Y.J.K. Co. Ltd. and Another v. Kazuo Aizawa and Others
Read the full judgment text of HCA 8177/1998 on BabelCite. This High Court CFI judgment was delivered on 24 November 1999.
1. The 1st plaintiff, Y.J.K. Company Limited ("YJK Japan"), is an insurance brokerage company incorporated in Japan in 1979. It is an agent of American International Underwriters ("AIU") in Japan. In 1980, it set up a subsidiary in Hong Kong, called "Y.J.K. (Far East) Company Limited" ("YJK Far East"), which is the 2nd plaintiff in this action. YJK Japan holds 499 of the 500 issued shares of YJK Far East, while the other remaining share was issued to the 1st defendant who held it on trust for YJ
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HCA008177/1998 HCA 8177/1998 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 8177 OF 1998 ____________
____________ Coram: Deputy Judge To in Court
Date of Handing Down Judgment: 24 November 1999 _______________ J U D G M E N T _______________ DRAMATIS PERSONNAE The Plaintiffs: 1. The 1st plaintiff, Y.J.K. Company Limited ("YJK Japan"), is an insurance brokerage company incorporated in Japan in 1979. It is an agent of American International Underwriters ("AIU") in Japan. In 1980, it set up a subsidiary in Hong Kong, called "Y.J.K. (Far East) Company Limited" ("YJK Far East"), which is the 2nd plaintiff in this action. YJK Japan holds 499 of the 500 issued shares of YJK Far East, while the other remaining share was issued to the 1st defendant who held it on trust for YJK Japan. 2. At the time when the legal proceedings were instituted, Nagasaka, Miyagawa, Koga and the 1st defendant were directors of YJK Japan; while the 1st and 2nd defendants and Nagasaka were directors of YJK Far East. Nagasaka is in effect the owner of both companies. The Defendants: 3. The 1st defendant was a former employee of AIU. He joined the YJK Group in July 1992 and was appointed as managing director of YJK Far East in October 1992 and director of YJK Japan in April 1995. In November 1992, he recruited the 4th defendant, also a former employee of AIU as a manager of YJK Far East. 4. In January 1993, the 1st defendant recruited the 5th defendant, also a former AIU employee, into YJK Far East. His position as described in his tax return was "deputy director". 5. In December 1996, the 1st defendant stepped down as managing director of YJK Far East in favour of the 2nd defendant, another former employee of AIU, whom he introduced into the YJK Group. The 1st defendant retained his directorship and chairmanship in YJK Far East and was the person in control of the YJK Group operation in Hong Kong. 6. The 6th defendant joined YJK Japan in April 1991 as an executive. His employment with YJK Japan was terminated in mid February 1998, but he was found working in YJK Far East in April and May 1998. Y.J.K. Brokers Limited ("YJK Brokers"): 7. This was a shelf company originally known as Honsen Management Limited, which was acquired by the YJK Group on 3 October 1992, through Matsumoto, presumably the 1st defendant's predecessor. There were two subscribers' shares. One was transferred to YJK Japan, while the other was transferred to Matsumoto who then transferred it to the 1st defendant on 18 February 1993. On the same day, the 1st defendant signed a written declaration that he held this share on trust for YJK Japan. As shown in the balance sheet of the company's annual report for the year ending 31 May 1994, the initial setting up cost and most of the loss for the first year were funded by a loan of $40,403 from YJK Far East. Thus as at 18 February 1993, YJK Brokers is a company belonging to YJK Japan. 8. The company changed its name to "Y.J.K. Consultancy Group (H.K.) Limited" and eventually to Y.J.K. Brokers Limited on 24 August 1993. 9. The purpose of setting up YJK Brokers was to meet the requirements under the new Part X of the Insurance Companies Ordinance, which prohibits a person from acting as an insurance agent and insurance broker at the same time. It was intended that YJK Brokers was to acquire a licence from the Hong Kong Confederation of Insurance Brokers ("CIB Licence") and to carry on business as an insurance broker while YJK Far East was to carry on business as insurance agent. However, in actual practice, YJK Brokers was used as window dressing only after acquiring the CIB Licence. All businesses obtained under the brokerage were treated as businesses of YJK Far East. YJK Brokers was treated as a dormant business. Siesta Co., Limited ("Siesta"): 10. This was a shelf company acquired by the 1st defendant in 1993 for the purpose of marketing an ancillary product, called "cashless medical service." A client who had subscribed for overseas travel insurance from the plaintiffs would, by paying a service charge, be issued a Siesta card which would enable the client to obtain medical services from clinics and hospitals which participate in the Siesta scheme without having to pay for the services. Siesta would settle the bill for the client first and then reimburse itself by processing an application for reimbursement under the terms of the insurance policy. This was a new service and was of mutual benefit to the plaintiffs and to Siesta. Siesta obtained its clientele through the plaintiffs and at the same time it promoted the sales of the plaintiffs. 11. The paid up capital of Siesta was $2, being represented by the two fully paid subscribers' shares, registered in the names of the 1st defendant and Ishida. The setting up cost of Siesta was paid by the 1st defendant with a loan borrowed from YJK Far East which also provided the working capital required by Siesta. Siesta operated on the premises of YJK Far East and was serviced by staff of YJK Far East. Nonacs Ltd ("Nonacs"): 12. This was a shelf company incorporated in 1997 which was acquired by Yusa and Miyano, after the present litigation started. The issued capital was then increased in June 1998 with a change of its name to Nonacs. The current shareholders are Miyano, Yanagisawa and Yusa. The former two were ex-employees of the YJK Group. It obtained a CIB licence in August 1998 and started business as insurance brokers. It employed all the former local staff of YJK Far East, except its local manager, Amy Chiu who remained with YJK Far East. In its brochure, it explains that the word "Nonacs" means nine and stands for the nine Japanese executives who are the 2nd, 4th, 5th and 6th defendants, Miyano, Kurata, Matsuoka, Ishida, and Masako Miura; all of whom were former employees of the YJK Group. Pricia Co. Ltd ("Pricia"): 13. This was a shelf company incorporated in 1996 which was acquired by the 5th defendant and Kurata, also after the present litigation started. The present shareholders are Kurata and Yanagisawa. It operated from the office of Nonacs a business similar to that of Siesta. Until 1999, its registered office was the same as Nonacs'. The 5th defendant and Kurata are its current directors. THE FACTS: 14. The 1st and 2nd defendants were directors of YJK Far East and entrusted with its management. The 2nd defendant was also its managing director. Nagasaka only visited Hong Kong once or twice each year, basically to receive the annual reports of the company and to have meetings with the Japanese staff. No shareholders meetings or directors meetings have been held. In 1994, the 1st defendant informed Nagasaka about acquisition of Siesta and that both Siesta and YJK Brokers were necessary for furthering the business of YJK Far East and through it the business of YJK Japan. In June 1995, Nagasaka received the reports of these companies for the year ending May 1994. That was the situation until 1995. 15. During his visit to Hong Kong in the summer of 1996, Nagasaka was not given the 1995 reports. Nor was he given the 1996 reports during his 1997 visit. Despite repeated requests to the 1st and 2nd defendants, these reports were not forthcoming. Various excuses were given to him including that the computer of the company had broken down, that documents had been mislaid and that the auditor was slow, etc. 16. In November 1997, when Nagasaka again asked the 2nd defendant for the audit reports of YJK Brokers and Siesta, the 2nd defendant refused and told him that those two companies belonged to the 1st defendant. At that time, the 1995 and 1996 reports of Siesta had in fact been compiled but had been withheld from Nagasaka for 14 months and 7 months respectively. It is also worth noting that at about the same time, the 2nd defendant issued a "confidential memo" to Amy Chiu, the local manager, and Connie Chan, the accountant, revealing plans to transfer all YJK Far East business to YJK Brokers by February 1998. By that time, the 1st defendant had unlawfully caused himself to be allotted 99,998 shares in YJK Brokers, making it effectively his own company. The inference to be drawn from these events is that the 1st and 2nd defendants were engaged in preparatory acts in diverting business of the plaintiffs to YJK Brokers and Siesta which were subsidiaries of and financed by the plaintiffs but were hijacked by the 1st defendant and others. 17. The 1995 and 1996 reports for YJK Far East were compiled in November 1997 and February 1998 respectively. They were not provided to Nagasaka until March 1998. Nagasaka felt something sinister was going on in the Hong Kong operation. On 13 May 1998, he and Miyagawa, came to Hong Kong for a surprise visit. Only the 4th defendant and the local staff were in the office. Accidentally, Connie Chan gave Nagasaka a copy of the 1997 report of YJK Far East which was also compiled on the same date as the 1996 report but had obviously been withheld from Nagasaka. Upon a search of the desk of the 1st defendant, they found various documents suggesting that the defendants were preparing to set up a competing business in Japan and to "hijack" the plaintiffs' subsidiaries in Hong Kong. They also found name cards, clothes and other personal effects belonging to the 6th defendant who had left the employment of YJK Japan in February 1998, suggesting that the 6th defendant was then working in YJK Far East. 18. On 14 May 1998, Nagasaka and Miyagawa had a meeting with the 1st and 2nd defendants. Nagasaka directed certain questions to them from the accountant of YJK Japan and demanded a response by 19 May 1998. Being dissatisfied with the response, the plaintiffs sought and obtained a Mareva injunction against the 1st defendant on 20 May 1998 and the present writ was issued and served on the defendants on 21 May 1998. The injunction was set down for hearing on 25 May 1998. Obviously, the atmosphere in YJK Far East became tense as copies of the writ rolled out of the fax machine, followed by copies which arrived by hand. 19. On the afternoon of 22 May, the 2nd and 5th defendants together with Connie Chan went to the office of a reputable firm of solicitors for consultation. When they returned, a course of sabotage began. I am not suggesting that had anything to do with the advice they received from their solicitors. 20. The sabotage began with the 5th defendant announcing termination of all local staff and telling them to clear their desks the following morning and to leave the premises. The 2nd and 5th defendants intimated to the local staff that YJK Japan had no money and wanted to close down the Hong Kong office and to take away all money standing in YJK Group account in Hong Kong. They intimated that the staff could either leave immediately and be paid their compensation in accordance with the law or to stay on without being paid anything. They said they were going to open a new brokerage business and wanted all local staff to join them. Amy Chiu was instructed to calculate the compensation due to the employees, including leave and severance payment, etc. 21. On the following day, when Amy Chiu returned to the office, she noticed at least four sets of computers were missing. She presented the calculation for compensation for termination to the 2nd defendant who approved without checking. Connie Chan prepared cash cheques for the staff which the 2nd defendant signed. The payment amounted to $577,473. When Amy Chiu presented her cheque to the bank for payment, she saw the 4th and 5th defendants withdrawing $400,000 in cash from the bank account of Siesta. The defendants took the local staff to Shangrila Hotel for an expensive farewell lunch costing $7,600 which the 5th defendant settled using the credit card of YJK Far East. Amy Chiu returned to the office for packing up after lunch. When she left at 5 p.m., only the 2nd defendant and another Japanese staff, Miura were still there. 22. From the record of request for overtime air-conditioning kept by the building management, it is apparent that some or all of the defendants had stayed in the office of YJK Far East until 8 p.m. on 23 May and returned at 11 a.m. on Sunday, 24 May and stayed until 8 p.m. to carry on with their acts of sabotage. 23. At the hearing on 25 May, an interim injunction was obtained by consent against the 1st , 2nd , 4th, 5th and 6th defendants in the terms as stated in the Order of Mr. Justice Sakhrani dated 25 May 1998. 24. When Nagasaka obtained possession of the offices of YJK Far East on 25 May 1998, the company was devoid of staff as all the local staff had been dismissed. The accounting records, company chops, seals and statutory records of YJK Far East, YJK Brokers and Siesta, their client lists and clients addresses, clients business cards, lists of contact personnel in insurance companies, and personnel files had disappeared. Save for a few mis-placed vouchers which survived the sabotage, the vouchers of YJK Far East for the current year were also missing. The telephone line of Siesta and most of the telephone lines of YJK Far East were disconnected. An electronic listening device was later found to have been purchased by the 5th defendant using credit card of YJK Far East and planted in the conference room. 25. Nagasaka was able to persuade Amy Chiu to return to work for the plaintiffs on 3 June 1998. The other staff declined to return and subsequently joined Nonacs operated by the 2nd defendant. The plaintiffs had to recruit temporary staff and to restore the telephone lines disconnected by the defendants. In the ensuing weeks, Amy Chiu received inquiries from their clients who told them that they had been contacted and informed by the 2nd, 5th and 6th defendants and Connie Chan that YJK Japan had financial problems and was unable to conduct business in Hong Kong. Miyagawa was also informed by insurance companies with whom YJK Far East had previously had substantial dealings that the 1st, 2nd, 5th and 6th defendants, Ishida and Miyano were spreading rumours that the YJK Group was in financial difficulties and had misappropriated insurance premium funds. Insurance companies hence refused to provide policies through the plaintiffs and instead dealt with their clients direct. 26. Subsequently, Nonacs started a similar insurance brokerage business in August 1998, employing all the former local staff of YJK Far East, except Amy Chiu. In a brochure issued to insurance companies, the 2nd and 5th defendants are described respectively as Senior Executive Director and Managing Director, while the 4th and 6th defendants and five other former Japanese employees of YJK Group are advertised as part of the executive team. The 5th defendant also operated from the office of Nonacs a "cashless medical service" under the name of Pricia, which he acquired with Kurata. Thus Nonacs and Pricia formed the mirror image of YJK Far East and Siesta. The 2nd defendant denied his employment with Nonacs, until when he was shown the brochure. He then admitted rendering assistance to but not being employed by Nonacs. He was evasive and far from telling the truth. THE CLAIMS AND COUNTERCLAIMS: 27. In brief terms, the plaintiffs claim:
28. The defence is one of denial. In particular, the defendants denied that YJK Brokers and Siesta were ever beneficially owned by the plaintiffs. The 1st, 2nd, 4th and 5th defendants counterclaimed for wrongful dismissal and loss of office. These counterclaims were abandoned at the hearing. 29. The 3rd defendant, i.e. Siesta, also counterclaimed for loss of business and goodwill as a result of the plaintiffs' action. However, Siesta was not represented at the hearing and its purported application to act in person has been refused by a Master prior to the hearing. This counterclaim is accordingly dismissed. 30. There are three special features in this trial. Firstly, the defendants adopted a united and common defence. It appeared that each defendant had been assigned special responsibilities in cross examining the plaintiffs' witnesses, with the 1st defendant assuming the role as their leading advocate. That may in part be due to their specific role in YJK Far East but may also be part of their common "party line" strategy. 31. A second special feature is that there were repeated attempts by the defendants to depart from their pleading and their witness statements. There may be innocent reasons for that. 32. The third special feature is the defendants' repeated defiance of the court's order for discovery. It is the plaintiffs' case that the defendant had removed all essential documents of YJK Far East, YJK Brokers and Siesta. Some of these documents were discovered, but obviously not all. However, in the course of the hearing, the defendants were able to produce undiscovered documents as and when they saw fit. Obviously, these are the documents they removed from the office of YJK Far East and that there are other documents still in their possession which they chose not to disclose. On the other hand, there are aspects of the defendants' evidence which one would expect to be supported by documents which only the defendants have possession of, but such documents were not produced. Ownership in YJK Brokers: 33. In para. 12(iii) of the defence, the 1st defendant pleaded that he was the majority shareholder of YJK Brokers. However, it is the defendants' evidence as well as their submission that the company is and was a subsidiary of the YJK Group. They submitted:
34. The rationale behind the 1st defendant's change of stance is difficult to understand. He and the other defendants acknowledged that YJK Brokers is a subsidiary of the YJK Group and that the 1st defendant never claimed his right as shareholder prior to the present litigation. As the defendants are unrepresented and in view of their inexplicable departure from their pleading which was drafted by counsel, I assume in their favour that ownership in the company is not conceded and proceed to make my own finding. 35. As outlined in the dramatis personnae, as at 18 February 1993, YJK Brokers is a company belonging to YJK Japan. There were only two subscribers' shares, one of which was held by YJK Japan, while the other one was held by the 1st defendant on trust for YJK Japan. 36. The purpose of setting up YJK Brokers was to meet the requirements under Part X of the Insurance Companies Ordinance, which was introduced in 1994. Nagasaka and the 1st defendant were appointed as its first directors. Nagasaka knew nothing of his appointment as the 1st defendant forged Nagasaka's signature on the consent to act as director. The 1st defendant claimed the forgery as "vicarious execution" authorised by Nagasaka. But Nagasaka denied ever authorising the 1st defendant to sign on his behalf. I assume in favour of the 1st defendant that it was signed for convenience and not with any sinister motive. 37. To meet the requirement for the CIB Licence, the issued capital of YJK Brokers had to be increased to $100,000. That was achieved by the 1st defendant signing and subsequent filing of a paper which purported to be a special resolution passed at an extraordinary general meeting held on 1 July 1995 in which the company resolved to increase its authorised share capital to $100,000 by creation of 90,000 ordinary shares. The 1st defendant then allotted to himself 99,998 shares and caused to be filed with the Companies Registry on 4 July a return of allotments stating that the shares were allotted payable in cash in the sum of $99,998. 38. As a result of Nagasaka's surprised visit on 13 May 1998, the 1st defendant transferred 50,000 and 49,999 shares (including the trust share he held for YJK Japan) under his name to Ishida and Miyano respectively on 19 May 1998. On the same day, he also transferred the other remaining share registered in the name of YJK Japan to Miyano by forging Nagasaka's signature on the transfer form and by signing himself as director of the 1st plaintiff. He claimed that Nagasaka consented to the transfer of that share to Miyano. That was emphatically denied by Nagasaka. 39. The 1st defendant alleged that the increase in capital and allotment was approved by Nagasaka. According to Nagasaka, neither was he informed, nor did he attend that meeting in which the special resolution was purportedly passed. He certainly did not approve of the allotment of shares to the 1st defendant. I have no difficulties in accepting the evidence of Nagasaka and rejecting the evidence of the 1st defendant. YJK Brokers was originally acquired to meet the requirements under the new Part X of the Insurance Companies Ordinance, which prohibits a person from acting as an insurance broker and as an insurance agent at the same time and which also limits an agent's capability to act as agent for not more than four insurance companies. YJK Far East has been a very profitable business before 1995. Its profit for the year ending 31 May 1993 was $2,705,692 with accumulated earnings of $4.8 million. Though it suffered a loss of $852,752 in 1994, its accumulated earning stood at $3.95 million. The majority of its business came from the brokerage operation. If the original intention was for YJK Brokers to operate the brokerage business, leaving YJK Far East to operate its agency business in view of its long established relations with AIU, it is inconceivable that Nagasaka would agree to YJK Far East giving up the major brokerage business by declining to subscribe for shares in YJK Brokers, bearing in mind that prior to the change in legislation, both the brokerage and agency businesses belonged to the plaintiffs. It is also inconceivable that after wholly financing its setting up cost with an unsecured loan, Nagasaka would agree to divest its brokerage business to YJK Brokers without retaining ownership in YJK Brokers by subscribing for its shares. 40. The 1st defendant's account was inherently incredible. His transfer of the share he held on trust for YJK Japan was dishonest and a blatant breach of fiduciary duty. His forgery of Nagasaka's signature in transferring the share registered in the name of YJK Japan was also dishonest. All these acts were acts of dishonesty aimed at severing the ownership of YJK Brokers from YJK Japan and concealing his own interest. I reject the evidence of the 1st defendant and accept the evidence of Nagasaka. 41. The power to increase the share capital of a company may only be exercised by the company in general meeting under section 53 of the Companies Ordinance. As no such meeting had been convened or held and no such resolution had been passed, I find that the capital of YJK Brokers had not been lawfully increased and there was not the requisite number of shares available for allotment. The purported allotment of 99,998 shares from the pool of 9,998 available shares was therefore a nullity. The transfer of YJK Japan's share was fraudulent and effected by forging Nagasaka's signature and the transfer of the trust share held by the 1st defendant was in breach of trust. 42. Mr. Barlow sought an order for rectifying the register of members. He referred me to the following passage from Kerr on Fraud and Mistake, 7th ed. (1952), p.6 which was cited with approval by Buckley L.J. in Cadogan v. Cadogan, [1977] 1 WLR 1041 at 1057:
43. In my judgment, the learned author was making a statement of general principle rather than prescribing the course the court should or may take to rectify a fraud. Cadogan v. Cadogan, was a case about fraudulent transfer of money and not about transfer of shares or rectification of register of members of a company. The Companies Ordinance has codified the law relating to companies. Section 100 of the Companies Ordinance and Order 102 of the Rules of High Court provide for a mechanism and procedures for rectifying the register by the court. I do not consider I have inherent jurisdiction to order rectification without invoking those mechanism and procedures. I consider justice would be done by granting relief in the form of an appropriate declaration. Such a declaration shall be binding on the parties to these proceedings and therefore the 1st defendant. It may affect the rights of third parties who claim title through him. Those rights should be determined by invoking the mechanism under section 100 and Order 102 so that issues such as the interest of a bona fide purchaser for value without notice of the fraud or other equitable interests, etc. could be determined as between those parties and the plaintiffs. In the circumstances, I decline granting an order for rectification of the share register but I grant an appropriate declaration. 44. All the books and records of YJK Brokers were removed by the defendants in the course of their sabotage on 22 to 25 May 1998. Accordingly, I make an order requiring the defendants to deliver up the same. Ownership in Siesta: 45. In para. 13 of the defence, the defendants pleaded that Siesta was acquired by the 1st defendant with share capital paid equally by the 1st and 5th defendants for the purposes recorded and set out in the Business Trust Agreement dated 1 June 1995. The defendants abandoned this line of defence in their evidence and argued that the 1st defendant and Ishida were legal owners of the shares of Siesta which they held on trust for the plaintiffs who were beneficial owners. In their final submission, they submitted:
As in the case of YJK Brokers, the defendants' departure from their pleading drafted by counsel, is inexplicable, except perhaps now that the funds in Siesta has been dissipated. For similar reasons, I shall not assume that ownership in Siesta has been conceded and shall proceed to make my own finding on the evidence. 46. It is the defendant's case that the 1st defendant and Ishida each contributed $1 to the paid up capital of Siesta at the time of its acquisition. The 1st defendant admitted that the setting up cost was met by a loan of $180,000 from YJK Far East to Siesta. Thus even on that evidence, the 1st defendant and Ishida never paid for the two shares and it was YJK Far East which financed the cost of the acquisition. The loan was a loan from YJK Far East to Siesta and not from the 1st defendant or Ishida to Siesta. And as the balance sheets of Siesta show, that loan has never been repaid. 47. The 1st defendant also agreed that YJK Far East provided the operating capital by way of loan and by giving credit terms in respect of insurance premium. Siesta was therefore able to have use of the premium it collected from its clients in cash for the duration of the credit period. All these are clearly borne out by the balance sheets of Siesta and are accepted by the defendants. In 1995, Siesta borrowed $680,000 from YJK Far East, which was used, among other purposes, to pay the acquisition cost. In 1996, the loan was reduced to $500,000, but there was, in addition, an amount of $591,998 due to YJK Far East as current liability. There was no similar liability shown in the 1995 balance sheet. In 1997, the loan and amount due to YJK Far East were respectively $300,000 and $591,998. It is curious that the amounts due in 1996 and 1997 are identical. Thus all the working capital and operational expenses were paid by YJK Far East. 48. Siesta operated from the premises of YJK Far East and with the staff of YJK Far East. (In the later years, Siesta made contribution to the office rental, paid the salary of the 4th defendant and a clerical staff and paid the 1st defendant a second salary. The defendants also alleged that Siesta contributed to the staff quarters rental. I shall deal with these issues later where it is more appropriate). 49. According to the evidence of the defendants, Siesta was formed for the purpose of advancing the business of YJK Far East and that it was regarded by the defendants as a subsidiary of the YJK Group. Siesta could have no independent existence without the clientele of the YJK Group, nor could it survive without the working capital, accommodation and staff provided by YJK Far East. Siesta's acquisition was financed by the loan from YJK Far East. The $2 provided by the 1st defendant and Ishida was but part of the acquisition cost paid by the loan. It was never paid by the 1st defendant or Ishida. Even if it were, it is de minimis when compared with the working capital of about $1 million financed by YJK Far East. As Siesta was acquired by the 1st defendant and Ishida in their course of employment with YJK Far East and for the plaintiffs' business, using the plaintiffs' funds, I have no difficulties to infer from the above facts that when Siesta was acquired, it was acquired for and as a subsidiary of the YJK Group. The two shares which then represented all the issued share capital of Siesta were held by the 1st defendant and Ishida as trustees for the plaintiffs. Ishida, was at the time an employee of YJK Far East. Ishida, though not a party to these proceedings, has indicated in open court that he has no claim to the share of Siesta registered under his name. Accordingly, I grant a declaration that the two shares of Siesta held by the 1st defendant and Ishida beneficially belong to the 2nd plaintiff and for similar reasons as those relating to the shares of YJK Brokers, I refuse to make an order for rectification of the register of members. 50. The 4th defendant agreed that she took away the books and records of Siesta which were eventually kept in the office of Nonacs. That I consider as an act of a joint enterprise. Accordingly I make an order against all the defendants for deliver up of the books and records of Siesta. Injunction: 51. The plaintiffs sought to have the interlocutory injunction restraining the defendants from retaining and using the plaintiffs' client lists made permanent. I have no doubt about the honesty and credibility of Amy Chiu. I accept her evidence that when she returned to the office of YJK Far East on 3 June 1998, she found the accounting records, client lists, clients addresses, clients business cards, etc. missing. I also accept her evidence that subsequently she received telephone calls from clients who informed them that the 2nd, 5th and 6th defendants and Connie Chan had spread rumours that YJK Japan was in financial difficulties and was unable to conduct business in Hong Kong and that these defendants were able to offer them similar service. I therefore have no difficulties to infer that these defendants had possession of the originals or copies of the client lists of the plaintiffs. As the defendants were acting in concert, I am satisfied that all the five defendants have joint possession of the client lists and various other documents they took away from YJK Far East. 52. These lists and documents belonged to the plaintiffs and were obtained by the defendants in their course of employment with the plaintiffs to whom they owed fiduciary duty. These defendants have demonstrated that they were prepared to sabotage the plaintiffs' business, spread rumour about their credit worthiness and to divert the plaintiffs' business and their clients to themselves. As the Nonacs brochure shows, except for the 1st defendant, they are all represented in the brochure as working for Nonacs which is carrying on a similar business as the plaintiffs'. 53. On the face of the company documents, the 1st defendant does not appear to be involved in the business of Nonacs. However, the defendants, including the 1st defendant, acted in concert in sabotaging YJK Far East and dismissing its staff. The 1st defendant actively encouraged the local staff to leave and to join Nonacs (see below) and is the person who has a financial interest in all these activities in terms of his shareholding in YJK Brokers and Siesta, I have no difficulties to infer that he was also a party to the Nonacs operation and in damaging and diverting the plaintiffs' business. 54. I am satisfied that unless the use of these lists are restrained, irrevocable damage will be done to the plaintiffs. Accordingly I grant the order that para. 2(b) and 2(c) in the interim injunction order made by Mr. Justice Sakhrani dated 25 May 1998 be made permanent. Mr. Barlow did not find it necessary to have para. 2(a) of the interim injunction order made permanent. Dividend received by 1st Defendant from YJK Far East: 55. The balance sheets and vouchers from YJK Far East show that a total amount of $2,166,000 was received by the 1st defendant from the funds of YJK Far East as dividend. The receipt of the money is not disputed by the 1st defendant. 56. For the year ending 31 May 1995, $366,000 was paid to the 1st defendant as dividend when the company suffered a loss of $319,428. For the year 1996, $600,000 was paid to the 1st defendant as dividend when the company suffered a loss of $48,945. In 1997, the 1st defendant received as dividend $600,000 when the company made a profit of $495,656 only. In 1998, he received a similar amount. The profit or loss for that year has not been ascertained as no balance sheet has been compiled. 57. There are two striking features in these payments described in the balance sheet and voucher as dividend. Firstly, they were paid even when the company reported a loss or when the profit was less than the dividend. Secondly, the 1st defendant held only one out of 500 issued shares of the company and he held that share on trust for YJK Japan. Yet YJK Japan was not paid any dividend for its 499 shares and the 1st defendant did not hand over the dividend received in respect of that share which he held on trust for YJK Japan. 58. No such dividend had been declared prior to the year ending 31 May 1995. However, it is remarkable that since the summer of 1996 when the 1995 report of YJK Far East was due, the auditor's reports for 1995 and 1996 were withheld from Nagasaka. The 1997 report was only accidentally disclosed during Nagasaka's surprise visit on 13 May 1998 by Connie Chan. These suggest there is something very irregular about these payments and other activities which the 1st and 2nd defendants were trying to hide from Nagasaka. 59. In the defence dated 3 August 1998, the defendants pleaded that the payment was orally approved by Nagasaka as part of the 1st defendant's remuneration. This defence was drafted by a very careful, experienced and uncompromising counsel. 60. In his witness statement dated 3 October 1998 which was accepted as his evidence in chief, the 1st defendant developed this further. He said that he was advised that since dividend was not taxable and as the salaries tax of all the defendants were paid by YJK Far East, this arrangement would partially relieve the burden of YJK Far East towards the 1st defendant's salaries tax. He said he discussed with Yanagisawa, the then managing director of YJK Far East and reported that at the annual meeting in 1996 in which Nagasaka attended. However, Nagasaka firmly denied knowledge of the payment and denied having given his approval. 61. The dividend he received was more than his reported income from both YJK Far East and Siesta. The 1st defendant knew that this account was incredible and modified it in his supplemental witness statement made shortly before he gave evidence. 62. He said that prior to 1994 the bonus for Japanese staff was paid by YJK Japan. As YJK Japan was in financial difficulties, he suspended payment of the bonus from YJK Japan. That was also what he said in his first witness statement, but at that stage he did not relate it to the dividend he received. This suggests that his failure to relate the bonus with dividend was not due to forgetfulness but for some other reasons. 63. He now claimed that he had then discussed with Nagasaka who agreed that the bonus should be paid by YJK Far East instead. Then, to reduce the tax liability of YJK Far East, the bonus was paid to him as dividend for distribution to all the Japanese staff. This is not supported by the evidence of the other defendants or by bank statements or other documentary evidence. 64. But, in all fairness to the 1st and 2nd defendants, when confronted with a series of questions from the Japanese accountant presented to them by Nagasaka on 14 May 1998, they mentioned the above arrangement. The inquiry was in relation to a sum of $256,000 which the Japanese accountant thought should have been remitted to YJK Japan. They responded by mentioning this tax saving arrangement whereby accumulated profits of YJK Far East was distributed to the 1st defendant at the rate of $50,000 per month to be used for disbursing expenses such as bonus, sales commission or "charge against revenue for the Japanese staff". They also said in that letter that Nagasaka approved of the arrangement. If in fact this was the arrangement, one would expect accounting records to be kept of how the 1st defendant disbursed those payments. These are totally lacking. 65. The defendants paid $603,000 legal costs to a reputable firm of solicitors and for the defence to be drafted by competent and uncompromising counsel. Given how well his first witness statement tied in with the pleading and that this so called "tax avoidance arrangement" had been in the minds of the 1st and 2nd defendants in May 1998, it is unlikely that his solicitors and counsel could have mistaken about the 1st defendant's instruction or that he had inadvertently overlooked what was in fact the truth. So, he chose to tell his counsel that the dividend was part of his salary, and now he chose to depart from that defence for no reason. I am not satisfy that the 1st defendant was telling the truth. I therefore find that he had wrongfully misappropriated funds of YJK Far East by paying unauthorised dividend to himself amounting to $2,166,000. 66. The 1st defendant was the recipient of the dividend. The 2nd defendant was the managing director and signed vouchers authorising these monthly payments. He made no enquiry about the propriety of these payments. In the circumstances, I have no difficulties to infer that he did so with full knowledge of its irregularity and as a joint enterprise with the 1st defendant. He is jointly and severally liable with the 1st defendant to the plaintiffs. 67. The plaintiffs attempted to attach liability for these dividends on the 4th defendant as the accounts manager of YJK Far East. However, according to Amy Chiu, the 4th defendant was only responsible for the accounts of Siesta and not YJK Far East. This claim against the 4th defendant must fail. 1st Defendant's unauthorised salary from Siesta: 68. The plaintiffs sought to recover what they called a "second salary" the 1st defendant received from Siesta. This claim refers to three amounts of $80,500, $150,000, and $249,000 received by the 1st defendant for the years ending 31 May 1995, 1996 and 1997 respectively as salary from Siesta. The receipt of these amounts was not disputed by the 1st defendant and they are reflected in the tax demand notes and tax returns prepared by Amy Chiu. Mr. Barlow submitted that these payments had never been authorised by the plaintiffs and it was a breach of fiduciary duty as director of YJK Far East and Siesta to appropriate the company's fund to pay himself a second salary. 69. The 1st defendant said that YJK Far East did not distinguish between staff of YJK Far East and Siesta. As Siesta had made trading profit, he apportioned part of his remuneration from Siesta so as to reduce the profit of Siesta and its tax liability and to reduce the expense of YJK Far East which was then suffering a loss. That sounds reasonable. However, in answer to Nagasaka's request on 14 May 1998, the 2nd defendant confirmed that the 1st defendant's remuneration was only $38,000 and made no mention of the Siesta salary. 70. Prior to the acquisition of Siesta, the 1st defendant as managing director of YJK Far East received $438,586 for the year ending May 1994, i.e $36,549 per month. Siesta commenced business in July 1993. For the financial year 1994/95, he reported in his tax return an income of $527,600 from YJK Far East and $60,000 from Siesta, totalling $587,600, i.e. $48,967 per month. Thus in addition to the second salary from Siesta, he had about 20% increase in his income from YJK Far East. 71. For the financial year ending March 1996, he drew a salary of $402,799 from YJK Far East and $150,000 from Siesta, totalling $552,799, i.e. $46,067 per month. That was slightly less than the 1994/95 level. In December 1996, he introduced the 2nd defendant into YJK Far East as managing director at a salary of $50,000 per month. The plaintiffs made no complaint about this salary. From this I infer that a salary of up to $50,000 per month in December 1996 as managing director had the plaintiffs' approval. Thus prior to 1995/96, the 1st defendant's salary from YJK Far East and Siesta was within this level. Hence, the payment of $60,000 for the financial year 1994/95 (or $80,500 for the accounting year ending May 1995) and $150,000 for the financial year 1995/96 were not irregular. 72. For the financial year 1996/97, the 1st defendant drew $201,244 from YJK Far East and $249,000 from Siesta, totalling $450,244, i.e. $37,520 per month. This was much less than what he received in the previous year. This was much less than the amount he would be entitled to receive before handing over his office as managing director to the 2nd defendant in December 1996 who was remunerated at $50,000 per month. It is also significant that the amount he drew from YJK Far East was reduced with the increase in his drawing from Siesta. This is therefore supportive of his assertion that this was a scheme of appropriating profit from Siesta and reducing the expenditure of YJK Far East. This is consistent with the degree of freedom or implied authority he has as director of both companies to manipulate the accounts of the two companies in order to mitigate their tax liability. In the circumstances, I cannot find any impropriety in his receipt of this second salary from Siesta. Accordingly, I dismiss the claim for these three amounts. Missappropriation from Siesta: staff quarters rentals: 73. This claim relates to two payments described in the profit and loss account of Siesta as payment for staff quarters of $200,000 and $456,000 for the year ending May 1995 and 1996 respectively. It is not in dispute that the rentals for these periods were paid by YJK Far East to the landlords. 74. In respect of the first amount, the 4th defendant produced an invoice and receipt from YJK Far East dated 31 May 1995, signed by Connie Chan as evidence of payment of $200,000 as Siesta's contribution to staff quarters expenses and $100,000 as Siesta's contribution to office rent. She explained that the invoice and receipt were typed on self duplicating paper so that it bore the same date but the payment was in fact made a year later. She also produced a copy of a cheque for the said amount of $300,000 and the saving account book of YJK Far East evidencing receipt of the said cheque on 16 July 1996. These documents had never been disclosed in the discovery process. They are also evidence that the defendants had removed documents belonging to YJK Far East and are still retaining them. 75. However, Mr. Barlow ably pointed out in cross examination that shortly after depositing the said amount of $300,000, a sum of $100,000 was withdrawn and paid back to Siesta. Mr. Barlow submitted these transactions represented a repayment of Siesta's loan to YJK Far East as reflected in the balance sheet for the year ending May 1997. Mr. Barlow has no document in support of his assertion. However, the profit and loss account of YJK Far East for the year ending May 1995 does not show any income from sub-rental or contribution for staff quarters while the sub-rental income for office rent of $100,000 was shown. This suggests that it is unlikely that the $200,000 was payment in respect of contribution for staff quarters. If it were, that amount would also have been reflected in the profit and loss account of YJK Far East, even if the payment had not actually made. 76. The defendants have custody of the books of YJK Far East and Siesta. Yet, they chose not to produce the supporting ledgers and accounting record in support of the payment. Those records are in their possession and solely within their control. In the absence of the supporting ledgers, I give no weight to the receipt and invoice produced by the 4th defendant. 77. In respect of the second amount of $456,000 for the year ending May 1996, no receipt or invoice was produced. While the profit and loss account of Siesta showed that this amount was incurred, there is no corresponding entry shown in the profit and loss account of YJK Far East which was supposed to be the recipient. Again, of interest is that the sub-rental income in respect of office rental has been recorded. In the absence of documentary evidence from the 4th defendant who was in the position to fortify her evidence with ledgers and so on, I do not accept her evidence that Siesta had paid the contribution in respect of the staff quarters as alleged. 78. In the end, I am satisfied that these sums of $200,000 and $456,000, though entered in the profit and loss account of Siesta as sub-rental paid, have in fact been misappropriated. 79. An amount of $139,736 was entered as rental for staff quarters for the 4th defendant for the year ending May 1997. While part of the rental was paid by Siesta when the lease was renewed, an amount of $16,967 was paid by YJK Far East and not reimbursed. 80. The 1st and 4th defendants were directors of Siesta at the material times. The irresistible inference is that they were the persons who misappropriate these funds and are liable to make good the loss of these funds. 81. The plaintiffs sought to attach liability to the 2nd defendant. However, as he was not a director of Siesta and in the absence of evidence linking him to the misappropriation, that claim could not stand against the 2nd defendant. Misappropriation from Siesta: The 1st defendant's loan: 82. As at 31 May 1997, the 1st defendant was indebted to Siesta in the amount of $157,740. This amount is acknowledged by the 1st defendant in the balance sheet which he signed. This loan has not been authorised by the plaintiffs. Accordingly, the 1st defendant shall repay the said loan. Missappropriation from Siesta: overseas travel expenses: 83. Overseas travel expenses of $11,221, $32,218 and $37,688 were recorded in the profit and loss account of Siesta for 1995, 1996 and 1997 respectively. Mr. Barlow submitted that Siesta's operation was basically local and there was no need to incur expenses for travelling overseas and hence, the expenses, if incurred were for private or pleasure trips. The 4th defendant said that she had to travel with the 1st defendant to Indonesia for meeting with Tee Pekku Co. Ltd. Her evidence was not supported by any documentary exhibits. She and the other defendants had removed all the files and books of Siesta. They ignored the court's order for discovery. Despite they had the indulgence from the court for late discovery, no documents in support of their case were produced. In the circumstances, I attach little weight to her evidence and am satisfied that the entries were in respect of fictitious transactions with the result that the funds represented therein were misappropriated. The 1st and 4th defendants, being directors of Siesta, are therefore liable to make good the loss of these funds, totalling $81,127. Missappropriation from Siesta/YJK Far East: 84. This is a claim for $932,980. It is based on the amount due from subsidiaries as recorded in the 1997 balance sheet of YJK Far East. Of this amount, $300,000 is reflected in Siesta's balance sheet as loan from YJK Far East and $591,998 as other amount, mainly insurance premium, due to YJK Far East. The balance of this claim represents a loan of $40,403 to YJK Brokers and an unaccountable difference of $579 which were incurred before the defendants joined the YJK Group and for which they should not be held responsible. 85. The loan to Siesta is documented in a loan agreement dated 21 December 1993, purportedly signed by Nagasaka and the 1st defendant on behalf of YJK Far East and by the 1st defendant and Ishida on behalf of Siesta for a loan of $200,000. The 1st defendant admitted that he forged Nagasaka's signature on the basis of "vicarious execution", while Nagasaka denied that he had ever authorised the 1st defendant to sign on his behalf or approved the loan. 86. On this issue, I do have some reservation about Nagasaka's evidence. His complaint about the accounts was that he had not been given the accounts for the years 1995 onwards. Thus, as at 1996 when he was not given the 1995 account, he had already read the 1994 account. The loan to the subsidiaries is clearly stated in the 1994 account. At the time, there were only two subsidiaries, Siesta and YJK Brokers which was dormant. The loan then outstanding was $540,982. He ought to have known from the 1994 balance sheet of YJK Brokers that the loan to YJK Brokers was $40,403 (or $40,982) and could readily conclude that the balance of $500,000 was the loan to the only other subsidiary, i.e. Siesta. If Nagasaka had any reason to doubt the propriety of the loan he would have raised it since the summer of 1995 when he received the accounts. He did not. The irresistible inference is that he had either approved or ratified the loan. 87. This loan, even if it had been ratified by Nagasaka was only for one year. It was not repaid by December 1994. This fact would have been disclosed in the 1995 reports and balance sheets of YJK Far East and Siesta in the summer of 1996. The 1995 and 1996 reports of Siesta were available in September 1996 and April 1997. They show the loan was increased from $200,000 to $680,000 in 1995 and then reduced to $500,000 in 1996. But these reports were deliberately withheld from Nagasaka. The 1997 balance sheet shows that the loan was reduced to $300,000 but in addition to the loan, there was an outstanding trading debt of $591,998 in both 1996 and 1997 not shown in the 1995 balance sheet. This trading debt represented outstanding insurance premium due to YJK Far East. The loan was allowed to continue and to increase under circumstances when Siesta was in a good position to repay. I have no doubt that there was some impropriety about this loan and the trading debt being allowed to be kept outstanding. Even on the basis of the defendants' evidence, $400,000 was the cash flow that was needed to run Siesta. 88. These figures are based on audited reports and balance sheets signed by the 1st and 2nd defendants in respect of YJK Far East, and the 1st and 4th defendants in respect of Siesta. The money in Siesta's bank accounts had been exhausted by the defendants, at least partly to pay their legal costs. However, as at 31 May 1997, the balance sheet shows that Siesta had more assets than to meet its liability and in fact it had $986,724 as cash at bank against a total liability of $891,998 due to YJK Far East. 89. Even if the loan had been lawful at inception, its extension and increase was without authority and for an improper motive. Siesta is a $2 company with YJK Far East providing the operating capital. It was allowed to accumulate huge amount of cash at the expense of its parent company. This cash was subsequently dissipated when the company was "hijacked" by the defendants and is now unrecoverable. 90. Mr. Barlow submitted that the funds in Siesta which could have been used to repay the loan and amount due, totalling $891,998, were used by the defendants to meet their legal costs or otherwise dissipated and sought to fix liability on 1st and 2nd defendants as directors of YJK Far East and on the 1st and 4th defendants as directors of Siesta for having misappropriated the said amount of $891,998. 91. While I agree that there may have been some impropriety in the way the loan and affairs of YJK Far East and Siesta were handled by the 1st, 2nd and 4th defendants, I am not satisfied that as at the date of issue of the writ, there was sufficient evidence of misappropriation. It could well be said that the 1st and 2nd defendants were in breach of their fiduciary duty in not taking steps to secure its repayment. It could also be said that the 1st and 4th defendants who derived their position as directors of Siesta because of their employment with YJK Far East also owed a similar duty to YJK Far East. It could further be said that all the three of them acted in a common design. However, as at the date of the writ, there were probably more than enough funds in the account of Siesta to meet its liability including those to YJK Far East. While the defendants admitted using the money standing in Siesta's account for their legal costs, that took place after the issue of the writ. The appropriate remedy would be to order the defendants to provide an account for YJK Far East and Siesta. The 1st defendant's loan from YJK Far East: 92. As at 31 May 1997, the 1st defendant owed YJK Far East $233,490. The loan is unsecured with an interest of 1% per annum. The loan is acknowledged by the 1st defendant in the 1997 balance sheet of YJK Far East. It is documented in a loan agreement dated 1 February 1994, purportedly signed by Nagasaka and the 1st defendant on behalf of YJK Far East as lender and by the 1st defendant as borrower for 2.5 million yen. That was equivalent to $176,750. It was then increased to $233,490 by a further advance of $46,740 during the accounting year 1994/95. 93. According to the defence, the loan was made in the name of the 1st defendant for the purpose of advancing money to Miyagawa and that Nagasaka had knowledge of the loan and its purpose. In reply to the inquiries from Nagasaka on 14 May 1998, the 1st and 2nd defendants replied that in December 1993 Miyagawa approached the 1st defendant for an emergency loan. As the 1st defendant did not have the money, in effect he caused the company to make out the loan to himself for the purpose of Miyagawa. In the reply they said that the 1st defendant had repaid the loan in full to YJK Far East in April 1994, though the loan between the 1st defendant and Miyagawa had only been partly settled. Miyagawa was appointed as director of YJK Japan in December 1997. At the time of the loan, he was working for AIU. Under cross examination, Miyagawa denied having borrowed 3 million yen from the 1st defendant as alleged. 94. Of course, the loan was not repaid in April 1994 as the balance sheet shows. On the contrary, it was increased in the next accounting year and carried forward to 1997. It also appeared that the defendants have developed a spiteful attitude against Miyagawa, the reasons for which I need not go into. There is no evidence from the defendants whether the alleged loan to Miyagawa had anything to do with his position in AIU. However, having seen the demeanour of the witnesses, I am satisfied that it is more likely than not that the loan was not for the purpose of the YJK Group. 95. Nagasaka had received the 1994 report in which the loan to the 1st defendant is clearly shown. If Nagasaka had any reason to doubt the propriety of the loan he would have raised it since the summer of 1995 when he received the account. He did not. Thus, despite that I do not accept the 1st and 2nd defendants' explanation given in their evidence and in their reply dated 19 May 1998, for similar reasons, I am driven to the conclusion that the loan of $176,750 had been authorised or at least ratified. 96. However, this finding does not absolve the 1st defendant, as the loan even if authorised or ratified, was a short term loan for one year and he, as director, ought to see that it was repaid. Not only that the loan was not repaid, he with the 2nd defendant withheld the company accounts for the ensuing years from YJK Japan and Nagasaka. Various excuses had been tendered for the delay. However, the inordinate delay only speaks for itself, i.e. there was a sinister reason behind it. 97. The 2nd defendant became managing director of YJK Far East in December 1996. By that time, he ought to know that the annual report of the company and accounts for 1995 was over due. He took no steps to expedite the preparation of the report and account and allowed the report and account for 1996 to become overdue as well. He failed to recover the loan from the 1st defendant and instead permitted the loan to increase. Accordingly, he with the 1st defendant were in breach of their fiduciary duty to YJK Far East and are jointly and severally liable to the company to make good the loan. 98. In addition, after service of the writ in relation to the present action, the 2nd defendant withdrew $80,000 from the saving account of YJK Far East. He signed a receipt for that amount on behalf of the 1st defendant. Under cross examination, he said that he was told that the company account would be frozen so he withdrew the money for the purpose of settling some impending bills. But he could produce no documents in support, despite his promise to do so. If the money was required for that purpose, he could have paid it into the petty cash account through which to settle the bills by cash. Though the receipt was typed out in the name of the 1st defendant, there is no evidence to suggest he had shared in the money or that the withdrawal was made pursuant to some common intention between the two defendants. I am therefore only satisfied that the 2nd defendant had misappropriated the $80,000 and there is no evidence that the 1st defendant was a party to the misappropriation. Accordingly, only the 2nd defendant shall repay YJK Far East the said sum of $80,000. Funds of YJK Far East misapplied by defendants: 99. On 23 May 1998, the local staff of YJK Far East and Siesta were summarily dismissed with payment of compensation of $577,473. The amount of compensation paid was not disputed. The 2nd defendant sought to justify the termination on the grounds that the local staff were frightened and confused by the unannounced visit of Nagasaka and Miyagawa on 13 May 1998 and the institution of the present proceedings. They put the blame on Amy Chiu for requesting their termination. The 2nd defendant concluded that their continuous employment will cause trouble and that the business could continue without the local staff. He thought the compensation will be reimbursed or substantially reimbursed by the provident fund scheme. Hence the 2nd defendant assumed responsibility for dismissal of all the local staff, including Anita Cheung who was employed by Siesta. 100. The 1st defendant received a Mareva injunction restraining him from removing his asset out of Hong Kong. All defendants received a copy of the writ with endorsement of claim. The endorsement alleged them of breach of fiduciary duty and claimed for an account, damages, and injunction restraining them from entering the premises of YJK Far East. The application for interim injunction was due to be heard on 25 May 1998. These defendants are highly educated and competent business men and woman. They had obtained legal advice from a reputable firm of solicitors before the sabotage began. The 2nd defendant, in particular, was a law graduate from Japan. They must know that the fiduciary basis of their employment with the plaintiffs was totally destroyed if not by their own conduct, by the institution of these legal proceedings. They ought to realise that their employer wanted to see no more of them after 25 May 1998 by applying for the injunction. They ought to realise that if their employment had not been terminated at the time of their receipt of the writ, would be terminated by 25 May 1998; and that their time in the company was short. Yet, they all said in evidence that they did not consider that their employment was at an end or about to end. I do not consider this was what they had in their minds. They knew they were going to be dismissed. 101. With this knowledge in mind, the 2nd and 5th defendants told the local staff that the head office in Japan was in financial difficulties and wanted to close down the Hong Kong operation, that the local staff may either accept dismissal with compensation or to stay on without being paid in view of the financial difficulties of YJK Japan. Of course, all these were untrue and the defendants knew they were untrue. These were said to instill the desire among the local staff to leave the company so as to cripple its operation. 102. Dismissing all the local staff was a very important decision for the company. This could not be a decision for executives who only had a weekend with the company and against whom such serious allegations as contained in the endorsement of claim were made. There was no reason why the defendants did not defer making the decision and leave it to Nagasaka to decide after the weekend. The defendants put the blame on Amy Chu for demanding dismissal. I find that Amy Chu had not made that demand. She had only suggested that the local staff should be compensated if they were dismissed. Even if Amy Chu had demanded the dismissal, those who made the decision for dismissal would be liable. The dismissal would paralyse the entire operation of the company, especially as the other Japanese executives were going to be dismissed. As the facts show, when the plaintiffs obtained access to YJK Far East premises, they found the company devoid of staff and record. I find the decision to dismiss the local staff was not made in the interest of the company. On the contrary it was made to sabotage and damage the interest of YJK Far East. Those who were responsible for the decision, whether as directors or as employees, were in breach of their fiduciary duty owed to the company in their respective capacities. 103. The 2nd defendant accepted responsibility for that decision. The 1st defendant was not present when the decision to dismiss was announced or when the mis-representations about YJK Japan's financial difficulties were made. However, he was the only other director in Hong Kong. He had a duty even in his last days of employment to protect the interest of the company and not to do anything to injure it. Even if he were not the one to make the decision, he had a duty to prevent that decision from being executed. He did not. Instead, he joined the lunch to mark the closure of the office of YJK Far East on 23 May 1998. He also told the local staff that he was there to protect them and make sure that they will be paid. The irresistible inference is that he was a party to the decision to dismiss the local staff in order to sabotage the company. 104. The 4th defendant did not appear to have played any role in the decision to dismiss the local staff. She was a party to the sabotage, at least in removing the books and records of Siesta and in mis-applying its funds. She was not a director of YJK Far East and did not have the same duty as had the 1st defendant to prevent the dismissal. Her duties were mainly related to Siesta. One of her own Siesta staff was also dismissed, which she could have prevented; but that staff was dismissed with funds of YJK Far East. In the totality of the evidence, I am unable to infer that she was a party to the decision. 105. The 5th defendant took a more active role than the 4th defendant. He was employed as a deputy director of YJK Far East. He took an active part in the management of the company, including seeking legal advice with the 2nd defendant on 21 May 1998. After that he declared the dismissal. He instilled the idea among the local staff that YJK Far East was in financial difficulties and persuaded them to accept dismissal and compensation. He with the 1st and 2nd defendant offered to employ all the local staff in their new company. In addition, he paid for the farewell lunch and for the listening device using the credit card of YJK Far East. He played an active role in sabotaging and spying on the company and in persuading the local staff to leave and subsequently to join Nonacs, of which he was the managing director. I have no difficulties to infer that he was a party to the decision to dismiss the local staff. Thus the 1st, 2nd and 5th defendants were in breach of their fiduciary duty owed to the company and are liable to reimburse YJK Far East for misapplying the company's fund in dismissing the local staff and to compensate for the costs of recruiting replacements. 106. As the dismissal was not in the interest of the company and not properly authorised, the farewell lunch must also be unauthorised. It was arranged as part and parcel of the dismissal exercise and to establish goodwill to attract the local staff to work in Nonacs. Similarly, the purchase of the listening device was for the purpose of spying on the plaintiffs which must be unauthorised. The irresistible inference is that it is part of the joint enterprise of those same persons responsible for the dismissal of the local staff. These expenses were paid using the credit card of YJK Far East. The 1st, 2nd and 5th defendants are jointly and severally liable to reimburse the cost of the lunch and the listening device. 107. There is no evidence that the cost of dismissal would be compensated from the provident fund. The terms and conditions of the fund was not produced. The dismissal was unauthorised. I consider the possibility of the plaintiffs being reimbursed for the unauthorised dismissal remote. If the company is entitled to be reimbursed, the defendants could recover against the fund manager by way of subrogation through separate proceedings. In any event, the issue of reimbursement from the provident fund has not been raised by the statement of defence. Taking of Account: Premium account of YJK Far East: 108. The evidence showed that during 1997 and 1998 the 2nd defendant authorised various withdrawals from the premium trust account set aside for paying insurance premium. On 22 and 29 August 1997, $150,000 and $100,000 respectively had been withdrawn. On 21 January 1998, $1,000,000 had been withdrawn while two sums of $130,666 and $134,441 had been returned. On 23 May 1998, $803,502 had also been withdrawn. The total amount withdrawn was $1,788,395. They were withdrawn for purposes other than paying insurance premium. The 2nd defendant alleged that the various amounts were withdrawn for the purpose of meeting the operational expenses of YJK Far East, but these allegations are not supported by documents. The plaintiffs sought damages in that amount against both the 1st and 2nd defendants or alternatively, an order that these defendants shall provide an account. 109. When cross examined by the 1st defendant, the 2nd defendant admitted that the withdrawals were against the expressed prohibition of the 1st defendant. On this evidence, both defendants knew such withdrawals were unauthorised, though the 2nd defendant sought to assume sole responsibility to the exclusion of the 1st defendant. I have found both defendants were dishonest and incredible witnesses. Their dishonesty is amply demonstrated in the 1st defendant's forgery of Nagasaka's signature in transferring the shares of YJK Brokers and in the 2nd defendant's expressed reasons for dismissing the local staff. I do not accept the 2nd defendant's evidence that the 1st defendant had prohibited such withdrawals. 110. Premium received from both the brokerage and agency business were paid into the premium trust account set aside for paying insurance premium due to insurance companies. The 1st and 2nd defendants were in control of the funds in this account. The 2nd defendant authorised the withdrawals. The 1st defendant was the only other director in control of the company. YJK Far East was not a very big company. It would not have been difficult for the 1st defendant to monitor the accounts of the company by checking the monthly statements or by imposing a system requiring such withdrawals to be made only upon the joint signatures of himself and the 2nd defendant. These withdrawals were for large amounts. Given the close working relationship between the 1st and 2nd defendants, the way that they acted in pursuant to a common enterprise in various matters, and in the totality of the evidence, it is more likely than not that the 1st defendant consented or knew about the withdrawals. It is an obvious breach of their duty as directors to authorise or to turn a blind eye to the withdrawal of funds from this account for purposes other than paying insurance premium. Even if the funds had been applied for the purposes of the company, there is a duty to give an account. The defendants had access to documents which they had removed from the company. The burden should be on them to show that the withdrawals were for the company's legitimate purpose. I consider it appropriate that the 1st and 2nd defendants should be ordered to give an account in respect of the money withdrawn from this account. Taking of accounts since 31 May 1997: 111. The 1st and 2nd defendants as directors were in control of YJK Far East and its bank accounts. No audited report has been compiled since 31 May 1997. The accounting records and bank statements of the company had been removed by the defendants. The appropriate relief is an order for these defendants to provide an account since 31 May 1997 and to pay the plaintiffs all sums due after taking of accounts. 112. Similarly, the 1st and 4th defendants as directors of Siesta are ordered to provide an account since 31 May 1997 in respect of Siesta and to pay the plaintiffs all sums due after taking of accounts. 113. The 4th and 5th defendants were directors of YJK Brokers between 31 May 1997 and 28 April 1998. The 1st defendant was the major registered shareholder and is the person in effective control of the company. They shall provide an account for the period since 31 May 1997 and to pay the plaintiffs all sums due after taking of accounts. Interest: 114. The plaintiffs are entitled to be awarded compound interest on all damages awarded as this is a case of breach of fiduciary duty: see Wallersteiner v. Moir (No.2), [1975] 1 QB 373 at 397-399. However, for easier calculation, the plaintiffs are only claiming simple interest. I therefore award interest on the damages at judgment rate. Summary of Awards 115. Hereunder is a summary of the awards I make in favour of the plaintiffs:
116. The total amount of the plaintiffs' damages assessed before taking of account is $4,042,095. The amounts for which the defendants are jointly and severally liable with other co-defendants are as tabulated below:
Representation: Mr. Barrie Barlow instructed by M/s Robertson, Double & Lee for Plaintiffs Mr. Kazuo Aizawa, 1st defendant, in person Mr. Yoshiaki Nishikata, 2nd defendant, in person Siesta Co., Limited, 3rd defendant, unrepresented Miss Masoko Nakamura, 4th defendant, in person Mr. Yutaka Ezure, 5th defendant, in person Mr. Hideki Yamada, 6th defendant, in person |