concerned, according to the information provided by Carrie, LSP paid the following amounts in respect of the Projects:
|
Projects |
Payments to (HK$) |
|
Sub-contractors |
Suppliers of Materials |
Total |
|
Ko Shan Road |
9,489,912.22 |
2,423,120.98 |
11,913,033.20 |
|
CX |
8,424,006.91 |
4,543,652.71 |
12,967,659.62 |
|
Kai Tak |
2,071,614.60 |
3,356,644.37 |
5,428,258.97 |
|
Ocean Park |
31,631,261.70 |
15,408,360.38 |
47,039,622.08 |
|
Total |
|
|
77,348,573.87 |
38.According to the tax returns filed by LSP, Lee was an employee of LSP and was paid salaries in the following amounts:
|
Period |
Salaries (HK$) |
|
1/4/2015-31/3/2016 |
380,000 |
|
1/4/2016-31/3/2017 |
442,000 |
|
1/4/2017-31/3/2018 |
842,000 |
|
1/4/2018-31/3/2019 |
669,500 |
A9. Dispute between Lee and Ds
39.By September 2018, all the works under the Projects had been substantially completed, and the only outstanding matters were warranty periods for which WPK withheld 5-10% of the contract prices as retention monies. Since then, Lee has been chasing Carrie and Ma for accounts of the Projects but to no avail[28].
40.Thereafter, Lee took steps to collate the financial information relating to the Projects and prepared an account for the Projects in that:
(1) Between 13 and 15 February 2019, Carrie uploaded the information and documents relating to the Direct Expenses and a spreadsheet setting out the funds transferred from the Company to LSP, and told Lee to read the documents by himself. Subsequently, Carrie provided copies of cheques issued by the Company to LSP[29].
(2) On 18 February 2019, Lee provided an account he prepared for the Projects, which listed out the contract prices, the amounts paid to sub-contractors, the amounts paid for materials and other expenses in respect of each Projects (“Feb 2019 Account”). Lee asked Ma to see if there were other expenses he wished to add (“我埋緊黃波記的project。我會比carrie, 你睇下有乜expenses要加。”). Ma replied “ok”.
(3) It is the unchallenged evidence of Lee that at the meeting held between him and Ma on 18 February 2019 (“Feb 2019 Meeting”), Lee said that account (“埋數”) needed to be prepared for the Projects. In response, Ma said that the variation orders in the amount of HK$1.5 million and HK$0.5 million in Ko Shan Road Project and CX Project would be paid to Lee, and as Kai Tak Project and Ocean Park Project both broke even, no profit would be paid to anyone[30].
(4) On 21 February 2019, Lee chased Ma for any expenses he would like to add and made clear that he wanted to complete the Feb 2019 Account by the end of February 2019. (“條數機 [sic] 大下!你下[sic] 有乜支出你加上去!我想二月底埋一下”). Ma responded the next day, saying that he would try but would need to finish work first. Lee retorted by saying that he had been chasing for an account for over a year (“追咗年機[sic]”).
41.Thereafter, Ma took steps to transfer the remaining funds from HSBC Account and the amounts payable by WPK to LSP:
(1) On 1 March 2019, Carrie requested Lee to sign 2 cheques of HK$600,000 each payable to LSP for payments of suppliers and wages. Lee only signed one cheque after seeing that only HK$3.1 million remained in HSBC Account, and requested Carrie to provide an account of the Projects to him.
(2) On 4 April 2019, Carrie again requested Lee to sign the other cheque of HK$600,000 payable to LSP, and Lee signed the same to avoid any adverse effect on the Company.
(3) By letter dated 8 April 2019 (signed by Ma) LSP requested WPK to pay all further sums payable under the Projects to LSP’s bank account, instead of HSBC Account (“April 2019 Letter”).
(4) On 10 April 2019, Wong forwarded April 2019 Letter to Lee. WPK did not comply with LSP’s request.
(5) On 15 April 2019, Lee ceased to be employed by LSP.
42.In the meantime, Lee obtained the following documents from Sunday:
(1) On 27 February 2019, the Payment Tables;
(2) On 4 April 2019, the LOAs; and
(3) On 17 April 2019, a spreadsheet under WPK’s name summarizing all payments made by WPK to the Company from 7 November 2014 to 15 February 2019 (including the First 2 Payments).
43.By letter dated 23 April 2019, Messrs. Henry Wai & Co (“HWC”), former solicitors of Lee, demanded Ds to make restitution of the Overpayments to the Company and acknowledge in writing that the benefits of the Projects and all sums receivable thereunder have been held on trust by LSP and/or Ma for the Company relying on the following grounds:
(1) The Projects were undertaken by the Company, and the benefits of the Projects were beneficially owned by the Company;
(2) The contract sums under the Projects were paid into HSBC Account of which both Lee and Ma were (and still are) joint signatories;
(3) The parties agreed that for administrative purposes, all materials, suppliers, sub-contractors, workers and employees for the Projects would be procured and paid by LSP on behalf of the Company;
(4) In early April 2019, Lee discovered the following “serious wrongs against the Company”:
(a) Ds had “wrongfully usurped the Projects” and “the contracts with WPK in relation to the Projects” in that Ko Shan Road Project was signed at the time when the Company had not been incorporated, the remaining 3 Projects should have been signed in the name of the Company but were signed in the name of LSP without Lee’s knowledge or consent;
(b) Ma had caused the Company to make the Overpayments to LSP; and
(c) Ma had attempted to usurp the benefits of the Projects by issuing the April 2019 Letter to WPK.
44.By another letter dated 30 April 2019, HWC gave notice that Lee would apply for leave to bring a statutory action against Ds on 8 May 2019.
45.LSP retorted by letter dated 30 April 2019, demanding Lee to pay HK$20,170.83 as compensation for terminating the employment contract on short notice.
46.On 13 June 2019, Lee commenced proceedings to obtain leave to bring the present action against Ds. On 30 September 2019, leave was given to Lee to bring this action in the name of the Company.
47.Thereafter, the Company proposed and Ds agreed that all payments due and payable in respect of the Projects should be paid into a stakeholder account maintained by Ds’ solicitors (“Stakeholder Account”), and the amount cannot be dealt without the consent of the Company. As at 23 August 2022, the amount in the Stakeholder Account was HK$9,923,644.58.
B. ISSUES
48.Against the above facts, the parties put forward diametrically opposite cases.
B1. Company’s case
49.JV Agreement[31]: In the evening of 6 March 2014, Ma and Lee reached an oral agreement to cooperate on the following terms (“JV Agreement”):
(1) Lee and Ma would establish a company with equal shares to pitch for and undertake projects for plumbing and draining installation works; and
(2) Ma and Lee would be the only directors and shareholders of the company.
50.Dec 2014 Agreement[32]: In December 2014, Lee and Ma orally agreed to vary the JV Agreement as follows:
(1) for projects of Lik Kai Engineering Company Ltd or other contractors or developers which required a sub-contractor with job references, such projects would be undertaken by and belong to LSP; and
(2) for projects of WPK and other contractors or developers which did not require a sub-contractor with job references, such projects would be undertaken and belong to the Company.
51.It was pursuant to the JV Agreement(as varied by the Dec 2014 Agreement) that Lee and Ma carried out the acts described in §§17-40 above, attended the WPK Meeting and obtained the Projects from WPK.
52.Understanding:
(1) There was a “tacit understanding” between Lee and Ma that the Company would share office and staff with LSP and would contribute a reasonable portion of the rent, salaries and other expenses paid by LSP during the period when the Projects were ongoing (“Understanding”)[33].
(2) Although the parties have not agreed on how the Indirect Expenses should be apportioned, it is the Company’s case that[34]:
(a) 50% of the Indirect Expenses should be borne by the Company; and
(b) The period during which the Projects were ongoing and required the use of LSP’s office and employees was from July 2014 to September 2018 (51 months) (“Relevant Period”).
53.Arrangement:
(1) In April 2015, Ma suggested (and Lee agreed) that all expenses in relation to the Company including the suppliers, sub-contractors and salaries be handled and paid by LSP, given that LSP had been operating for some time and would be able to obtain better credit terms with suppliers and the salaries could be paid through autopay system already set up[35] (“Arrangement”).
(2) It was pursuant to the Arrangement that Lee co-signed 64 cheques and caused HK$121,300,000 be transferred from HSBC Account to LSP for the purpose of defraying the Direct Expenses and Indirect Expenses.
54.On the basis of the above factual premise, the Company pleaded the following causes of action against Ds[36]:
(1) LSP held Ko Shan Road Project on express or common intention constructive trust for the Company but acted in breach of trust by usurping the same from the Company[37];
(2) LSP held the other 3 Projects on express or constructive trust for the Company but acted in breach of trust by usurping the same from the Company [38];
(3) Ma acted in breach of his fiduciary duties and duty as trustee by making the Overpayments to the benefit of LSP, and attempting to misappropriate the income derived from the Projects; and
(4) LSP is liable to account for the Overpayments for knowing receipt, money had and received or unjust enrichment[39].
B2. Ds’ case
55.Ds deny that there was any binding agreement reached in the form of the JV Agreement or the Dec 2014 Agreement or that there was any agreement or common intention reached at the WPK Meeting which had the effect of creating any trust in respect of Ko Shan Road Project[40].
56.If (which is denied), there was a binding agreement between Lee and Ma to form a joint venture company and share profits equally, such agreement was intended to explore and develop new opportunities and at most covered Ko Shan Road Project which Lee acted as project-in-charge, but not the other 3 Projects[41].
57.In addition, Ds pleaded the following positive defences.
58.Employment Agreement:
(1) Lee came to work for LSP pursuant to the “Employment Agreement” (as defined in §69(1) below).
(2) Lee was entitled to be paid the “Bonus” (as defined in §69(2) below) for acting as project-in-charge of Ko Shan Road Project, as agreed by Ma in July 2014[42].
(3) The other 3 Projects were awarded to LSP and “had nothing to do with Lee”, who “did not take charge of any of these projects”.
59.Side Business[43]:
(1) The Company was set up to pursue the business of provision of maintenance works (“Side Business”).
(2) In mid-July 2014, Lee proposed to set up a new company to carry on the Side Business. Ma was of the view that the Side Business was worth considering. Their discussions culminated in the incorporation of the Company.
(3) In early August 2014, Ma proposed to reduce the terms of their cooperation in writing but Lee did not reply.
60.Security Agreement / Varied Security Agreement[44]:
(1) In order to address Lee’s concern about his share of profit from Ko Shan Road Project and in view of the discussion on setting up a new company to run the Side Business, in mid-October 2014, Ma agreed to set up the Company and to pay 5% - 7% of payments received from WPK under Ko Shan Road Project into a separate bank account with Lee and Ma as joint signatories as a measure of security for Lee (“Security Agreement”).
(2) Pursuant to the Security Agreement, the Company was incorporated with Lee and Ma as its only shareholders and directors, and the HSBC Account was opened in January 2015.
(3) Shortly after the HSBC Account was opened, Lee threatened to leave the employment unless all payments from WPK be paid into HSBC Account before any payments were made to LSP to defray its expenses. It was agreed between Ma and Lee that each of them had to deposit HK$1 million as “mutual security for the parties” (“Varied Security Agreement”).
(4) Pursuant to the Varied Security Agreement:
(a) The Feb 2015 Letter was sent to WPK;
(b) The Company became the “paymaster of payments received from WPK to [LSP] and to retain sufficient payment of profits not less than HK$1,000,000 in the [HSBC Account]”;
(c) Lee withdrew HK$500,000 each on 16 September 2017 and 2 November 2018, leaving Ma’s HK$1 million and balance of WPK payments in excess of HK$1 million.
61.The Company had no business or operation other than acting as “paymaster” [45]:
(1) Lee had unrestricted access to all files of LSP and consented to all withdrawals from HSBC Account by co-signing all the cheques, rather than relying on any alleged misrepresentations made by Ma.
(2) Lee only concerned about whether there was more than HK$1 million in HSBC Account to meet his share of profits.
(3) The payments derived from the other 3 Projects were paid into HSBC Account because Hung considered it “inappropriate for WPK to issue payments to different accounts of the same contractor”[46].
B3. Issues for determination
62.Although counsel have in their Agreed List of Issues (“ALOI”) identified 15 issues (and sub-issues), the principles issues which require determination of the court are:
(1) Whether Lee and Ma reached the JV Agreement (as varied by the Dec 2014 Agreement) or whether Lee agreed to work for LSP on the terms that he would only be entitled to be paid salary and the “Bonus”[47] (Issue 1).
(2) Whether the Company was set up pursuant to the JV Agreement or the discussions about the Side Business and the Security Agreement[48] (Issue 2).
(3) Whether the payments of monies into and out of HSBC Account were pursuant to the JV Agreement, the Understanding and the Arrangement or pursuant to the Security Agreement and the Varied Security Agreement[49] (Issue 3).
(4) Whether the Projects (and the benefits derived from them) have been held by LSP on trust for the Company and, if so, whether LSP acted in breach of trust and Ma acted in breach of fiduciary duties owed to the Company, or whether the Projects have been held by LSP in its own right[50] (Issue 4).
(5) If LSP held the Projects on trust for the Company, whether Ds are liable to repay or account for the Overpayments[51] (Issue 5).
63.The first 3 issues are factual issues which will be considered together.
C. DISCUSSION
C1. Approach to evidence
64.The approach of the court in assessing the credibility of the witnesses where there is a direct conflict of their testimony as to the existence or otherwise of an alleged oral agreement is not in dispute. As stated by DHCJ Jin Pao SC in Leung Chin Sing, Rabo and Another v Ko Chun Hay, Kelvin [2021] HKCFI 2242, §§41-44:
“41. Since this case concerns the existence of an alleged oral agreement, and turns on my assessment of the credibility of witnesses, the legal principles on evaluating the truthfulness of an account given by a witness are relevant. These principles were referred to in Hui Cheung Fai v Daiwa Development Ltd (HCA 1734/2009, 8 April 2014) at [77-80] by DHCJ Eugene Fung SC, and helpfully summarized by Recorder Yvonne Cheng SC in Joint and Several Trustees of the Property of Yeung Wing Sing v Yeung Wing Sing [2021] HKCFI 2018 at [26] as follows:
‘(1) contemporaneous written documents and documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility;
(2) in deciding whether to accept a witness’ account, importance should also be attached to the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events;
(3) regard should be had to the consistency of the witness’ evidence with undisputed or indisputable evidence, and the internal consistency of the witness’ evidence;
(4) care should be taken in drawing conclusions about truthfulness and reliability solely or mainly from the appearance of a witness or from the assessment of a witness’ character;
(5) witnesses’ credibility should be tested by reference to the objective facts proved independently of their testimony, and regard should be had to their motives and to the overall probabilities.’
42. It is rare in modern commercial litigation to encounter a claim based on an agreement which is not only said to have been purely by word of mouth but of which there is no contemporaneous documentary record of any kind. The prevalence of e-mails, text messages and other forms of electronic communication is such that most agreements or discussions which are of legal significance, even if not embodied in writing, leave some form of electronic imprint: Blue v Ashley [2017] EWHC 1928 (Comm) at [65] per Leggatt J (as he then was); Music Holdings Property HK Ltd v Ooi Lean Choo [2020] HKCFI 1312 at [58] per Ng J. Because the value of a written record is understood by anyone with business experience, its absence may, depending on the circumstances, tend to suggest that no contract was concluded: Blue v Ashley at [49]; Wing Hing (1956) Co Ltd v Nissin Foods Co Ltd [2021] HKCFI 638 at [56] per DHCJ Abraham Chan SC.
43. In Gestmin SGPS SA v Credit Suisse (UK) Limited [2013] EWHC 3560 (Comm) at [16-20], Leggatt J (as he then was) set out a detailed analysis on the unreliability of human memory and the impact on the civil litigation process on recalling past events. In view of these considerations, at [22], it was held that the best approach for a judge to adopt in the trial of a commercial case is to place little if any reliance on witnesses’ recollection of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. These observations were cited with approval by Kwan VP in Galleria (Hong Kong) Ltd v DBS Bank, Hong Kong Branch [2021] HKCA 611 at [175]...
44. I also bear in mind that the burden of proof rests on the Plaintiffs to prove and establish the oral agreement, including the manner in which it was concluded and on the terms as pleaded, on a balance of probabilities. There is no burden on the Defendant to persuade the Court that his alternative version of events should be accepted: Music Holdings Property HK Ltd at [55] per Ng J.”
65.Mr Nip relies heavily on §44 in Leung Chin Sing and submits that the court only needs to consider whether the Company discharges the burden of proving the existence of the JV Agreement as Ds have no burden to persuade the court that any of the positive defences pleaded in their Defence should be accepted. I am unable to agree.
66.It is well established that in civil proceedings, the burden of proof lies upon the party who substantially asserts the affirmative of the issue. Where a given allegation, whether affirmative or negative, forms an essential part of a party’s case, the proof of such allegation rests on him (Phipson on Evidence, 20th ed., §6-06). This was precisely the principle referred to in Music Holdings Property HK Ltd [2020] HKCFI 1312, where Ng J said (at §55):
“Since it is Ms Lau who puts forward the alleged oral agreements in support of her defence and counterclaim, she bears the burden of proving those oral agreements on balance of probabilities—it is not for the Plaintiffs to convince this court of the truth of their alternative account.”
67.As Ds rely on the existence of the Employment Agreement, the Security Agreement and the Varied Security Agreement said to have been made orally, they bear the evidential burden of proving the existence of such agreements. In any event, in considering whether the parties have discharged the burden of proving the existence of the agreements they rely upon, it is necessary to consider the inherent likelihood of their assertions by reference to the objective facts proved. The court cannot brush aside the positive defences advanced by Ds.
C2. Issues 1 - 3
68.The Company’s case is that in the evening of 6 March 2014, Ma and Lee reached the JV Agreement. It was pursuant to the JV Agreement that Lee and Ma:
(1) carried out the acts described in §§17-40 above[52];
(2) attended the WPK Meeting, made the representations and obtained Wong’s agreement to award Ko Shan Road Project to their joint venture company[53]; and
(3) obtained the agreement of WPK to award the other 3 Projects to their joint venture company on the same basis as Ko Shan Road Project[54].
69.Ds’ pleaded case is that Lee was an employee of LSP[55]:
(1) In June/July 2014, an oral agreement was reached between Ma and Lee that Lee would be employed by LSP as project manager, and for projects which Lee assumed additional responsibility as project-in-charge, he would be given a share of the profits (“Employment Agreement”).
(2) On 15 July 2014, Ma orally agreed to pay not less than HK$1 million from the profits of Ko Shan Road Project to Lee (“Bonus”).
(3) Lee took part in the preparation of tenders in March 2014, and was paid monthly salary at HK$38,000/month from July 2014. When Lee left the employment without notice to LSP on 15 April 2019, his salary was HK$51,500/month.
(4) It was an implied term of the Employment Agreement that Lee had to complete the project works up to expiry of the period of retention before he would be entitled to share any profits under any projects. This plea is not pursued by Ds at trial.
70.In respect of these factual issues:
(1) Both Lee and Ma give evidence on the issues and are subject to extensive cross-examination. For the reasons explained in §§73 - 75 below, I accept Lee’s evidence and reject Ma’s evidence to the extent that his evidence is inconsistent with that of Lee.
(2) Wong and Hung give evidence on the WPK Meeting and other matters relating to WPK and the Projects. For the reasons explained in §77 below, I accept Wong’s evidence in entirety.
(3) I do not accept Hung’s evidence in his WS or under cross-examination, to the extent that it is inconsistent with the contents of his affirmation made on 6 May 2019 in support of Lee’s application for leave to bring the present action (“Hung’s Aff”). As is clear from his evidence under cross-examination, Hung’s Aff was signed after the contents had been explained by HWC to him. It was only after Hung had started working for LSP as project director that he sought to retract the evidence he had given in Hung’s Aff.
71.It is not in dispute that Lee and Ma met in the evening of 6 March 2014 for dinner and thereafter, Ma offered to drive Lee back to home during which they discussed the possibility of Lee joining the business of LSP. Ma was very keen in inviting Lee to join as an employee but Lee declined. Their evidence differ on whether an agreement was reached during their discussion in the car.
72.Lee’s evidence is that[56]:
(1) Ma offered to pay him a bonus out of the sums paid for the variation orders of the projects, but he declined. Lee told Ma that he had seen many cases that an employee ended up receiving no bonus as the boss invariably claimed that there was no profit for paying any bonus.
(2) Ma then offered to cooperate with Lee on the basis that he would have 60% share while Lee would have 40%. Lee insisted on equal share of 50%, which was eventually accepted by Ma.
(3) They then discussed the arrangement for Lee to become a 50% shareholder of LSP, but Ma said that the arrangement would be quite complicated and proposed that a new company be formed to carry on business as contractor undertaking plumbing and drainage installation works, with 2 of them as the only directors and equal shareholders.
(4) Immediately after the JV Agreement was reached, Lee started working together with Ma on the preparation of tenders for new plumbing and drainage installation works projects and he attended and worked at the Old Premises from time to time without receiving any remuneration. There was a division of responsibility with Lee mainly responsible for studying and measuring plans and drawings, while Ma responsible for making the calculations and preparing the tender documents.
(5) It was pursuant to the JV Agreement that Lee attended the WPK Meeting, and made the representations to Wong and Hung to the effect that he and Ma were business partners, their company would be undertaking Ko Shan Road Project if awarded by WPK and he would personally handle the Project.
73.Lee has been cross-examined extensively on the above evidence of his. He remains unshaken during cross-examination. As regards the JV Agreement:
(1) Lee explains how Ma repeatedly invited him to join as project manager of LSP, both before and after their meeting on 6 March 2014, and the reasons for rejecting the offer.
(2) The reasons he gave to Ma are consistent with Lee’s substantial experience and credentials in plumbing and drainage installation works, and is supported by the evidence of Pang, Ip and Wong, all of who speak very highly of the experience, competence and integrity of Lee.
(3) Had Lee wanted to seek employment in plumbing and drainage installation works, he could easily have found employment in an established company including WPK. This is confirmed by Wong in his evidence.
(4) As explains by Lee, there was simply no reason for him to agree to be employed by a small company like LSP at the time. This is consistent with the objective facts that (a) LSP was new in the field and did not have any significant job reference (none has been identified); (b) Ma did not have any formal training or qualification in plumbing and drainage installation works; and (c) despite having submitted tenders for projects, LSP had yet to be awarded with any significant project (none has been identified by Ds).
(5) Lee’s evidence that it was pursuant to the JV Agreement that he started to work on the preparation of tenders for LSP from early March 2014 is consistent with the fact that it was only until June 2015 (15 months after Lee had started working for LSP) that Lee began to receive a modest salary of HK$38,000/month. If Lee were merely an employee, there would be no reason for him to work for 15 months without receiving any salary.
74.Lee’s evidence on the WPK Meeting is consistent with, and corroborated by, the evidence of Wong, who is an independent witness. Wong gives evidence in a straight forward and candid manner. Indeed, much of his evidence is not being challenged. His cross-examination is focused on Ds’ suggestion that all along WPK intended to contract with LSP, rather than the Company jointly owned by Ma and Lee. I accept the evidence of Wong.
75.Lee’s evidence on the Dec 2014 Agreement is not challenged by Ds, and I accept his evidence.
76.Wong’s evidence on the WPK Meeting, which I accept, is that:
(1) Lee told Wong that he had been jointly running a company with Ma, and they were very much hoping to be awarded with Ko Shan Road Project[57].
(2) Ma referred to Lee as his “拍檔” (partner), and Wong encouraged both Lee and Ma to work hard while they were young[58].
(3) Wong and Hung requested Lee to personally manage Ko Shan Road Project, and Lee confirmed that he would personally handle the Project. As Wong had trust and confidence in Lee’s capability and sense of responsibility, he changed his view about LSP’s tender and intended to award the Project to the company of Ma and Lee[59].
(4) Wong asked if the contract price could be further reduced. Hung suggested the price of HK$23,280,000, which was accepted by Lee without reference to Ma[60].
(5) Wong agreed to award Ko Shan Road Project to the company of Lee and Ma at the lump sum fixed price of HK$23,280,000[61].
77.Under cross-examination, Wong says that:
(1) He has a clear recollection of the WPK Meeting as it was an informal meeting which took place after office hours.
(2) He and hence WPK all along intended to award Ko Shan Road Project and other 3 Projects to “朗誠” which he understood to be the company jointly owned by Lee and Ma.
(3) Lee said that Ma was his partner. Wong had confidence in Lee as he did well while working for WPK. The most important consideration was that he had confidence in Lee, and Lee had to be personally in charge of Ko Shan Road Project. By contrast, Wong did not have much contact with Ma except on social occasions.
(4) Lee agreed to reduce the price of Ko Shan Road Project on the spot, which reinforced his belief that Lee was a partner of the joint venture business, rather than a mere employee.
78.Lee’s evidence is also corroborated by the evidence in Hung’s Aff, where Hung confirmed that:
(1) At the WPK Meeting, Ma introduced Lee as his partner and said that they were very keen to take up the installation works of Ko Shan Road Project through their company in which Lee had an interest. Lee agreed to further reduce the contract price without reference to Ma[62].
(2) WPK intended to award Ko Shan Road Project and the other 3 Projects to the company of Ma and Lee, as Lee (but not Ma) was well known to WPK and the management of WPK trusted and had confidence with Lee[63].
79.By contrast, Ma’s evidence bears all the hallmarks of recent fabrication and is incredulous.
(1) In his WS, Ma’s evidence is that:
(a) No agreement, whether in the form of the JV Agreement or any other form, was reached with Lee on 6 March 2014. During the period between February and March 2014 including the discussion on 6 March 2014, he was only looking to employ someone who had experience to take up the position as project-in-charge. Although Lee indicated that he was interested in taking part in the preparation of tenders for LSP on the basis that if the projects were profitable, he would like to receive a bonus, Ma did not accept the proposal[64].
(b) Ko Shan Road Project was formally awarded to LSP on 15 July 2014 but the preparation work had commenced in early July 2014. It was only in early July 2014 that Lee agreed to be employed by LSP as project manager at HK$35,000/month. At that time, based on his estimate on the profit, Ma promised to pay bonus of not less than HK$1 million to Lee[65].
(c) Then, Ma contradicts himself and says that before the WPK Meeting, he and Lee agreed that LSP would employ Lee as project manager and the project-in-charge of Ko Shan Road Project at HK$35,000/month if such Project was awarded to LSP[66].
(d) He started paying salary to Lee in cash in July 2014 following Lee’s request, as Lee did not want LSP to report the salary paid to him. It was only until June 2015 that Lee was paid salary through LSP’s bank account in the same manner as other employees[67].
(2) After having seen Lee’s WS, Ma filed his SWS and changed his evidence in that[68]:
(a) Ma refers to the WhatsApp conversations (exhibited to Lee’s WS) regarding their discussions on the ongoing tenders, and relies on (i) Lee’s reply that he tentatively plan to come to work in June 2014, and (ii) Ma’s response that he would know the result of the tenders in May or June, and Lee could join in August or September.
(b) At that time, the only agreement reached between him and Lee was that it was only after LSP had been awarded project that Lee would join LSP as project manager.
(c) Then Ma contradicts himself saying that although Lee had not signed any employment contract, he had agreed to join LSP and had been receiving salary from LSP and was entitled to annual leave, sick leave, MPF from May 2015. All along, the works carried out by Lee was in his capacity as project manager of LSP including Ko Shan Road Project.
(3) Ma’s evidence in his WS and SWS is inconsistent with Ds’ pleaded case on the Employment Agreement.
80.The fact that the parties have reached the JV Agreement on 6 March 2014 and they pitched for and undertook the Projects pursuant to the JV Agreement is consistent with, and supported by, the following objective facts.
81.First, Lee began to work on the preparation of tenders for LSP and attended the Old Premises from time to time from mid-March 2014. Immediately after WPK Meeting in June 2014, Lee began to work on Ko Shan Road Project on a full time basis. He did so without receiving any remuneration. It was only until June 2015 that LSP began to pay a relatively modest salary of HK$38,000/month to Lee. It is inherently unlikely that Lee would agree to work for LSP for such a long period without receiving any salary if he were merely an employee of LSP.
82.Mr Nip relies heavily on the fact that Lee was paid salary by LSP from June 2015 to March 2019 and tax returns were filed by LSP reporting the payment of such salary which, he submits, go against the Company’s case on the JV Agreement and supports Ds’ case on the Employment Agreement. I disagree. The fact that Lee received salary only from LSP from June 2015 (but not before) is consistent with the fact that he and Ma had reached the JV Agreement. There is no inconsistency between the parties having reached the JV Agreement and LSP paying salary to Lee from June 2015 as it is not in dispute that until completion of Ko Shan Road Project, there would be no distribution of profit generated by the Project.
83.I do not accept Ma’s allegation that from July 2014 to May 2015, salary was paid to Lee in cash or that the amount of salary reported in the tax returns prepared by Carrie and filed by LSP had been under-stated at the request of Lee[69].
(1) Despite the very serious nature of the allegation which involve defrauding the Inland Revenue Department and filing inaccurate tax returns, not a single document has been adduced by Ds in support of the allegation.
(2) When asked by this Court, Ma is not able to provide any credible explanation as to why he is unable to produce any bank statement or accounting ledgers of LSP to show that Lee was paid salary in cash for the period from July 2014 to May 2015.
(3) It seems to me that the allegation is fabricated by Ma in his attempt to explain away the fact that Lee started working pursuant to the JV Agreement from mid-March 2014 without receiving any remuneration from LSP.
(4) The extent to which Ma is prepared to fabricate allegation does not reflect well on his credibility generally. I do not accept Ma’s evidence to the extent that his evidence is inconsistent with that of Lee and Wong.
84.Second, the conduct of Ma in providing the June 2014 Forecast to Lee and discussing with Lee about recruitment of every employees and sub-contractors and the amounts to be paid to them throughout June to December 2014 are consistent with the fact that Ko Shan Road Project was undertaken pursuant to the JV Agreement. They are inconsistent with Ds’ case that Lee was merely an employee.
85.Third, the message sent by Ma to Lee on 2 August 2014 where he referred to the fact that he had been thinking about the details of their cooperation and that he would prepare a written agreement for that purpose is consistent with the parties having reached the JV Agreement on 6 March 2014.
86.Fourth, in around August 2014, Lee proposed to Ma that each of them should contribute HK$2 million as working capital for their joint venture business and Ma agreed, followed by Lee taking out a mortgage loan of HK$2 million on 19 August 2014. This is consistent with the parties having reached the JV Agreement and required working capital to finance Ko Shan Road Project undertaken pursuant to such Agreement.
87.I do not accept Ds’ allegations on the Side Business and the Security Agreement.
(1) The alleged Side Business was not mentioned in any contemporaneous documents or featured in any messages exchanged between Ma and Lee during the entire period from mid-March 2014 to April 2019 when they worked together.
(2) The allegation on the Side Business first appeared in Ma’s WS filed on 30 November 2020 and was only introduced to the Defence by way of amendments in January 2023, which was 19 months and 45 months respectively after the Company (through HWC) had demanded Ds to account for the sums received under the Projects. No explanation has been proffered as to why the allegation was not raised at the earlier stage.
(3) In any event, on Ds’ case, the Side Business never got off the ground. There was no reason for Lee and Ma to contribute any working capital to finance a business which they never started. At the time when Lee proposed the capital contribution, the only ongoing business / project which required working capital was Ko Shan Road Project.
88.Fifth, Ma took steps to incorporate the Company on 23 October 2014 with Lee and him as the only directors and equal shareholders. This was followed by:
(1) Ma and Lee opening the HSBC Account in January 2015 which could only be operated upon the signatures of both of them.
(2) Shortly after the HSBC Account had been set up, on 5 March 2015, Lee texted Ma saying that the payments should be made by the Company. The actual words used were “我諗我同你應該用新公司account比糧比較正路!”.[70] In response, Ma texted Lee on 31 March 2015, “明天要出糧，有時間回來傾。”.[71] The discussion ended after Lee had accepted the Arrangement then proposed by Ma.
(3) At Ma’s request, on 13 March 2015, each of Lee and Ma paid HK$1 million into HSBC Account, which had been mixed with the funds in the Account and applied to defray the Direct Expenses and Indirect Expenses. It was only until 16 September 2017 and 2 November 2018 that Lee obtained the return of his money (without any interest) in 2 tranches of HK$500,000 each.
(4) There was no reason for Ma and Lee to pay the same amount of money into the HSBC Account and allow the money to be used to defray the Direct Expenses and Indirect Expenses unless each of them had an equal interest in the Projects. Nor was there any reason for Lee to pay his own money into HSBC Account and for such money to be used to pay LSP’s expenses for over 2 ½ years if he were merely an employee and did not have any interest in the Projects.
89.I do not accept Ds’ allegation that the HK$1 million was paid by Lee pursuant to the Varied Security Agreement[72] which I consider to be another allegation fabricated by Ds after the commencement of the action for the following reasons:
(1) The allegation is not supported by any document, contemporaneous or otherwise.
(2) In all the messages exchanged between Lee and Ma, there was no reference whatsoever to the alleged or any bonus, still less a bonus of HK$1 million. Nor was there any reference to an alleged agreement which involved Lee and Ma having to pay HK$1 million each as “security” or “mutual security”, whether in respect of Lee’s entitlement to “Bonus” or to “ensure or guarantee that [Lee] would see the Ko Shan Road Project through to completion” belatedly introduced to the Defence by way of amendments on 26 January 2023.
(3) Ds’ allegation makes no sense. The alleged agreement did not provide any security for Lee at all. Rather, it imposed an obligation on Lee to provide his personal fund which he could not use for a prolong period of time. There was no reason for Lee to agree to such “Varied Security Agreement” which only worked to his disadvantage and did not provide any “security” to him.
(4) The falsity of Ds’ allegation can also be seen from the fact that LSP never paid or offered to pay the alleged or any “Bonus” to Lee.
(5) When asked by this Court as to why LSP never paid the alleged “Bonus” to Lee, Ma claims that this was due to the commencement of this action. This cannot be the true reason given that on Ds’ own case, Lee was entitled to receive the Bonus upon completion of Ko Shan Road Project. If the alleged Varied Security Agreement and the alleged agreement on the Bonus existed, at the latest, LSP should have paid the “Bonus” to Lee when he left the employment on 15 April 2019. Not only did LSP never pay the “Bonus” to Lee, it demanded Lee to pay HK$20,170.83 as “compensation” for terminating the employment on short notice.
90.Sixth, Ma signed the Feb 2015 Letter on behalf of LSP informing WPK that the “company payment account” was changed from LSP’s account to HSBC Account.
(1) The instructions continued and extended to all the income derived from the other 3 Projects subsequently awarded by WPK to LSP until Ma sent the April 2019 Letter to WPK.
(2) During the period from 17 March 2015 to 15 February 2019, a total amount of HK$122,456,775.08 was paid by WPK into HSBC Account.
(3) The fact that Ds agreed to allow all the income derived from the Projects from 25 February 2015 to be paid into the HSBC Account is only consistent with the fact that Ds knew that the Projects were undertaken pursuant to the JV Agreement and the income derived from the Projects belonged to the Company, but not LSP.
91.I do not accept Ds’ allegation that the instruction for WPK to pay all the income derived from the Projects into HSBC Account was issued pursuant to the Security Agreement.
(1) The allegation defies common sense. If the purpose was to provide security for the “Bonus”, there was no reason why Ds did not change the instruction once the amount paid into HSBC Account reached HK$1 million.
(2) It is implausible that Ds would allow the instruction to continue and extend to all the Projects if the Company did not have any interest in the Projects.
(3) Ds’ assertion that WPK was not willing to change the payment account is not supported by any document.
(4) In any event, the assertion makes no sense. If, as Ds allege, the income derived from the Projects belonged to LSP, there was no reason why it could not issue a letter to WPK in the same way it sent the Feb 2015 Letter. There was no reason for WPK not to comply with the request.
92.Seventh, Carrie, the longest serving employee of LSP who was in charge of the accounting matters of LSP and the Company, prepared the following accounts for the Projects and the Company at the request of Lee in early 2019:
(1) For each of the Projects, the name of the Project concerned appeared at the top of the account, and the Direct Expenses for the entire period of the Project were listed out in great details (collectively “Projects Accounts”). The Project Accounts show the gross profits derived from the Projects, which Lee was entitled to know. There was no reason for Carrie to agree to prepare the Project Accounts for Lee if he or the Company had no interest in the Projects.
(2) As for the Indirect Expenses, Carrie prepared a separate account under the name of the Company listing out all the Indirect Expenses which she considered should be attributed to the Company for the period from 29 July 2014 to 17 December 2019 (“Expenses Account”).
93.Under cross-examination, Carrie asserts that the name of the Company appearing on the Expenses Account was a mistake when she copied and used a table she had used. She discovered the mistake in 2019. I do not think that her assertion is true:
(1) Carrie is not able to identify which table she allegedly copied and why the name of the Company appeared in that table. If, which seems to be her evidence, she prepared and updated separate expenses account for the Company, it is consistent with and supports the Company’s case that the Projects were undertaken pursuant to the JV Agreement such that it was necessary for a separate account to be prepared for the Company. It is inconsistent with Ds’ case that the Company had no business or expenses throughout the entire period.
(2) As Carrie admits under cross-examination, the Expenses Account was prepared by her following Lee’s request for an updated account on the expenses of the Projects in early 2019. This explains why the first expense listed was dated 29 July 2014, but not 2011 when LSP started its business.
(3) If Carrie had allegedly discovered the “mistake” in 2019 as she claims, she would have corrected the “mistake”, rather than allowing the “mistake” to continue when she updated the Expenses Account all the way up to the last item dated 17 December 2019.
(4) When asked by this Court about the Expenses Account, Carrie asserts that it should be the expenses account of LSP. That cannot be true as the Expenses Account did not cover LSP’s expenses incurred prior to 29 July 2014 or the expenses incurred after 17 December 2019.
94.Eighth, the third parties involved in dealing with the Projects all knew and understood that the Projects were undertaken by the Company or the company in which Ma and Lee have equal interest:
(1) WPK: Wong and Hung of WPK intended and understood that the Projects were awarded to the company of Lee and Ma, which could only be a reference to the Company (LSP was at all times wholly owned by Ma). Consistent with this, the income derived from the Projects were paid into the Company’s HSBC Account.
(2) A significant number of Subcontractors Payment Certificates (prepared by the staff of LSP and approved by Lee) stated that the Company was the subcontractor and/or bore the chop of the Company (see §§31-34 above).
(3) In each of the Payment Tables in respect of the Projects, WPK described the Company as the contractor. Ds never took issue with WPK treating the Company as the contractor of the Projects.
(4) Pang: His evidence is that he was told by Lee in July 2014 when Lee invited him to work for his new company, that Lee had started running his own business as a contractor for plumbing and drainage works and that business was ran with his former colleague on a 50:50 basis. Ma and Lee referred to each other as partner during the dinner with Pang in mid-August 2014[73]. All along, Pang understood that Lee was one of the bosses and that he was working for a joint venture company jointly owned by Ma and Lee in equal shares[74].
(5) Ip: His evidence is that he was told by Lee in June 2016 that he and Ma had jointly established the Company on a 50:50 basis for their joint venture business; he agreed to work for the joint venture only because Lee was one of the bosses of the joint venture; and he understood that LSP was a company used by Lee and Ma to run the joint venture business[75].
(6) Carrie: In the conversation between Lee and Carrie on 8 April 2019[76], Lee referred to his concern that Ma might withdraw HK$20,000 daily from HSBC Account using the Company’s ATM card (which could be done without the consent of Lee), Carrie pacified Lee saying that Ma would not be that bad. When Lee said that Carrie was very clear about the situation and referred to the fact that the Projects from WPK were undertaken on a 50:50 basis at the outset, Carrie did not express any disagreement. Instead, she referred to Ma saying that Lee had not followed up on the Projects. When Lee repeated that the Projects were undertaken on the basis of 50:50, Carrie said she knew about that, but she also knew that Ma would insist on his view.
(7) I do not accept Carrie’s evidence under cross-examination that she understood Lee’s reference of 50:50 to be a reference to the Side Business. As stated above, the Side Business never got off the ground, there was simply no income or business to speak of and no reason for Lee to be concerned about such non-existent Business.
(8) The latter part of the conversation shows that Carrie was aware of Lee’s interest in the Projects and the lack of proper account. She said Lee should consider receiving payments by instalments as the amount payable by Ma might be as much as HK$2-3 million, and Ma needed funds for his ongoing projects.
(9) When asked by this Court as to why Carrie referred to HK$2-3 million if Lee were only an employee and had no interest in the Projects, Carrie asserts that this was a reference to the HK$1 million “Bonus” which she was aware of. The assertion cannot be true as the reference to HK$2-3 million was in the context of their discussion about the options available for Lee to receive his share under the Projects. There was no reference to the alleged HK$1 million Bonus.
95.Lastly, as stated in §§39 – 40 above, during the whole period when Lee was chasing Ma to finalise the accounts of the Projects so as to determine their share of the profits, Ma never said anything to the effect that Lee was merely an employee or that the Projects were undertaken by LSP in his own right.
(1) In particular, at the Feb 2019 Meeting, Ma himself said that the variation orders in the amount of HK$1.5 million and HK$0.5 million in Ko Shan Road Project and CX Project would be paid to Lee. No profit would be paid in respect of Kai Tak Project and Ocean Park Project allegedly because they “broke even”[77].
(2) The fact that Ma told Lee that he would pay HK$1.5 million and HK$0.5 million to him in respect of Ko Shan Road Project and CX Project is corroborated by the conversation between Lee and Carrie on 8 April 2019 where she referred to the “option” available to Lee, and the HK$2-3 million payable to Lee.
(3) The evidence on the Feb 2019 Meeting reinforces my view that Ds’ allegations on the Employment Agreement, the Bonus, the Security Agreement and the Varied Security Agreement are false.
96.For the above reasons, I find that:
(1) Lee and Ma reached the JV Agreement on 6 March 2014, which was subsequently varied by the Dec 2014 Agreement;
(2) It was pursuant to the JV Agreement that (a) Lee and Ma formed the Company; (b) Lee and Ds undertook the Projects on the basis that the Projects and the income derived therefrom belonged to the Company; (c) the income derived from the Projects were paid into HSBC Account; and (d) separate accounts were prepared for the Projects and the Indirect Expenses.
(3) The funds in the HSBC Account were transferred to LSP for payments of the Direct Expenses and Indirect Expenses pursuant to the Arrangement.
(4) There was the Understanding between Lee and Ds that the Company would share office and staff with LSP, and the Company would contribute a reasonable portion of the rent, salaries and other expenses paid by LSP during the Relevant Period.
(5) Ds’ allegations that (a) Lee and Ds reached the Employment Agreement; (b) Lee agreed to work for LSP on the terms that he would only be entitled to be paid monthly salary and the Bonus; (c) the Company was set up pursuant to the discussion on the Side Business and the Security Agreement; (d) Lee and Ma reached the Security Agreement and the payment of all the income derived from the Projects from February 2015 onwards into HSBC Account was pursuant to the Security Agreement; and (e) Lee and Ma reached the Varied Security Agreement and the HK$1 million paid by Lee into HSBC Account was pursuant to the Varied Security Agreement, are pure fabrications and must be rejected.
C3. Issue 4
97.The Company’s case, as pleaded in the ASOC, may be summarized as follows.
98.LSP held Ko Shan Road Project on express or common intention constructive trust for the Company in that[78]:
(1) The JV Agreement and the agreement reached at WPK Meeting constituted a contract between LSP, Ma and Lee for LSP to hold Ko Shan Road Project on trust for the benefit of the Company once it was incorporated.
(2) Alternatively, there was an agreement and shared common intention that the joint venture company, which became the Company, would have the beneficial ownership of Ko Shan Road Project once it was incorporated.
(3) In reliance on the aforesaid common intention, after its incorporation, the Company (through Ma and Lee) actively participated and worked on Ko Shan Road Project, and made numerous payments to LSP in discharge of what were represented to be legitimate expenses incurred by LSP in the Project.
(4) In the circumstances it would be unconscionable for LSP to deny the Company’s beneficial ownership of Ko Shan Road Project.
99.LSP held the other 3 Projects on express or constructive trust for the Company[79]:
(1) LSP entered into the LOAs with WPK subject to the JV Agreement, the WPK Meeting and the understanding between WPK, Ds, Lee, and the Company that the other 3 Projects were being awarded to the Company on the same basis as Ko Shan Road Project. On this basis, LSP entered into the LOAs as agent for and on behalf of the Company.
(2) Further or alternatively, insofar as LSP sought to appropriate the LOAs of the other 3 Projects, it did so with the knowledge that Ma acted in breach of his fiduciary duties to the Company, and it held the benefits of the LOAs on constructive trust for the Company.
C3.1 Express trust
100.Mr Nip submits that the Company’s case on express trust must fail because:
(1) It is not pleaded that any trust was created on 6 March 2014 when the JV Agreement was reached.
(2) The pleaded case on express trust must fail for lack of three certainties (Snell’s Equity, 34th ed., §22-012). As to certainty of words, Sir James Bacon VC stated in Heartley v Nicholson (1874-85) LR 19 Eq 233 at 242:
“It remains, therefore, only to be considered whether or not the testator did in his lifetime constitute himself such trustee. It is not necessary that the declaration of a trust should be in terms explicit. But what I take the law to require is, that the donor should have evinced by acts which admit of no other interpretation, that he himself had ceased to be, and that some other person had become, the beneficial owner of the subject of the gift or transfer, and that such legal right to it, if any, as he retained was held by him in trust for the donee.” (underlined added)
(3) There is no plea on the words used during the WPK Meeting such as to evince an intention on the part of Lee and Ds to create a trust. There is no certainty of object as the Company was not yet incorporated at the time of the WPK Meeting.
(4) Under cross-examination, Lee admits that at the WPK Meeting, he did not mention that a “new company” would be used. In his own words: “當時冇特登講用新公司做，冇講過用新公司做”. To be sure, he was asked to confirm again whether he mentioned about any new company, and his answer was: “當時我記憶係冇”. This admission negates the fundamental element of the Company’s case pleaded in §28 of ASOC.
101.I do not agree with Mr Nip’s submissions.
102.So far as pleading is concerned:
(1) In §60 of ASOC, it is averred that by reason of the matters pleaded in the previous paragraphs, after the incorporation of the Company, LSP held Ko Shan Road Project on express trust for the Company.
(2) In §60(1) of ASOC, it is pleaded that the JV Agreement together with the agreement reached at the WPK Meeting constituted a contract between LSP, Ma and Lee for LSP to hold Ko Shan Road Project and the LOA on trust for the benefit of the Company once it was incorporated.
103.The above plea is sufficient to satisfy the 3 “certainties” for an express trust in favour of the Company over Ko Shan Road Project in that:
(1) The terms of the JV Agreement and the representations made by Ma (representing himself and LSP) and Lee at the WPK Meeting (set out in §§76-78 above) were sufficiently certain to evince an intention on the part of LSP that it intended and agreed to hold Ko Shan Road Project upon trust for the Company once it was incorporated.
(2) The subject matter of the trust was Ko Shan Road Project and the LOA to be signed by LSP in respect of that Project.
(3) The object or person intended to have the benefit of the trust was the company jointly owned by Ma and Lee, which could only be a reference to the Company (no other company is jointly owned by Lee and Ma).
(4) The analysis is not affected by Lee’s evidence under cross-examination that according to his recollection, he did not specifically mention “new company” or “intended JV company” at the WPK Meeting. The Company was sufficiently identified at the WPK Meeting when Ma and Lee referred to the company jointly owned by them (no other company is jointly owned by Lee and Ma), which was also the understanding of Wong and Hung.
104.For the above reasons, I find that there was an express trust that LSP held and undertook Ko Shan Road Project on trust for the Company once it was incorporated.
105.As for the other 3 Projects awarded by WPK to LSP, the Company’s case on express trust is pleaded in §61 of ASOC, which avers that LSP entered into the LOAs in respect of the 3 Projects subject to the JV Agreement, the agreement reached at the WPK Meeting and the understanding between WPK, Ma, Lee, LSP and the Company that the other 3 Projects would be awarded to the Company on the same basis as Ko Shan Road Project.
106.The plea is sufficient to give rise to an express trust in favour of the Company over the other 3 Projects and the 3 certainties are satisfied in that:
(1) The terms of the JV Agreement, the representations made by Ma (representing himself and LSP) and Lee at the WPK Meeting (set out in §§76-78 above) and the understanding between WPK, Ds and Lee were sufficiently certain that LSP intended and agreed to hold the other 3 Projects upon trust for the Company.
(2) The subject matters of the trust were the 3 Projects and the LOAs signed by LSP in respect of such Projects.
(3) The object or person intended to have the benefit of the trust was the Company.
107.For the foregoing reasons, I find that there was an express trust that LSP held and undertook the other 3 Projects on trust for the Company.
C3.2 Common intention constructive trust
108.As regards common intention constructive trust (“CICT”), Mr Nip submits that the relevant principles have been sufficiently summarized by DHCJ Stock SC in Leung Hang Lin and Li Kwai Fuk v Lam Mei Yung [2019] HKCFI 2819 at §§7-8 as follows:
“7. The principles applicable to common intention constructive trusts are set out in various Hong Kong authorities, notably: Luo Xing Juan v Estate of Hui Shui See (2009) 12 HKCFAR 1 per Ribeiro PJ at §§35 – 38; Liu Wai Keung v Liu Wai Man [2013] 5 HKLRD 9; Mo Ying v Brillex Development Ltd [2015] 2 HKLRD 985; Primecredit Ltd v Yeung Chun Pang Barry [2017] 4 HKLRD 327.
8. In summary:
(1) The starting point is that equity follows the law. There is a presumption that the beneficial interest follows the legal interest. Where the property is registered in a defendant’s name, the plaintiff bears the burden of showing, on the balance of probabilities, that the defendant held the property on trust for him or her such that the beneficial ownership differs to the legal ownership. See: Liu Wai Keung §44; Mo Ying §5.16; Primecredit §17.
(2) The burden may be discharged by showing that: (i) there was a common intention held by the plaintiff and the property owner at the time of the purchase (or exceptionally, thereafter) that the beneficial ownership was to be different to the legal ownership; (ii) the plaintiff altered his or her position in detrimental reliance upon the common intention; and (iii) it is unconscionable for the property owner to assert ownership in reliance on the legal title. The constructive trust is constituted by the plaintiff’s detrimental reliance on the common intention and the unconscionability of the legal owner departing therefrom. See: Luo Xing Juan §38; Liu Wai Keung §46.
(3) The approach to ascertaining common intention is objective. One looks to the intention of each party which was reasonably understood by the other party to be manifested by the first party’s words and conduct. See: Liu Wai Keung §47; Mo Ying §5.16.
(4) The doctrine is sometimes described as having two limbs. First, where at any time prior to the acquisition (or exceptionally, at a later date), there is an agreement, arrangement or understanding reached between the parties as to how the property is to be held beneficially, based on evidence of express discussions. Second, where there is no evidence to support such a finding but the court relies on the parties’ conduct as a basis from which to infer a common intention. There is some authority that under the second limb, direct contributions to the purchase price by a party who is not a legal owner will readily justify the inference. See: Mo Ying §5.8; Primecredit §§2.3 and 2.4.
(5) However, the modern approach is to assess the parties’ common intention by a holistic approach having regard to the context and the particular facts. The court is not constrained to consider only pure direct monetary contributions to the purchase price. In a Chinese setting, especially for the older generations, where explicit discussions on property rights within the family are not that common, the court has to pay more regard to circumstantial matters. See: Mo Ying §§5.14 and 5.15; Primecredit §1.6.”
109.Mr Nip submits that in Luo Xing Juan v Estate of Hui Shui See (2009) 12 HKCFAR 1, Ribeiro PJ emphasised the following fundamental principles:
“38. Where a constructive trust is alleged to arise on the basis of the parties’ common intention, it is the intention commonly held by the property owner and the claimant regarding their shared beneficial interests in the property that matters. The trust is constituted by the claimant’s detrimental reliance on their common intention and the unconscionability of the property owner departing therefrom.
39. It follows that Glory Rise’s ownership of the Property is crucial. The fact that A and B might form a common intention that they should have shared beneficial interests in C’s property cannot in principle be sufficient to impose a constructive trust on C to hold C’s property on trust for A and B. C is not a party to and does not unconscionably depart from any common intention, so there is nothing to constitute C as a trustee for A and B. If B does not make good his promise, he might attract personal liability to A, but it does not mean that an equitable interest in C’s property is created in favour of A.” (underlined added)
110.Mr Nip submits that the Company’s case on CICT must fail for the following reasons:
(1) There was no common intention on the part of LSP or anything to affect LSP’s conscience or to constitute detrimental reliance by the Company.
(2) The common intention must be held by the Company and LSP (the property owner) that the beneficial ownership was to be different from beneficial ownership. It was factually impossible that the Company (which was not in existence) had such intention at the time of the WPK Meeting.
(3) LSP was not a party to and did not unconscionably depart from any common intention, so there is nothing to constitute a trustee for Lee and Ma.
(4) LSP’s conscience was not affected by anything said at the WPK Meeting as there was no mention of any intended JV company.
(5) If there was no agreement or intention to award the Projects to the Company or to hold them on trust for the Company, there could not have been any detrimental reliance by the Company.
(6) It is doubtful whether CICT applies in commercial context as the law remains unsettled[80].
111.I do not agree with Mr Nip’s submissions. In my judgment, the Company has discharged the burden of proving that LSP carried on and held the Projects on CICT for the Company for the reasons set out in §§112 - 115 below.
112.First, there was common intention held by the Company and LSP when Lee and Ma attended the WPK Meeting to pitch for Ko Shan Road Project that the beneficial ownership of the Project belonged to the Company upon its incorporation.
(1) So far as LSP is concerned, it was represented by Ma who was its sole shareholder and director.
(2) As regards the Company, although it was not in existence at the time of WPK Meeting, Lee and Ma had already agreed under the JV Agreement that they would establish a company with 2 of them as directors/shareholders to pitch for and undertake projects for plumbing and installation works. The mind and will of the Company was represented by Lee and Ma at the WPK Meeting, and bound the Company once it was incorporated.
(3) Even if the Company could not have the common intention at the WPK Meeting as it had not been incorporated, upon its incorporation, the Company (acting by Ma and Lee) became privy to the common intention.
(4) The analysis is not affected by Lee’s evidence under cross-examination that according to his recollection, he did not specifically mention “new company” or “intended JV company” at the WPK Meeting. The Company was sufficiently identified at the WPK Meeting when Lee referred to the company owned by him and Ma (no other company is jointly owned by Ma and Lee), which was also the understanding of Wong and Hung.
(5) It remained the intention of Lee and Ma (being all its directors/shareholders) after the incorporation of the Company that Ko Shan Road Project was to be undertaken for the benefit of the Company, such that the income derived from the Project was to be paid into HSBC Account, and the expenses be met out of the Company’s funds in the same Account.
113.As regards common intention on the part of the Company in respect of the other 3 Projects awarded by WPK, at the time the 3 Projects were awarded to LSP:
(1) Ma, who remained bound by the JV Agreement, was the only person who could and did represent LSP.
(2) The Company was already in existence and was represented by Lee and Ma who remained its only directors/shareholders.
(3) The Company (represented by Ma and Lee) already had the common intention derived from the JV Agreement and the WPK Meeting.
114.Second, the Company altered its position in detrimental reliance upon the common intention that LSP held the Projects on trust for the Company.
(1) As the evidence analysed in §§18-40, 81-95 above shows, during the 4 ½ years’ period when the Projects were ongoing (July 2014 to February 2019), the Company did not insist on LSP accounting for the income derived from the Projects, and continued to allow its funds in the HSBC Account to be transferred to LSP for the purpose of defraying the Direct Expenses and Indirect Expenses.
(2) As WPK intended and understood that the Projects were awarded to the company owned by Ma and Lee, it would have readily agreed to change the name of the contracting party from LSP to the Company had it been necessary for the Company to make such request. This is reinforced by the fact that when Ma issued the April 2019 Letter directing WPK to pay the amount payable under the Projects to LSP’s bank account, WPK refused to comply with the request.
115.Third, it is unconscionable for LSP (property owner) to assert ownership in reliance on the legal title on the Projects. The unconscionability is clear.
(1) LSP (through Ma) was privy to the common intention and knew that Lee had been undertaking the Projects pursuant to the JV Agreement, the agreement reached at the WPK Meeting and the understanding between Ds, Lee and WPK that the Projects were undertaken by the company jointly owned by Lee and Ma.
(2) With such knowledge, LSP (a) allowed Lee to continue to work on the Projects and used his own funds as working capital for the Projects; and (c) carried on the Projects in the manner consistent with the common intention including directing WPK to pay all the income derived from the Projects into HSBC Account, agreeing to the Arrangement for LSP to pay the Direct Expenses and Indirect Expenses on behalf of the Company throughout the entire period when the Projects were ongoing.
(3) It was only until Ds filed their Defence in November 2019 that they asserted, for the first time, that the Projects and the income derived therefrom and paid into HSBC Account belonged to LSP beneficially.
116.For the foregoing reasons, the Company’s claim based on CICT also succeeds.
117.It follows that LSP has been holding the Projects and all the income derived therefrom (including the amount held in the Stakeholder Account) on trust for the Company, and is liable to account to the Company as such trustee. The Company qua beneficiary is entitled to an account as of right (Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, §167; Lewin on Trust 20th ed (Vol.2), § 41-002).
C3.3 Breach of trust on the part of LSP
118.So far as breach of trust is concerned, in my view, LSP has acted in breach of trust in that:
(1) It usurped the Projects and refused to acknowledge the Company’s beneficial interest under the Projects and the income derived therefrom to the Company;
(2) It refused to account for the income received under the Projects and to pay over the amount held in the Stakeholder Account to the Company; and
(3) It failed to provide a proper account on the legitimate expenses of the Company, including what were the Indirect Expenses incurred during the Relevant Period and the basis for requiring the Company to bear 50% of such Indirect Expenses (as I so find).
119.In addition, the Company claims that LSP is liable to account for the Overpayments to the Company on the bases of knowing receipt, subject to the Company’s equitable interest, money had and received or unjust enrichment[81]. In light of the finding that LSP holds the Projects and the income derived therefrom on trust for the Company, it is not necessary to consider these alternative causes of action.
C3.4 Breach of fiduciary duties on the part of Ma
120.The Company claims that Ma acted in breach of his fiduciary duties owed to the Company and his duties as trustee of the Company’s assets in the following aspects:
(1) Ma attempted to misappropriate the Company’s funds by issuing the April 2019 Letter to WPK[82]; and
(2) Ma procured or caused the Company to make the Overpayments to the benefit of LSP by making misrepresentations to Lee that the Overpayments were for the purpose of paying the Direct Expenses or Indirect Expenses of the Company[83].
121.It is well settled that:
(1) A director owes fiduciary duties to the company, which requires him to act honestly and in the best interests of the company, and not to place himself in a position of conflict and not to profit from his position (Hollington on Shareholders’ Rights,9th ed, §5-28).
(2) As a matter of law, the giving away of company assets by a director for no consideration is prima facie a use of powers for improper purpose. Once a prima facie case is shown that the director has acted in breach of fiduciary duty in misapplying company assets, the evidential burden shifts to the director to demonstrate the proprietary of the transaction (Bishopsgate Investment Management Ltd v Maxwell (No 2) [1994] 1 All ER 261, 265d-f, 269d-e).
122.Mr Nip (rightly) does not dispute that if the Projects have been held by LSP on trust for the Company, in issuing the April 2019 Letter and causing the Company to make the Overpayments to the benefit of LSP, Ma acted in breach of his fiduciary duties and is liable to pay equitable compensation to the Company to the same extent as LSP. The amount which Ma is liable to pay to the Company is to be determined as part of the process of account.
C4. Issue 5
123.The Company’s case is that the total Indirect Expenses paid by LSP during the Relevant Period was HK$13,374,000, and only 50% of such Indirect Expenses (i.e. HK$6,687,000) should be borne by the Company. The Indirect Expenses consist of:
(1) HK$12,750,000, being salaries paid to employees at HK$250,000/month x 51 months. The amount included the salary paid to Lee from June 2015, which was HK$38,000/month and later increased to HK$51,500/month.[84]
(2) HK$624,000, being rent of LSP’s office from July 2014 to June 2016 at HK$8,000/month, and from July 2016 to September 2018 at HK$16,000/month.
124.Apart from putting the Company to strict proof, Ds have not put forward any positive case or adduced any evidence as to what expenses they claim had been incurred which should be attributed to the Company. In his written closing, Mr Nip submits that the Company’s case on the Understanding is that a “reasonable portion” of the rent, salaries and other expenses paid by LSP should be borne by the Company but “no explanation has been provided as to what the said reasonable portion to be bought”.
125.So far as Direct Expenses are concerned, the amount incurred for each of the Projects is based on the information prepared by Carrie. Neither the Company nor Ds take issue on the correctness of the amounts.
126.As regards Indirect Expenses:
(1) There is no dispute that LSP carried on other projects during the Relevant Period in which the Company has no interest or involvement. There is no reason why the Company should bear all the Indirect Expenses incurred during the Relevant Period.
(2) LSP has the opportunity to put forward its case on what it contends to be a fair apportionment of the Indirect Expenses but chose not to do so.
(3) In the absence of any proper basis to challenge the 50% apportionment claimed by the Company, I hold that the Company is to bear 50% of the legitimate Indirect Expenses incurred by LSP during the Relevant Period that is, indirect operating expenses of LSP incurred during the Relevant Period but excludes any direct expenses incurred by LSP in relation to the other projects undertaken in its own right during the Relevant Period (“Legitimate Indirect Expenses”).
127.As regards the Company’s claim for Overpayments:
(1) Mr Nip contends that the Company’s calculations on the Overpayments are “flawed” in that they failed to take into account the profit tax paid by LSP and “other overheads and expenses (apart from salaries and rent) incurred by LSP in carrying on its business and operating the 4 Projects”. I disagree.
(2) No evidence has been adduced by Ds in respect of the so-called “other overheads and expenses”. This is despite the fact that Ds have possession of all documents and information pertaining to the Indirect Expenses incurred by LSP during the Relevant Period.
(3) Nevertheless, in light of my finding that the Expenses Account was the expenses account prepared by Ds for the Company (instead of LSP, as suggested by Carrie), it seems to me that there may be some basis for Ds to contend that the Legitimate Indirect Expenses incurred during the Relevant Period were those stated in the Expenses Account.
(4) Whether or not all the expenses listed in the Expenses Account were Legitimate Indirect Expenses and for which the Company has to bear 50% is a matter to be determined in the process of account.
(5) On the Company’s case, substantial profits were generated by the Projects. As legal owner of the Projects LSP would be liable to pay profit tax in respect of the profits so generated.
128.Despite the failure on the part of Ds in adducing evidence on the Legitimate Indirect Expenses and for which the Company has to bear 50% thereof and the profits tax said to have been paid by LSP, it seems to me that Ds should be given a further opportunity to claim deductions for Legitimate Indirect Expenses and the profit tax paid, if any, in the form of an account, within 35 days from the date of this Judgment.
129.If Ds do not claim any deductions for Legitimate Indirect Expenses or profit tax paid within this time limit, judgment will be entered against each of LSP and Ma in the amount equivalent to the Overpayments.
130.As for interest, Mr Koo asks for interest on the amount Ds are liable to account to the Company at HSBC prime lending rate plus 1% from the date of the writ (10 October 2019) to the date of judgment and, thereafter, at judgment rate until payment. Mr Nip does not oppose this.
131.Accordingly, Ds are ordered to pay interest on the amount they are liable to account to the Company upon taking of the account or in default thereof, the amount equivalent to the Overpayments.
132.In the ASOC, the Company also claims declaratory relief and other relief in respect of all assets, income, profits, interest and other benefits derived from the use of the Overpayments, it seems to me that other than granting a declaration that Ds are liable to account for such benefits, the other relief should be considered after Ds have made their claim for Legitimate Indirect Expenses or the time limit for claiming such expenses expire. I give liberty to the parties to apply for further order in this respect.
D. DISPOSITION
133.For the reasons set out above, in respect of the 5 Issues, I hold that:
(1) Issue 1: Lee and Ma reached the JV Agreement as varied by the Dec 2014 Agreement.
(2) Issue 2: The Company was set up pursuant to the JV Agreement.
(3) Issue 3: The payments into and out of the HSBC Account were made pursuant to the JV Agreement, the Understanding and the Arrangement.
(4) Issue 4: The Projects and the income derived from them have been held by LSP on trust for the Company. The Company acted in breach of trust by usurping the Projects and failing to account for the income derived from the Projects to the Company. Ma acted in breach of fiduciary duties owed to the Company.
(5) Issue 5: Ds are liable to account for all the income derived from the Projects to the Company, subject to deduction of the Direct Expenses, 50% of the Legitimate Indirect Expenses and any profit tax paid in respect of the Projects.
134.I make the following order:
(1) A declaration that the Projects and the benefits thereof, including all income derived from the Projects (i.e. the First 2 Payments, the amounts paid by WPK into HSBC Account and the amount paid into Stakeholder Account) has been held by LSP on trust for the Company from the date of its incorporation.
(2) A declaration that Ds and each of them is liable to account to the Company for all the assets, income, profits, interest and other benefits whatsoever derived from the use of the amount equivalent to the Overpayments or the amount which Ds are liable to account to the Company upon taking of the account under §(4) below (as the case may be).
(3) An order that Ds shall cause the sum of HK$9,921,644.58 kept in the Stakeholder Account together with any interest accrued thereon be paid to the Company within 7 days of this Judgment.
(4) An order that Ds do within 35 days of this Judgment provide an account to the Company in respect of:
(a) All the Legitimate Indirect Expenses together with a brief narrative in respect of each such Expense (insofar as it is not apparent on the face of the description or supporting documents); and
(b) The profits tax paid by LSP in respect of the Projects.
(5) The account under §(4) shall be confirmed by an affirmation to be made by Ds together with the supporting documents to be filed within 14 days thereafter.
(6) If Ds do not provide the account or the affirmation within the time limited to do so, the Company be at liberty to enter judgment against Ds in the amount equivalent to the Overpayments.
(7) There be liberty to apply for further order in respect of the matter stated in §132 above.
(8) There be liberty to apply for further directions on the process of account.
135.As for costs, I make a costs order nisi that Ds are to pay to the Company the costs of and occasioned by this action including all costs reserved to the Company on an indemnity basis, with certificate for 2 counsel. It is appropriate to order costs against Ds on a higher scale having regard to the nature of the claims, which involve breach of trust and breach of fiduciary duties on the part of LSP and Ma respectively, and to reflect the court’s disapproval of Ds’ conduct in putting forward a defence based on factual allegations all of which I find to be false.
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(Linda Chan) |
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Judge of the Court of First Instance |
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High Court |
Mr Ernest Koo and Mr Rex Yam, instructed by Li Kwok & Law, for the Plaintiff
Mr Norman Nip SC leading Mr Eric Chung and Mr Roger Phang, instructed by H.Y. Leung & Co. LLP, for the 1st and 2nd Defendants
[1] Prayer §§(1)-(2)
[2] Prayer §§(3)-(5)
[3] Prayer §(6)
[4] Prayer §(7)
[5] By consent summons filed on 27 September 2019
[6] Ma WS §1
[7] Ma WS §2
[8] Wong WS §§1-2
[9] Lee WS §12
[10] Lee WS §14
[11] Lee SWS §§26-27; Lee WS §§18-20
[12] Wong WS §5
[13] Ma WS §34
[14] Wong WS §§6-7
[15] Wong WS §12
[16] Lee SWS §31
[17] Lee WS §28
[18] Lee SWS §§17-18
[19] Lee SWS §31(c)
[20] Lee SWS §31(d)
[21] Lee WS §34
[22] ASOC §30
[23] Lee WS §33
[24] Lee WS §40
[25] Lee WS §42
[26] Ma WS §21
[27] Lee WS §§125-128; Ma WS §90
[28] Lee WS §§78-79
[29] Lee WS §§80-82
[30] Lee WS §83
[31] ASOC §19; Lee WS §§14-17
[32] ASOC §42
[33] ASOC §35
[34] Annexure to ASOC
[35] ASOC §§50-51; Lee WS 72-73
[36] In the ASOC there is an alternative plea (at §62) that by reason of the numerous payment certificates submitted to and accepted by WPK in respect of the Projects which had been signed by Ma with the chop of the Company, the LOAs had been varied to the effect that the Company became the sub-contractor in place of LSP and LSP is estopped from denying the same. This claim is not pursued by the Company at trial
[37] ASOC §60
[38] ASOC §61
[39] ASOC §§73-77
[40] Amended Defence (“Defence”) §§1C, 10-12
[41] Defence §1D
[42] Defence §§1C, 5-8, 31
[43] Defence §12A-12B
[44] Defence §§13-21A
[45] Defence §§25-30
[46] Defence §§22-24A
[47] ALOI §§1-3
[48] ALOI §§3, 4(1), 5
[49] ALOI §§4(2), 4(3), 6, 9
[50] ALOI §§7-8
[51] ALOI §§10-15
[52] ASOC §20; Lee SWS §§26-28
[53] ASOC §§21-28
[54] ASOC §44
[55] Defence §§1C, 5-8, 31
[56] Lee WS §§12-20
[57] Wong WS §9
[58] Wong WS §9
[59] Wong WS §§10-11
[60] Wong WS §11
[61] Wong WS §11
[62] Hung’s Aff §12
[63] Hung’s Aff §§13, 15, 17-19, 21
[64] Ma WS §§14, 25
[65] Ma WS §§13, 15
[66] Ma WS §35
[67] Ma WS §40
[68] Ma SWS §§1-7
[69] Ma WS §§40-44
[70] WhatsApp conversation (5.3.2015 – 6:50:08)
[71] WhatsApp conversation (31.3.2015 – 11:31:18)
[72] Defence §17
[73] Pang WS §§6-7
[74] Pang WS §§8-9, 12
[75] Ip WS §§6-9
[76] Which was recorded by Lee, the contents have been reproduced in transcripts
[77] Lee WS §83
[78] ASOC §60
[79] ASOC §61
[80] Citing Laskar v Laskar [2008] 1 WLR 2695 at §17, Lord Neuberger; Marr v Collie [2018] 1 AC 631; Chan Sang v Chan Kwok [2015] 3 HKLRD 131, §§36-38, per Chow J (as he then was)
[81] ASOC §§73-77
[82] ASOC §63
[83] ASOC §§64-72
[84] Reply §10(2)(c)
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