Lui Yuk Lung v. Pau Siu Keung & Another
Read the full judgment text of HCA 16392/1998 on BabelCite. This High Court CFI judgment was delivered on 6 May 2002.
1. This case provides a graphic example of the difficulties men can get into if they elect to conduct their business affairs, involving construction contracts worth many millions of dollars, by way of unrecorded oral arrangements, and, if recording agreements, doing so without setting out all the important terms, and without legal advice.
Cited by 1 case · Cites 1 case
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HCA016392/1998 HCA 16391/1998 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 16391 OF 1998 ____________
And HCA 16392/1998 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 16392 OF 1998 ____________
____________ (Heard together) Coram: Deputy High Court Judge Saunders in Court Dates of Hearing: 16-19, 22-24 April 2002 Date of Judgment: 6 May 2002 _______________ J U D G M E N T _______________ Introduction 1.This case provides a graphic example of the difficulties men can get into if they elect to conduct their business affairs, involving construction contracts worth many millions of dollars, by way of unrecorded oral arrangements, and, if recording agreements, doing so without setting out all the important terms, and without legal advice. 2.There are two actions by the same plaintiff against the first defendant, and in the second action there is a second defendant. Both defendants are represented by the same solicitors and counsel. Although the subject matter of each is different the two actions are inextricably linked. With no objection from any party I directed that both actions be heard together. The background 3.The plaintiff Lui Yuk Lung (Mr Lui) is a business man who has known the defendant Pau Siu Keung (Mr Pau) since 1982. When Mr Lui first came to Hong Kong he worked as a construction worker for Mr Pau's company, Pau Kee Construction Company (PKCC). He ceased that work in 1988, but they remained friends. Their already harmonious relationship may have improved in 1995 when Mr Pau separated from his wife and began living with a relative of Mr Lui. Although they are not married I shall refer to her as Mrs Pau. Since 1988 Mr Lui has been in the China trading business, and it appears that he has been very successful. In late 1997 or early 1998 he emigrated to Canada where he now resides, although he continues with his trading business in China. 4.Law Yuk Lung (Mr Law), is also a friend of Mr Pau. Mr Law has worked in the construction industry for many years, both for Mr Pau and with his own company, Eric's Construction Company (Eric's). On a number of occasions Eric's has been a subcontractor to PKCC. Both PKCC and Eric's are unincorporated firms, PKCC being a sole proprietorship and Eric's a partnership between Mr Law and a friend. 5.Pau Kee Construction Company Limited (PKCC Ltd.) was formed in March 1996. It has a share capital of $10,000 divided into 10,000 $1.00 shares. Only two shares have been issued, one each to Mr Pau and Mr Lui. Both Mr Pau and Mr Lui were directors of the company and Mr Lui was the secretary. The formation of the joint venture 6.In June 1995 Mr Pau, through PKCC, won a contract to be a subcontractor in the construction work that was taking place on the new airport railway project. The head contractor was Maeda Corporation (Hong Kong), (Maeda), a company with whom PKCC had worked for many years and with whom Mr Pau personally had a good and long established reputation. The contract was in respect of concrete, roof and drainage works at Lai King Station. The contract was known as the 508 project. 7.In June 1995 Mr Pau was facing financial difficulty. He was in the process of divorce proceedings with his wife and he did not have sufficient funds to carry out the 508 project. He approached Mr Lui and asked Mr Lui if he could borrow $3 million for the project. Mr Lui offered to lend $1 million. However that was not enough for Mr Pau and no agreement was reached. 8.In late July 1995 Mr Lui, Mr Pau and Mr Law met in a restaurant in Tuen Mun. There was a discussion between them as a result of which Mr Lui agreed to provide (I use the word deliberately) $3 million for the project and the three would form a joint venture to undertake the work. There was an issue as to whether a document recording the agreement was made in the restaurant or later at the site office but nothing turns on the difference. 9.On 1 August 1995 the three signed a document in Chinese, prepared by Mr Lui in the following terms: " JOINT VENTURE AGREEMENT
10.Although now immediately obvious to any reader the conflict between the shares each was to take and the division of profit escaped all three who signed it. 11.Mr Lui contributed the sum of $3 million by 5 cheques between 13 July 1995 and 23 October 1995. The sums were paid into the bank account of PKCC. Work began and Maeda made payments to PKCC. From time to time throughout the contract each of the three parties made withdrawals from PKCC bank account. All of these were by way of cheques which had to be signed by Mr Pau. In effect each treated the account as a form of bank for themselves, withdrawing money and applying it for their own purposes when they needed it, and repaying it if funds were required by PKCC. No proper control was kept over these withdrawals and repayments, and their recording in the books of PKCC left a lot to be desired. 12.The contract was completed in around May 1998 and a dispute has arisen between the parties as to how the profit should be distributed. The dispute became confined to three issues during the course of the trial. The issues 13.First it was the contention of Mr Pau and Mr Law that the sum of $3 million, introduced by Mr Lui, was capital, they contributing their expertise to the contract. Thus, they argued, the sum of $3 million should not be paid to Mr Lui before calculating the profit, but after the profit was calculated and distributed. As the joint venture undertook only the one contract, no separate exercise was required to calculate the profit on the transaction and determine whether any capital was left for distribution; it was sufficient to simply divide the sum remaining after calculating costs of the project and divide it in accordance with their shares in the venture. 14.Second, not surprisingly, Mr Lui said that any profits should be distributed equally, that is on the basis of 33.33% each. Mr Pau and Mr Law, equally not surprisingly, said the profits should be distributed on the basis of the recorded shares, 40%, 30% and 30%. 15.Third, Mr Lui said that while there was an agreement that Mr Law should receive a salary during the period of the contract there was no similar agreement in respect of Mr Pau and the accounts should be adjusted accordingly. Claims by Mr Lui that sums deducted in the PKCC accounts for entertainment and messing were not justified were abandoned during submission. The incorporation of the company 16.In March 1996 Mr Pau decided to form a limited liability company. There was an issue as to whether this idea was Mr Pau's or whether Mr Lui suggested it, but nothing turns on the difference. Both knew that a limited liability company had protective advantages. Instructions were given to a solicitor, Roger Leung Wai Man, of Lai & Leung. He attended on the formation of the company, PKCC Ltd. With the structure that I have described. There was no evidence from the solicitor as to the instructions (if any) he was given in respect of the structure of the company. 17.The case for Mr Lui was that he owned the share he held in his own right. Mr Pau contended that he only asked Mr Lui to become a shareholder as he knew that it was necessary to have two shareholders in a limited liability company. He said that throughout Mr Lui knew that he held his share as a mere nominee for Mr Pau. 18.In March 1997 Mr Pau successfully tendered for another Airport railway project, this time at Tsing Yi station. Again the contractor was Maeda. Mr Pau accepted this contract in the name of PKCC Ltd. This project became known as the 511 project. The whole of the work was subcontracted to Eric's. This project was still underway in December 1997. Mr Lui made no financial contribution to the contract and, other than asserting that it was a joint decision to use the company to undertake the project, appears not to have been involved at all in either the work or the management of the contract. He did from time to time talk about the project with Mr Pau, but this appears to have been on a quite informal basis. 19.Mr Lui said that in December 1997, when he was about to emigrate, he went to Mr Pau and they agreed that Mr Lui would transfer his share to Mr Law and that Mr Pau would pay to Mr Lui 50% of the distributable profit of the company. 20.Mr Pau's case was that in fact it had been agreed in March 1997, when Mr Lui was dealing with his prospective emigration, that Mr Lui would transfer his share to Mr Law who would hold it as a nominee for Mr Pau in the same way. He said that there was no arrangement that would require the payment of any money to Mr Lui as it was always known that Mr Lui held the share as a mere nominee. 21.Thus two issue arise for determination, namely the terms under which Mr Lui held the share and whether there was an agreement in December 1997 to pay him 50% of the distributable profits of the company. The loan agreement 22.On the third day of the trial, in the course of his cross-examination, Mr Lui produced a Chinese document that had not been discovered. It tended to cast his case in a completely different light. I did not allow him to give his solicitors instructions about it as he was being cross-examined, but left it to Mr Manzoni to examine Mr Lui as to the document. 23.Mr Lui said that he had known all along that it existed but had not been able to locate it and accordingly had not told his solicitors about it. He said that he had searched for it after the trial began and had found it between the pages of an unused diary. The document (its translation is as provided by the plaintiffs solicitors and is not certified) is best set out in full: " LOAN AGREEMENT
24.The document purports to have been signed by each of the parties and is dated 10 July 1995. It was the evidence of Mr Lui that he arranged the loan through his business partner in Shanghai, Mr Cheung. He said that he saw Mr Cheung in Shanghai and that it was Mr Cheung who wrote out the document. He said that he then brought it to Hong Kong where he met Mr Pau in a bar and that Mr Pau then signed it. 25.Mr Pau acknowledged that the signature on the document appeared to be his but said that he had never seen the document before. He said that it was a forgery. It was common ground that no interest was paid to Mr Cheung and there is no claim for interest in the PKCC accounts. The issues (i) A "joint venture" or a partnership? 26.As the trial developed it became apparent that nothing turned on this issue. Although styled a "joint venture agreement" neither party contended that there should be any special difference between such an entity and a partnership. Both agreed that the arrangement was in fact a partnership to undertake the 508 project and that the real issues were as to the terms of the partnership. It follows that where terms are not found to have been agreed by the parties the provisions of the Partnership Ordinance Cap 38 will apply. (ii) What are the parties shares in the joint venture? 27.Although there was no dispute that the joint venture agreement was in Mr Lui's handwriting there was a dispute as to who formulated the words. Mr Lui said that it was dictated to him by Mr Pau and Mr Pau said Mr Lui simply wrote it himself. There are occasions where the application of the contra proferentem rule may assist in the resolution of the construction of inconsistent or repugnant clauses, but this is not such a case. In this case all agree that at the time of signing the document they read it, but each overlooked the conflict presented. 28.I prefer to look at the way in which the parties themselves considered their involvement in the arrangement to determine their true intention. Mr Lui gave two passages of evidence which, I find, reflect the way in which he considered he was entitled to share in the profit. First, the following exchange with the bench, directly as to the point:
29.Then, to Mr Manzoni, when discussing how a sum of $404,000, paid to him in March 1998, was determined:
30.It is clear that in answering both of these questions Mr Lui considered that he was entitled to 30% of the profits. It is significant that in March 1998 the dispute arose, he considered that he was entitled to 30% of the profits. 31.When the writ was first issued there was no specific reference to this issue in the statement of claim, although the full terms of the joint venture contract were set out. No suggestion was made that Mr Lui had been underpaid by 3.33%. The relief sought was an accounting. 32.Significantly, in his witness statement, signed on 30 June 1999, Mr Lui had this to say when describing the terms of the joint venture agreement:
33.It is abundantly plain that, at that time, Mr Lui considered the share in profit that he had was 30%. 34.At some time after the statement was signed, which expressed his view of the contract, a careful reading of the document, no doubt by his advisors, has revealed the inconsistency. He has thereafter sought to take advantage of it. No doubt if the project had run at a loss Mr Lui would contend for only a 30% share of the responsibility for the losses. 35.I am satisfied that the true intention of the parties was that they should share in both profits and losses in the ratio of 30:40:30. (iii) Is the $3 million provided by Mr Lui capital or a loan? 36.The answer to this issue is important, for if the defendant's contention is correct, on their best case, they will be entitled to judgement against the plaintiff for a sum in excess of $2.3 million, and this on litigation begun by the plaintiff. 37.If the sum is an advance by Mr Lui to the joint venture it must be deducted from the profits of the project before determining the sum available to be divided in accordance with the ratios that I have found to be appropriate. If on the other hand it is a sum of capital introduced to the partnership then, as this project was the only one undertaken, it will not be first deducted but will form part of the sum available to be distributed in accordance with the ratios. 38.There is no dispute that when Mr Pau first went to Mr Lui for money for the 508 project he sought a "loan" of $3 million. Mr Lui's response was that he could only lend $1 million. Mr Lui said that he later agreed to "take out" $3 million. The joint venture agreement uses the some what neutral expression "contribute HK$3 million to finance the project." 39.Just as for the "shares" issue, the way in which the proceedings have been carried on and the content of the pleadings and witness statements are useful in determining the parties true view of this issue. First, although there was no admission of the terms of the joint venture, there was not the slightest suggestion in the statement of defence that the sum of $3 million was capital and not a loan. If, as is plain, the contention results in a substantial debt by the plaintiff to the defendants of $2.3 million, I am forced to wonder why this had not occurred to the defendants earlier. It was only during the course of the trial that the defendants sought and were granted leave to file an amended defence and counterclaim making these assertions. 40.Second, and again significantly, in his witness statement signed on 10 September 1999 Mr Pau had this to say:
41.He does not suggest that, instead of a loan, the sum was to be a capital contribution of $3 million. He does not suggest that such a sum of capital would in any way be balanced by the contribution of himself of the contract and his expertise and of Mr Law of his expertise. The effect of Mr Pau's statement is simply that in return for a loan Mr Lui would have a share in the venture. 42.The contract made a total profit of $7.9 million (before deduction of the "capital" of $3 million). On such an arrangement Mr Lui would invest $3 million and get a return of $2.3 million. On such an arrangement, for Mr Lui to make anything beyond the return of his capital, the project would have to make a profit in excess of $10 million. If the investment was intended to be the capital of the partnership I have no doubt that all involved would have discussed the need to achieve a profit well in excess of $10 million for Mr Lui to receive any sort of realistic return, let alone a return of his capital. 43.I am satisfied that all intended that Mr Lui would advance the sum of $3 million to the joint venture, interest free, in return for a 30% share in the profit, which would give him both a return on his capital, and a profit to reflect the loss risk he undertook by being a joint venture partner. 44.It will be noted that I have reached this conclusion without reference to the loan agreement. While I have significant doubts as to the provenance of the document, neither party sought further time to explore the issue and the evidence is quite insufficient to make any proper findings, especially bearing in mind the serious consequences of an adverse finding against the plaintiff. 45.The conclusions I have reached have not turned on the credibity of the witnesses, but rather on their undeniable actions in the past. Thus I take the view that the credibility consequences for Mr Lui, if adverse findings in relation to that document are made, do not affect the matters upon which I have relied to hold that the sum of $3 million is a loan and not capital. I accordingly do not propose to make any findings in relation to the loan agreement. (v) Was Mr Pau entitled to a salary? 46.It was accepted by all that a salary of $40,000 a month would be paid to Mr Law. That was agreed in the restaurant when the joint venture terms were discussed. It was Mr Pau's contention that at the same time it was agreed that he would be entitled to a salary of $30,000 a month. This was rejected by Mr Lui who said that no such salary was agreed. Mr Law supported Mr Pau, but that really takes Mr Pau's case no further having regard to the relationship between the two men. 47.It is instructive however to look at the way the parties themselves dealt with this issue. Mr Pau acknowledged that no specific cheques were drawn for his salary. He says that he made drawings and that in due course he expected that those drawings would, in part, be attributed to him as salary. 48.But the difference between drawings and salary is important. The sum paid as salary would be debited in the accounts before the partners interests were determined. That being the case one would expect that Mr Pau would ensure that specific cheques were drawn for his salary in order that they may be properly recorded in the accounts and not erroneously debited to him as drawings. I accept that an adjustment can be later made, but that is easily likely to raise the sort of dispute as to entitlement that has arisen here. 49.No separate set of accounts was kept for the joint venture, rather the accounts were kept in the name of PKCC. However Mr Pau did have accounts prepared for PKCC for the year ended 31 March 1996. This period covered the whole of the first eight months of the joint venture, from August 1995 to March 1996. He certified those accounts as true and correct on 28 November 1996. In the accounts a sum of $90,000 for "proprietor's salary" is entered in the profit and loss statement. That equates to a sum of $11,250 per month for each of the eight relevant months. He was unable to explain why, if he was entitled to a salary totalling $320,000 for those eight months there was no appropriate entry in the accounts. For the next financial year the accounts, certified by Mr Pau as true and correct on 16 July 1997, make no deduction at all for a proprietor's salary. Again Mr Pau could not explain why the sum of $480,000, to which, on his case he was entitled, was not accounted for. The accounts for the year ended 31 March 1998 were certified as true and correct by Mr Pau, but on an unknown date, although certainly after the dispute arose. In these accounts a deduction is made for salary of $1,065,000, a rate of $88,750 a month over the year. No inference can be drawn from the figure, as by the time the accounts were prepared the parties knew the nature of the dispute. 50.At my request a schedule was put in by Mr Pau setting out the payments that he claimed were salary payments to him. The document bore no relationship to the annual accounts to which I have referred. The first payment was in May 1997, 21 months after the project began. He offered no explanation as to why, if he was entitled to a salary, he did not have such a payment made prior to that time. Although the project was not completed until about March 1998 the spasmodic "salary" payments ceased in December 1997, only to begin again in February 2000, when the issue was alive in the minds of all. 51.There is no suggestion that the question of a salary for Mr Pau was ever discussed other than at the preliminary meeting. The first time it became an issue was when Mr Lui received the management accounts and found that a sum had been debited in the management accounts for that purpose, although there were no cheques specifically drawn for the purpose. 52.It was Mr Law's evidence that that sum was entered in the management accounts on his instruction, he believing that there was an agreement that Mr Pau should receive a salary. That was a unilateral action on his part, there being no evidence of any consultation by him at the time with Mr Pau or Mr Lui. While that act does support an inference that there was an agreement to pay Mr Pau a salary it is far outweighed by Mr Pau's own treatment of his position. 53.Mr Manzoni argued that there was commercial logic in the payment of salary to Mr Pau. But that disregards the fact that he was not engaged full time on the site, as was Mr Law and the fact that Mr Pau's share in the joint venture was 40% against the 30% for each of the other two partners. 54.Weighing all of these matters I find that there was no agreement that Mr Pau should be paid a salary during the course of the project. (vi) Has Mr Lui contributed an extra $250,000? 55.In the course of his cross-examination of Mr Pau was referred to a cash deposit of the sum of $250,000 into the PKCC bank account on 5 October 1996. Mr Ng, for Mr Lui, contended that that sum was paid in by Mr Lui and that he should be given credit for that sum. While I am satisfied that the fact of the payment has been properly proved by way of hearsay notices there was no evidence at all as to who made the payment. It was not put to Mr Lui at all. Each of the three partners withdrew and repaid sums into the account from time to time. I reject the argument that the sum can be attributed to Mr Lui. (vii) Was there an agreement in December 1997 to pay Mr Lui 50% of the distributable profits of the company? 56.I propose to deal with this issue first, for its conclusion is relevant to the determination of the second issue in relation to the company. It is Mr Lui's case that on 3 December 1997 he went to the 508 site office to see the accounts clerk Ms. Tso. He said that she had contacted him previously and had told him about withdrawals made by Mr Pau from the bank account of PKCC Ltd. He said that when he went to see about matters he met with Mr Pau and that an agreement was made that Mr Pau would pay to him half the profits of PKCC Ltd and that Mr Lui would resign as a director and secretary and transfer his share to Mr Law. 57.Mr Lui then contacted the company accountants, A Systems Ltd and instructed them to prepare share transfer documents. The accountant was not called, but a letter from the firm dated 9 July 1998 was admitted pursuant to a hearsay notice. The letter records that Mr Lui was advised that the consideration should be calculated on the net assets of the company. The share transfer documents were duly prepared. The letter is silent as to whether any consideration was provided in the document. Mr Law gave evidence that it was he who later inserted the consideration of $1.00, at the same time as he dated the documents. The accountant's letter records that, when sent out, the document was undated. 58.Both Mr Lui and Mr Pau said that the agreement to transfer the share was made in March or April of 1997, when Mr Lui discussed with them his impending emigration. Mr Pau acknowledges that there was discussion in December 1997, but says that it was confined to the finalisation of the share transfer and that there was no discussion at all in respect of any payment. 59.The parties being completely at odds on the issue it is again necessary to look at the surrounding circumstances and their actions to find what happened. 60.Mr Lui's position as to both the date of the agreement and its terms varied markedly. The date on which the agreement was made varied between 3 December and 5 December and the statement of claim was amended to reflect these changes. It was said first in the statement of claim to be 3 December, then at the commencement of the trial, by amendment to be 5 December, then at the conclusion of the trial by further amendment, back to 3 December. 61.Next, he vacillated on the issue of the date at which the calculation, of either profits or net assets, was to be made. By his solicitors letter before action in July 1998 he contended that the period was to be from the date of incorporation until 16 December 1997. By the statement of claim it was to be from incorporation until 31 December 1997. In evidence in chief he said first, that it was to 31 December 1997, but in cross-examination said that the agreement was to 16 December 1997 but that he had used the date of 31 December 1997 "because it was easy to remember". In re-examination he returned to contend for 16 December 1997. 62.The agreement was made, on his evidence, on 3 December 1997. He offers no explanation as to why either 16 December 1997 or 31 December 1997 should be fixed as the appropriate date. Both are beyond the date of the alleged agreement and any number of steps might properly or improperly be taken before those dates arrived which could drastically affect both net profit and net assets. 63.It is right that on 16 December 1997 Mr Law signed the share transfer document, but there was no way, on 3 December 1997, that either Mr Pau or Mr Lui could have known that would happen. There is simply no logic to justify the selection of 16 December 1997, and no proper basis on which, if that date was agreed, why Mr Lui should be entitled to arbitrarily adjust it to 31 December 1997. 64.Mr Lui accepts that the accountant's letter correctly set out what took place in the telephone conversation he had with them. He says that he did not tell them of the arrangement made that he should be paid 50% of the net profits of the company. He does not say why he did not give them that information. But he accepts that he was advised that the consideration should be calculated on the net assets of the company. That sum of course could be quite different from the net profit. The company may have made a substantial profit but have substantial liabilities that would drastically reduce the value of the net assets after the profit was transferred to capital. If, as he accepts, he was given that advice by the accountants he surely would have corrected them and told them of the arrangement he had made. 65.In March 1998 Mr Lui went to see Mr Pau to ask for money. The discussion was confined to the 508 project. There was no suggestion then by Mr Lui that he ought to be paid some money in respect of the company and no complaint about the failure to produce accounts. He had had by then the management accounts for the 508 project, and although he raised issues in respect of them he said nothing about the 511 project and the limited liability company. It is right that after that date Mr Pau deliberately avoided Mr Lui's telephone calls and any meeting. But as he was being pressed by Mr Lui in respect of the 508 project accounts no inference can be drawn against him from this conduct insofar as the 511 project is concerned. 66.Finally, if it should be the case that the preponderance of the evidence favours the view that Mr Lui held the share as a nominee only, there is no basis upon which he should receive any particular payment for the transfer, let alone 50% of the profits or the assets. (viii) Did Mr Lui hold the share in PKCC Ltd as a nominee or in his own right? 67.There are further facts which must be taken into account in the resolution of the issue. First, there was no trust deed in respect of the share. Second, although Mr Pau said that Mr Lui had agreed to transfer the share to Mr Law in March or April 1997, in October 1997 Mr Pau arranged for Mr Lui to sign the company's annual return for the period ended 31 March 1997, as the company secretary. On Mr Pau's case Mr Lui was not secretary at that time. Third, although Mr Pau and Mr Law contended that the agreement was made in March 1997, it was not until December 1997 that the documents were prepared and signed. When it was signed it was signed undated, but Mr Law later dated it 30 April 1997. 68.It is right that in normal circumstances a solicitor, if instructed that a person is to hold a share as a nominee ought to advise that an appropriate trust deed is completed. The absence of such a deed may be evidence that the share is not held as a nominee. But in this case that matter must be viewed in the light of the fact that the persons involved are not sophisticated in the ways of business, let alone corporate and trustee law, and may not necessarily instruct their solicitors fully. The matter is relevant but not in any way decisive. In the absence of evidence from the solicitor as to the instructions he was given I cannot place weight on the fact that there is no trust document. 69.Mr Pau explained the signing of the annual return by saying that he got Mr Lui to sign it as he was the secretary for the relevant period. It is not clear from the Companies Ordinance whether an annual return should be signed by the secretary for the time being, or whether it must be signed by the secretary for the year in question. Most lawyers would, I think, have it signed by the secretary for the time being. But again, with men such as these, I cannot dismiss the logic adopted by Mr Pau. He said that in April Mr Lui had said that he would arrange the share transfer documents with the accountants. There is a logic to that as the accountants were primarily Mr Lui's accountants. Mr Pau said that at the time of signing the annual return he asked where the transfer documents were and was assured that it was in hand. 70.As to the dating of the documents, Mr Law said that he dated them 30 April 1997 because, although he could not remember the exact date on which the arrangement was made, he knew that it was close to that date. He said that he did that in about April 1998, when the documents were discovered in an account clerks drawer. This evidence is important because Mr Law took those steps before any allegation as to the problem in respect of the shares had been made. It is significant too that in March 1998 Mr Lui had collected the cheque for $404,000, but that was in relation to the joint venture, and he then raised no issue about payment for the shares with either Mr Pau or Mr Law. 71.When the company was first in established in March 1996 a resolution was passed authorizing the opening of a bank account. The resolution provided that cheques may be signed by either of the two directors. But no account was opened at that time. In April 1997 a bank account was opened. That coincided with the 511 contract, the first and only contract undertaken by PKCC Ltd. A new resolution was passed providing that Mr Pau alone could sign cheques drawn on the account. Mr Manzoni made the forceful submission that, if, as Mr Lui contends, he was an equal partner in the company, no provision was made for him to sign cheques. 72.It is right as Mr Ng submits, that Mr Law, being constantly in Hong Kong would be a more "convenient" nominee, but the tasks that need be performed by a nominee shareholder in a private limited liability company that trades as little as this one did are few and far between. The actual operation of the bank account by Mr Pau alone, supports the view that Mr Lui was a nominee. 73.Mr Ng placed weight on the fact that the solicitors fees and costs of the establishment of PKCC Ltd. were paid from the PKCC 508 bank account. But there is no suggestion from Mr Lui, either that he knew that at the time, or that he placed any significance on the matter. In the accounts of PKCC the sum was allocated to Mr Lui as drawings. The point does not advance Mr Lui's contention. 74.On Mr Lui's own evidence he was not involved in the administration or management of the 511 project. Having regard to the interest he took in the 508 project I reject the suggestion that he allowed Mr Pau to fob him off with assurances that all was well and that he need not bother with the matter. If he was a 50% shareholder in his own right I am satisfied that he would not have allowed the matter to rest there, as he appears to have done. 75.Having concluded that there was no arrangement to pay 50% of the distributable profits of the company to Mr Lui, and having regard to the factors that I have set out, I find on the balance of probabilities, that Mr Lui held his one share in PKCC Ltd. as a nominee for Mr Pau. 76.Weighing all of these matters, I am not satisfied that an agreement was reached that Mr Pau should pay to Mr Lui 50% of the net profit of PKCC Ltd. Conclusions 77.My conclusions as to the issues posed are as follows:
Relief 78.As to action 16931, in relation to the shares of PKCC Ltd. there will be judgement for the defendant and a declaration that the share held by the plaintiff was held by him as a nominee for the defendant. I find that there was no agreement that he be paid anything for the transfer of the share to Mr Law. No accounting or other step is therefore required in this action. 79.As to action 16932, the profits of the joint venture are to be divided in accordance with the findings that I have made. 80.Both parties were of the view that I could, on the information before the court, fix whatever sum would be payable. Mr Manzoni very helpfully provided me with a series of spreadsheets which showed the various computations that could be made based upon a range of findings. But these do not enable me to make findings as to the sum due. Although that is a desirable course, for it would bring the litigation to an end I find that an accounting will be required. 81.No accounts have ever been prepared for the joint venture. Taxation accounts have been prepared for PKCC but those are predicated on the existence of PKCC as a going concern, with the consequent effect that has on the balance sheet, income and expenditure items. These accounts have been prepared solely for taxation purposes. There are entries which, while appropriate for taxation purposes, are not entries that will be made during an accounting between parties to determine a division of available cash profits, as against taxable profits. Further they appear to charge tax at 22.3% and there appears no justification for that, with the maximum personal tax rate being only 15%. 82.The following factors need to be taken into account:
83.Thus the finalisation of the sum due in accordance with the findings that I have made is not merely a matter of choosing the spreadsheet which reflects those findings. Accounting adjustments are required which, in the absence of evidence on the issues are best done by an accountant. That said, it should be a simple matter for the parties to agree on the basis on which the accounts are to be adjusted. 84.In case they cannot agree leave is reserved to apply and if necessary I will hear evidence on the manner of the calculation and determine the issue. Costs 85.The plaintiff has substantially succeeded in the joint venture action and would normally be entitled to costs. His late production of the loan agreement is a factor that weighs against him in the award of costs. Had it been produced, as it should, at the start, or even if lost, the case conducted on its basis, Mr Pau may well have taken a very different view of the proceedings. 86.But at the same time Mr Pau did not produce the C K Kwok & Co accounts until March 2002, a very long time after the proceedings began. I accept that there were issues as to retention and the like but draft accounts reflecting those issues ought to have been prepared long ago. Had they been prepared and made available to the plaintiff he may well have been able to prepare something similar to Mr Manzoni's very useful spreadsheets and taken a different view of the proceedings, or at least the quantum and perhaps the venue. So both sides are open to criticism for the delay in the production of potentially relevant or significant documents. As to the shares action the defendant has succeeded but as the two actions were being run side by side the criticism of him endures for this action. 87.At the present time I am inclined to the view that justice would be done if each party were to bear their own costs. But I reserve the issue of costs to be argued if necessary.
Representation: Mr Alan Ng, instructed by Messrs Jones, Day, Reavis & Pogue, for the Plaintiff in both cases Mr C Manzoni, instructed by Messrs Wong & Fok, for the Defendants in both cases |
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