Yip Kwai Chor v. King Fung Contruction Work Co Ltd and Another

HCMP375/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 375 OF 2005

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BETWEEN

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AND

HCA2183/2004

ACTION NO. 2183 OF 2004

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BETWEEN

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Before : Recorder A. Ho, S.C. in Court

Dates of Hearing : 30-31 March, 3-4, 6-7, 10-13 April, 3-6, 10-11 July 2006

Date of Judgment : 12 December 2006

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J U D G M E N T

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The Parties

1.These proceedings concern Mr. Yip Kwai Chor, Mr. Lau Kai Yan, King Fung Construction Work Company Limited (景澤建築工程有限公司) (“the Company”), and Sing Yip Construction Engineering Limited.

2.Mr. Yip was at all times the controlling shareholder of Sing Yip Construction Engineering Limited.  Sing Yip carried on business as a building contractor specializing in the erection of wooden formwork for the moulding of concrete in construction sites. 

3.Mr. Lau also carried on business as a formwork contractor.  Apparently, because Mr. Lau was commonly known to his friends by the name “澤”, his business was called “景澤建築工程公司” though the name in English was “King Fung”. 

4.In March 2001, Mr. Lau incorporated his business under the name of King Fung Construction Work Company Limited.  Mr. Lau and his brother-in-law, Mr. Chung Kin Ming, were the 2 subscribers of the Company shares.  On record, Mr. Lau held 70% of the issued shares and Mr. Chung the remaining 30%.  Mr. Lau and Mr. Chung were the first directors of the Company. 

5.In March 2002, Mr. Yip replaced Mr. Chung as a shareholder and director of the Company.  Since then, Mr. Yip holds 30% of the shares on record.  Mr. Yip and Mr. Lau became the only 2 directors of the Company until June 2004.  The circumstances surrounding Mr. Yip’s joining the Company, the extent of his beneficial interest, the events in about June 2004 concerning the appointment of one Mr. Wong Kwong Hing as an additional director, and the subsequent removal of Mr. Yip are contentious issues in these proceedings will be dealt with in more detail below.

The Proceedings

6.On 29 July 2004, Mr. Yip commenced proceedings to wind up the Company.  With the subsequent abandonment of the relief for winding-up, the petition continued only under Section 168A of the Companies Ordinance.  Mr. Yip claimed a number of reliefs, including (i) an order for his shares to be purchased either by Mr. Lau or the Company; (ii) an order that the money which had allegedly been misappropriated or misapplied by Mr. Lau be repaid to the Company; and (iii) an order authorizing him to bring proceedings on behalf of the Company against Mr. Lau in respect of the latter’s breach of fiduciary duties. 

7.On the other hand, in September 2004, an action was commenced in the name of the Company, comprising (i) a claim against Mr. Yip for the sum of $2,500,000, the total of 5 advancements allegedly made to Mr. Yip as a personal loan; (ii) a claim against both Mr. Yip and Sing Yip for the sum of $3,247,828, being the balance of various expenses disbursed on Sing Yip’s behalf in relation to 2 projects which had allegedly been subcontracted by the Company to Sing Yip, namely, the projects at Kam Chin Village and Hang Hau; and (iii) a claim against Mr. Yip and Sing Yip for damages, being remedial costs which the Company had allegedly incurred in relation to the said 2 projects.  The alleged subcontracts and the alleged expenses are matters of serious dispute in these proceedings.  More will be said about them later in this Judgment.

8.These two sets of proceedings were heard together.

Shareholders’ Agreement

9.Mr. Yip and Mr. Lau came to know each other in about 1999 or 2000 when they were both engaged as sub-sub-contractors for a development project known as the Park Avenue.

10.Since then, Sing Yip had been engaged as a formwork subcontractor in other major development projects.  Those included the West Rail (Mei Foo Sun Chuen Station) project; the West Rail (Tsuen Wan Station) project involving a substantial turnover of $80 million; a residential project in Tokwawan under Shun Shing Construction Engineering Co. Ltd. involving a contract sum of about $19 million; and the University of Science and Technology under Ng Yeung Construction Company. 

11.On the other hand, Mr. Lau had experience as a sub-sub-contactor in a number of projects, including developments of the South Bay Peninsula in Chai Wan, Laguna City (phases I to III); South Horizons (phase IV); the Centre (basement floors); Deer Hill and the Island Resort.

12.The capacity in which Mr. Lau undertook these works was subject to cross-examination.  When questions were asked about his alleged connection with China Overseas Building Construction Limited (the relevance of which will be discussed below) and whether he was China Overseas’ direct subcontractor (二判), or a mere sub-sub-contractor (三判), his answers were ambiguous and evasive.  It was typified by his response that he did not know the distinction between a subcontractor (二判) and a sub-sub-contractor (三判or 三沙).  Considering that he had been in the construction industry since 1979, I find such answers wholly disingenuous.  Mr. Lau must have known, which I find as a fact, that within the construction industry the status of a direct sub-contractor (二判) was superior to that of a sub-sub-contractor (三判or 三沙) or those further down the line of subcontracting.

13.As a relevant background to this case, I find that Sing Yip as well as Mr. Yip, who had a record of being engaged as a direct subcontractor (二判), enjoyed a stronger reputation among those in the trade than Mr. Lau.    

14.As a matter of fact, for a period of time after its incorporation, the Company did not have its own office.  It adopted Sing Yip’s address and made use of its premises, initially at Cheung Sha Wan, then Tai Lin Pai Road in Kwai Chung, and later Knutsford Terrace in Tsimshatsui.  No payment, however, was required from the Company or Mr. Lau.

15.It was during the time when Mr. Lau was involved in the South Bay Peninsula project that he came to know a Mr. Chow of China Overseas.  Sometime in the early part of 2002, Mr. Lau came to know of the project at Ma On Shan of which China Overseas was the principal contractor.  Until then, neither Mr. Lau nor the Company had any record of being engaged as a direct subcontractor (二判).  Attempts were made by Mr. Lau to procure the subcontract for the Ma On Shan site, but without success.  It was in these circumstances that Mr. Lau decided to invite Mr. Yip to be his business partner, hoping that China Overseas would be sufficiently impressed by Sing Yip’s track record to offer the subcontract to the Company.

16.I accept, in this connection, that in the course of discussing their proposed business association, Mr. Yip had alluded to his financial strength with reference to Sing Yip’s previous projects.  Mr. Lau’s move to invite Mr. Yip as a business partner was obviously the result of a combination of factors, including his desire to take advantage of Sing Yip’s track record with the prospect of future business for the Company as well as the confidence he had in Mr. Yip’s financial position. 

17.In the event, the Company was successful in securing the Ma On Shan project as subcontractor of China Overseas.  Although the invitation to tender was issued to the Company on 22 February 2002 (which was a short time before Mr. Yip formally became the Company’s director), I find that this subcontract was secured primarily because of Sing Yip’s good record and reputation.  In response to the invitation, a quotation was submitted on about 22 March 2002.  It was signed by Mr. Yip on behalf of the Company, which further highlighted Mr. Yip’s role in procuring the subcontract.  In this regard, while I have noted that the letter of assurance in relation to workers’ wages (dated 30 April 2002) was signed by Mr. Lau, this fact does not alter my view that the prime reason for the success in securing the Ma On Shan subcontract was due to the support and connection of Mr. Yip and Sing Yip.    

18.Mr. Yip was made a director of the Company in place of Mr. Chung on 1 March 2002 (according to the Company’s financial statements).  The 30% shares originally under the name of Mr. Chung were transferred to Mr. Yip.  One of the contentious issues is the terms of the agreement upon which Mr. Yip joined the Company.  According to Mr. Yip, Mr. Lau promised him that he should be entitled to 50% of the Company’s profits notwithstanding that he was on record only a 30% shareholder.  It was common ground that the agreement was not set out or evidenced in writing.

19.On this question, 2 diametrically opposite versions were given by Mr. Yip and Mr. Lau.  According to Mr. Yip, on a number of occasions Mr. Lau promised him words to the effect “50/50, both as partners, no difference between the two of us”.  Mr. Yip emphasised the background of his already established connection with principal contractors, his accomplished status as a subcontractor and his good business record in the previous projects.  He asked rhetorically why in these circumstances would he accept a smaller share of the profit than Mr. Lau.

20.On the other hand, Mr. Lau said he was given the impression that Mr. Yip was financially very strong and would be able to inject substantial funds into the Company on short notice.  He was thus prepared to offer 30% of the shareholding in the Company without even asking Mr. Yip to pay for it.  Furthermore, on behalf of Mr. Lau, Mr. Yau asked the Court to consider the fact that as events developed further, not only did Mr. Yip failed to inject any funds into the Company to meet the initial outlay of expenditure in the Ma On Shan project, he was in fact borrowing from the Company.  Such conduct would militate against there being any agreement as to the 50/50 profit-sharing arrangement.  It might be added in Mr. Lau’s favour the fact that he was the only signatory to the Company’s bank account.  Had there been the 50/50 profit-sharing arrangement, it might be argued that Mr. Yip would have insisted on being a co-signatory to the account.

21.I prefer the account given by Mr. Yip to that by Mr. Lau.  As already noted, it was due to Mr. Lau’s desire to take advantage of Sing Yip’s good record and reputation that he had offered partnership with Mr. Yip (by way of shares in the Company).  I find it unlikely that Mr. Yip would have been content with a minority shareholding in the Company when he and Sing Yip had already established an accomplished position in the trade.  Given the relatively stronger bargaining position, it did not seem probable to me that Mr. Yip would agree to join Mr. Lau’s Company were it not for the promise that he would be entitled to equal sharing of the profits together with Mr. Lau.  These circumstances clearly favoured the version given by Mr. Yip and I do not consider it relevant whether Mr. Yip had eventually failed to inject funds into the Company.

22.In this connection, some evidence had been led as to whose signatures appeared in the respective subcontracts for the Ma On Shan and the King’s Park project.  I have to say I only regard such evidence to be of marginal relevance.  Be that as it may, my finding is that when the Ma On Shan subcontract was signed in August 2002, only Mr. Yip signed on that subcontract.  He did so on behalf of the Company.  It was only subsequently that Mr. Lau inserted his signature on the document because he was keen to demonstrate that he also played a part in procuring the subcontract.  Later, in September 2002, Mr. Yip presented a quotation to China Overseas for the King’s Park project on behalf of the Company.  By then the Company had already established a working relationship with China Overseas.  Eventually when the subcontract was secured in November, I am satisfied that initially Mr. Yip was the only person who signed the subcontract on behalf of the Company.  Mr. Lau added his signature to the document later for the same reason as in the previous case.  I am satisfied that Mr. Yip was all along the contact person between the Company and the principal contractor.

23.I have considered the question of Mr. Lau being the sole signatory of the Company’s bank account.  I do not find it improbable that Mr. Yip was content to leave the control over the Company’s account in the hands of Mr. Lau, so long as he (Mr. Yip) was given his due share of the profits.  In the end, I do not think this signatory arrangement was sufficient to alter my view on the question.

24.To conclude on this issue, I am satisfied that Mr. Lau had indeed agreed with Mr. Yip that both parties would be entitled to an equal share of the Company’s profits between them. 

Projects at Kam Chin Village and Hang Hau

25.In March 2003, the Company further secured a subcontract worth $7.8 million in relation to a development at Kam Chin Village in Sheung Shui under the principal contractor, Hong Kong Construction Co. Ltd.  Mr. Yip signed the subcontract on behalf of the Company.  Mr. Yip further provided a Sing Yip’s cheque of $780,000 to meet the requirement for security under the subcontract.  Apparently, at the time Mr. Lau was not even aware that the security was provided by Sing Yip and not the Company.

26.Soon after, the Kam Chin Village works were subcontracted in the Company’s name to one Mr. Ku, the proprietor of Lei Keung Engineering Company.  It would appear from the documents that this sub-sub-contract was entered into around 10 March 2003.

27.One of the contentious issues in the case is the so-called “back-to-back subcontract arrangement”.  It is Mr. Lau’s case that on an occasion in April 2003 shortly after the Kam Chin Village contract was obtained, he told Mr. Yip at the King’s Park site office that the projects at hand (the King’s Park and Ma On Shan sites) were already occupying a lot of his (Mr. Lau’s) time.  He urged Mr. Yip to share some that responsibility by taking charge of the Kam Chin Village site.  He suggested that Sing Yip should take up the project as the Company’s subcontractor for the price of 90% of what the Company would receive.

28.This alleged conversation was set out more specifically (in direct speech) in one of Mr. Lau’s witness statements which was filed only a day before the commencement of this hearing.  The essence of it was that he had told Mr. Yip that the Kam Chin Village site would be subcontracted to him (Mr. Yip).  Mr. Yip was to conduct the contract on his own account and Mr. Lau would not be concerned so long as 10% of the contract sum would be paid to the Company.  According to Mr. Lau, Mr. Yip had neither accepted the proposal nor declined it on that occasion. 

29.It is Mr. Lau’s case that, when the first interim payment was received from the main contractor, Mr. Yip requested the sum to be transferred to Sing Yip because he wanted Sing Yip to be the sub-subcontractor.  Mr. Lau said he would only be prepared to issue the cheque to Sing Yip on condition that Mr. Yip would take personal responsibility for the sub-subcontract. 

30.It is not disputed that as the Kam Chin Village works progressed, the first few interim payments received from the principal contractor were indeed transferred by the Company to Sing Yip.  Sing Yip had received a total of 5 such payments between June and September 2003, aggregating over $4.3 million.  During this period, the expenses for materials and wages for workers were paid by Sing Yip out of its own account.

31.Not long after the commencement of the Kam Chin Village project, the Company obtained another subcontract from China Overseas in relation to the development above the Hang Hau Station.  The subcontract works at this site commenced sometime in about May 2003, although the subcontract was signed only a few months later in August.

32.Mr. Lau asserted that a similar back-to-back subcontract arrangement was made with Sing Yip in respect of the Hang Hau project, but no specific details were given as to the manner in which the arrangement was agreed.  There is no dispute however of the fact that 3 interim payments between August and October 2003 totalling over $5.3 million were transferred from the Company to Sing Yip.  During this period, expenses incurred for the site were paid out of Sing Yip’s account.

33.There seems also little dispute that from the time of the commencement of the works at Kam Chin Village and Hang Hau, Mr. Yip was the person who took charge in overseeing the works on site.  Indeed, the records of attendance at site meetings as well as correspondence in relation to the Kam Chin Village project showed Mr. Yip’s personal supervision of the project.  I am prepared to draw the same inference of involvement in respect of the Hang Hau project.

34.During the course of the works at the 2 sites, both Sing Yip as well as the Company had made payments towards project expenditure.  The Company had paid an aggregate sum of $1,797,059 in relation to the Kam Chin Village site between March and September, and $1,732,180 plus transportation costs of $18,589 in relation to the Hang Hau site between June and September.  The sum total of the Company’s expenditure for this period amounted to $3,547,828.   

35.I would digress at this point to deal with a few documents produced in connection with the issue on the “back-to-back subcontract arrangement”.  In Mr. Lau’s witness statement of 28 December 2005, he sought to support the back-to-back arrangement by reference to a document which he said was drawn up by Company staff in May 2003.  The document purported to record that Sing Yip on its own account would be solely responsible in undertaking the Kam Chin Village project.  After completion, Sing Yip would pay 10% of the contract sum to the Company as administrative fee.  In the statement, Mr. Lau went on to say that because of his position as the person in charge of the Company he signed the document but Mr. Yip did not.  The absence of Mr. Yip’s signature was explained on the basis that he had already had an oral agreement with Mr. Yip and therefore it was unnecessary for Mr. Yip to sign.  In that statement, Mr. Lau went to the extent of making reference to the industry’s practice to explain why the document was only signed in May after the works had already commenced.  The document referred to was produced in the course of the trial which on the face bore a date of 1 May 2003 (which I would call the “the May document”).  

36.There were in fact 2 more similar documents, one relating to the Kam Chin Village project and the other the Hang Hau project (the Hang Hau project will be dealt with later).  Both these documents bore the date 1 November 2003 (“the November documents”).  Save for different references to the projects and the main contractors, the contents of the November documents were almost identical to each other, as well as to the May document.

37.In the December 2005 witness statement, Mr. Lau gave an explanation for the creation of the November document relating to the Hang Hau project (I believe his reference in the statement to a November 2004 contact is a mistake).  He explained that because Mr. Yip had left Hong Kong in October, some disgruntled workers whose wages had not been paid took the matter to the Labour Tribunal.  The November document was drawn up to show the Tribunal that it was Sing Yip and not the Company’s responsibility to pay the workers.

38.The creation and the purpose of these several documents were called into question.  When cross-examined, Mr. Lau again became evasive.  First, despite the fact that his signature appeared in all these several documents, he was initially not prepared to admit his own signature.  Then, he tried to avoid giving direct answers to questions on the circumstances as to how these documents came into existence beyond saying that his understanding was that the Company needed the documents for the Labour Tribunal dispute.  He said it was not him who prepared the documents and questions should be directed to Leung Ping Hung.

39.It is now accepted in the submissions made on behalf of Mr. Lau that these several documents were prepared by Mr. Lau’s assistant in about November 2003.  It was fair for Mr. Yau to accept that these documents were not relied upon as contemporaneous record of the so-called back-to-back arrangement.  Even so, however, I do not consider that these documents should simply be ignored.  To the contrary, I would consider as significant the length to which Mr. Lau had gone by making reference to these documents with a view to establishing his case of a back-to-back arrangement:  Initially, he asserted the existence of such an arrangement in his affirmation of 23 September 2004.  There was no reference to these several documents.  The assertion was denied, and one of the points made by Mr. Yip (in his affirmation of 6 November) was the absence of any agreement or board resolution to evidence such an arrangement.  It was in response to the challenge of absence of writing that Mr. Lau in his 2nd affirmation exhibited “the 2 un-signed sub-contracts”.  They were the 2 November documents.  Later, as I have already mentioned, Mr. Lau’s witness statement of December 2005 made further reference to the contract drawn up in May and the explanation given for the absence of Mr. Yip’s signature on the document.  It was then explained that the November document relating to the Hang Hau project was prepared for the Labour Tribunal dispute.  He then failed to give any clear explanation as to these several documents at the trial.

40.I have considerable misgivings about the creation of these documents as well as the use to which they had been put in these proceedings.  To me the purpose of the creation of the May document remained highly suspect.  I am particularly concerned why the document should bear the date of 1 May 2003 when it, admittedly, was not prepared until some months later.  No satisfactory account was given.  The shift of emphasis away from a reliance on the document in Mr. Lau’s statement (produced only a day before the commencement of the trial) only served to raise more questions about its veracity.  Furthermore, if the May document was indeed prepared for the dispute in the Labour Tribunal, what reason could there be for the creation of one of the November documents to cover exactly the subject matter.  I have not received clear explanation on this and many other questions.  I do not accept that Mr. Lau was ignorant about the true circumstances of all these queries in the way he would have the court believed.  Although the evidence is not sufficient to justify a finding that the May document was fabricated for the purpose of this trial, and I make no finding to that effect, my misgivings about the absence of a satisfactory explanation and the lack of candour on Mr. Lau’s part has, in my view, damaged his credibility considerably. 

41.Mr. Leung Ping Kong also gave evidence on the subject.  He signed as a witness on the May document and one of the November documents.  Suffice it to say that Mr. Leung’s answers on these documents were just as uninformative as those of Mr. Lau.  

42.I return now to the analysis of the evidence on the “back-to-back subcontract arrangement”.

43.On 10 September 2003, Mr. Yip signed what was referred to in these proceedings as the “acknowledgment letter”.  The “acknowledgment letter” is a 3-page document all of which bore the signature of Mr. Yip.  The first 2 pages were the itemized breakdown of the sums incurred by the Company in the 2 sites.  These 2 pages each bore the date 10 September 2003.  The third page set out the total expenditure for each site as well as the aggregate amount for both sites.  Peculiarly, this page bore a date of 9 September with the figure “10” added underneath, but apparently nothing turns on the point.

44.On the first page of the acknowledgment letter, the various sums incurred for the Kam Chin Village site were described as having been “loaned” (借支) to Sing Yip.  On the second page, the various sums incurred for the Hang Hau project were similar described as being “loaned”.  The same description (借支) was found on the third page. 

45.It is Mr. Lau and the Company’s case that this 3-page “acknowledgment letter” evidenced both the fact of the back-to-back subcontract arrangement between the Company and Sing Yip, as well as the amount owed by Sing Yip in respect of the 2 sites.       

46.In respect of the “acknowledgment letter”, Mr. Yip first made a point about the way the document was produced in evidence.  When the document was first adduced as an exhibit in Mr. Leung Ping King’s affirmation of 31 August 2004, and then an exhibit in Mr. Lau’s affirmation of 26 September 2004, what they produced was a photocopy of only the third page with 2 Chinese words meaning “loan” appearing prominently against the sums referable to the Kam Chin Village and the Hang Hau sites.  The photocopy in the respective exhibits also showed Mr. Leung’s signature.

47.Mr. Yip promptly took issue with the authenticity of the exhibited copies.  As is now admitted by Mr. Leung, neither the 2 Chinese words “loan” nor his signature in fact appeared on the original of the document.  Mr. Lau was questioned on the subject regarding the exhibit attached to his affirmation.  He was unable to explain why he made use of the copy of the page containing Mr. Leung’s insertions and not simply a clean copy made out of the original of the document.  When it came for Mr. Leung to be cross-examined, he sought to explain that he made a copy only of page 3 of the document the day after the document was signed by Mr. Yip.  He needed only that page to show the final total of the sums owed by Sing Yip.  The original of the 3-page document was kept by Mr. Lau.  He added the Chinese words on the photocopy for his own record.  He signed on the photocopy because Mr. Lau asked him to do so.  It did not occur to him to ask Mr. Lau for the original to enable a clean copy to be made for the purpose of his affirmation.  Mr. Leung’s explanation, I have to say, does not make things any clearer on the subject. 

48.Mr. Yip invited the Court to infer a sinister motive on the part of Mr. Lau and Mr. Leung in choosing to adduce in evidence the photocopy containing Mr. Leung’s insertions.  In particular, he questioned the need for Mr. Leung’s signature on the copy were it not for the purpose of trying to give an appearance that the document was a genuine acknowledgment of a loan with the countersignature of Mr. Leung (the Company’s accountant).  Mr. Yip’s challenge again raises the question of credibility of Mr. Lau and Mr. Leung.

49.Mr. Yip was in turn cross-examined on the “acknowledgment letter”.  Initially he said he did not read it carefully before he signed.  At one stage in his cross-examination, he suggested that he put his signature on the document before the contents were written.  That was soon retracted.  His explanation of the “acknowledgment letter” was that since he was the person overseeing the 2 sites, it was a document produced for the purpose of squaring the accounts.  He did not notice the word “lent” (借支) on all 3 pages of the document. 

50.After having heard the witnesses and considered the evidence, I would make the following findings.  First, as already noted above, I regard Mr. Lau and Mr. Leung’s explanation concerning their use of the copy “acknowledgment letter” with Mr. Leung’s insertions wholly unsatisfactory.  It was obvious to me that Mr. Lau was evasive and I find that his knowledge on the subject should be much fuller than he was prepared to admit in evidence.  I am also skeptical of Mr. Leung’s explanation as to the insertion of his signature on the photocopy of the document.  If the copy was meant as a record of Sing Yip’s indebtedness, it already bore Mr. Yip’s signature and I do not see the need for Mr. Leung’s. 

51.However, while I find Mr. Lau and Mr. Leung’s evidence on the subject unsatisfactory, the fact remains that Mr. Yip had signed the “acknowledgment letter”, which on any fair reading, clearly indicated that the sums itemized therein were “loaned” (借支) by the Company to Sing Yip.  This, to me, is strong indication that Sing Yip had indeed taken on the works at the sites at Kam Chin Village and Hang Hau on its own account.

52.I wish to make it clear here that I do not accept Mr. Lau’s evidence that the reason for the so-called back-to-back subcontract arrangement was because he was too occupied with the Ma On Shan and King’s Park projects.  I also do not accept the version of the conversation he allegedly had with Mr. Yip at the King’s Park site office in about April 2003 (which now finds its way into the evidence in the rather belated witness statement filed only a day before the commencement of this trial).  Neither do I accept Mr. Lau’s evidence that Mr. Yip had agreed to take personal responsibility for the sub-contract in return for his agreeing to issue the cheque to Sing Yip to transfer the interim payments from the main contractor. 

53.On the other hand, Mr. Yip had strongly urged upon me to look at the “acknowledgment letter” in the context of the surrounding circumstances and not simply take the document at face value.  Mr. Yip pointed to the fact that it would not be reasonable to expect Sing Yip, being a company with superior status in the trade, to be content to be the Company’s subcontractor.  Further, Mr. Yip sought to explain why Sing Yip’s account was used for defraying expenses incurred at the 2 sites.  He said it was his gravest mistake to have allowed Sing Yip’s account to be used.  Mr. Yip gave several reasons.  First, he said that as he was to oversee these 2 sites, such an arrangement would facilitate better accounting management.  He needed better control over the account because Lau did not agree to open another account for the Company.  He said if he were not to use Sing Yip’s account, he would need to carry a lot of cash, in the millions.  The additional advantage of using Sing Yip’s account was that its good reputation would enable it to obtain materials and services on better terms.  Mr. Yip also mentioned the fact that Mr. Leung Ping Kong acted as the quantity surveyor for the Ma On Shan and King’s Park sites and Mr. Leung Ping Hung for the other 2 sites.  I understand him to be saying that with different quantity surveyors, separate accounts would facilitate better accounting management, although this point did not come across very clearly. 

54.As to the points made by Mr. Yip, while I would have been prepared to accept that, had this been a transaction between unrelated parties, it would probably be unlikely for Sing Yip to accept a subcontract under someone who enjoyed a lesser status in the trade, yet the dealings between Mr. Yip and Mr. Lau were essentially between business partners and not unrelated parties.  I am not convinced that any inhibition Mr. Yip might feel about being engaged as a subcontractor under someone of a lesser reputation would apply quite so strongly to an arrangement of accepting a transfer of the sites from the Company.  To me, those considerations that Mr. Yip urged upon me are not sufficient to displace the clear evidence of the “acknowledge letter” which stated in no uncertain terms that the sums itemized were “loaned” (借支) by the Company to Sing Yip.  The inescapable conclusion is that Sing Yip was undertaking the works at the 2 sites on its own account.  In the circumstances, although I have rejected Mr. Lau’s evidence as to the manner in which the so-called back-to-back arrangement was entered into, I am satisfied on the basis of the “acknowledgment letter” that at some stage after the subcontracts were secured, Mr. Yip had indeed agreed with Mr. Lau (who was acting for the Company for that purpose) to accept an arrangement of having the Kam Chin Village and the Hang Hau projects assigned from the Company to Sing Yip.  The arrangement agreed upon was a purely private arrangement between the Company and Sing Yip, and did not involve any formal assignment of the subcontracts as far as the main contractors were concerned.  Although there is insufficient evidence to enable me to make findings as to the precise terms of this arrangement, I am satisfied that the effect of the arrangement was that Sing Yip had undertaken to carry out the works at the sites on its own account in the place of the Company. 

55.I do not speculate as to the reason of the parties entering into this arrangement.  There is not sufficient reliable evidence to enable me to do so beyond saying that the arrangement must have been agreed upon sometime before the end of June 2003 (being the date of the first transfer payment in respect of Kam Chin Village site).  But I do consider that the conclusion I have reached is consistent with Mr. Yip’s role of being primarily instrumental to securing the 2 projects.  It is also consistent with him being the person who undertook overall supervision of the works at the 2 sites, and that it was he who subsequently decided to reduce the scope of the subcontract at the Kam Chin Village site by surrendering the work relating to the 5 villas back to the main contractor.  Further, and relevantly, the use of the Sing Yip’s account does lend support to my finding regarding this arrangement. 

56.I also find Mr. Yip’s explanation as to the purpose of the “acknowledgment letter” unconvincing.  While it was right to describe the document as evidencing the squaring of the accounts relating to the 2 sites, yet the accounts involved were the accounts between the Company and Sing Yip, not the internal accounts of the Company.  I further reject Mr. Yip’s evidence that he had not read the documents carefully before signing.  I find that Mr. Yip knew at the time that he was acknowledging Sing Yip’s indebtedness to the Company in respect of the 2 sites.  In this connection, I have not overlooked the fact that shortly after the signing of the “acknowledgment letter”, substantial interim payments were transferred by the Company into Sing Yip’s account in relation to both sites.  However, I do not consider such transfer to be inconsistent with my finding that Sing Yip was indebted to the Company as set out in the “acknowledgment letter”.  The transfer of payments merely evidenced the continuation of the site-transfer arrangement between the parties.

57.A cheque dated 10 September 2003 was issued by Sing Yip in favour of the Company for $300,000.  It was deposited into the Company’s account on 11 September, the same day the 2 interim payments were transferred to Sing Yip.  On a photocopy of the cheque, words were written to the effect that Sing Yip was “repaying” (远款) the Company in relation to the Hang Hau site.  It is not in dispute that those words were in Mr. Yip’s handwriting.  Mr. Yip gave different explanations for the $300,000.  In his affirmation of 17 January 2005, he said it was a loan by Sing Yip to the Company.  In his closing submissions, he explained that it was a return of a part of the interim payment to the Company because the Company was short of funds.  I do not accept either of such explanations as they plainly contradict what Mr. Yip had written on the photocopy himself.  I am satisfied that the sum $300,000 was a partial repayment towards Sing Yip’s indebtedness owed to the Company.

58.I should also mention in this connection that Mr. Yip had on more than one occasions in his affirmations sought to explain that the sum $5,747,828 (which included this part of the Company’s claim of $3,547,828) was partial reimbursement from the Company in respect of the expenses incurred by Sing Yip in relation to the 2 sites.  I do not accept such an explanation as it appears clearly to me that the figures set out in Mr. Yip’s affirmations completely ignored, quite wrongly, the interim payments received by Sing Yip from the Company in the course of the works.  I will return to discuss this sum $5,747,828 in the next section of this Judgment. 

59.To complete the chronology on this topic, as I have already mentioned, the site-transfer arrangement continued after the “acknowledgment letter”.  Sing Yip received further transfer of the interim payments for the 2 sites, on 19 September for Kam Chin Village and 6 October for Hang Hau.  The works at the sites continued to be under the general supervision of Mr. Yip until October when Mr. Yip was detained in Dongguan on the Mainland.

Loans to Mr. Yip ($2,500,000)

60.The Company claims against Mr. Yip for 5 sums totalling $2.5 million allegedly advanced to Mr. Yip as personal loans on 5 occasions spanning January and July 2003.  Mr. Yip did not dispute he had received the sums but explained that they were paid to him as dividend to which he was entitled.  He said in his affirmation of 6 November 2004 that just before Chinese New Year in 2003, Mr. Lau agreed with him that the Company would distribute some profits between them and each of them could withdraw up to $2.5 million.  

61.In cross-examination, Mr. Yip attributed these distributions to the fact that he had worked for the Company since 2002 without any pay and that the Company had been making use of Sing Yip’s office for free.  He also suggested that these sums were meant as reimbursements of his miscellaneous expenses and entertainment.    

62.I would mention, first, that the 5 payments in question were the subject of the demand letter from the Company’s solicitors dated 7 July 2004, and specifically included as part of the aggregate total of $5,747,828.  When Mr. Yip petitioned for the winding-up of the Company at the end of July 2004, he must have been alive to this demand when he made reference in both the Petition as well as his supporting affirmation to the sum of $5,747,828.  As already noted, the explanation he gave was that the sum of $5,747,828 (including the $2.5 million) was partial reimbursement by the Company in relation to the expenditure he had incurred for the 2 sites.  I have already rejected this explanation. 

63.Secondly, as noted above, Mr. Yip had proffered other explanations for the $2.5 million, notably, as a distribution of profits or recognition of his service without pay.  The fact that Mr. Yip had given different explanations would certainly require the court to scrutinize his evidence very closely. 

64.The counterfoils of the 5 cheques were produced in evidence.  In relation to the first of these (that is, 30 January 2003), the writing on the counterfoil indicated the payment to be a 「站支」 which, on Mr. Lau’s evidence, meant “temporary” advancement.  This was not seriously challenged by Mr. Yip.  Relating to the counterfoil for the second cheque (dated 10 April 2003), Mr. Yip queried that the position of the word “borrow” (借) appeared to be out of line with the other words (“use for miscellaneous expenses” (什支用)), and he contended that the word “borrow” was not written contemporaneously when the cheque was made out.  I tend to agree with Mr. Yip on this point.  As for the other 3 payments, Mr. Yip made the point that the counterfoils had not been produced.  He further made the point, with which I agree, that the words (私人借支) (私人) (借支) appearing on the photocopies of the cheques were self-serving. 

65.I will turn to examine Mr. Lau’s evidence on this issue.  According to Mr. Lau, Mr. Yip requested the advancement because Sing Yip was experiencing cash-flow problem.  (Although he was not very specific, I would presume Mr. Lau was ascribing the same reason to all 5 borrowings.)

66.In this regard, if one were to add this extra borrowing of $2.5 million (albeit a personal borrowing of Mr. Yip) to Sing Yip’s indebtedness of $3,547,828, the total amount owed by Mr. Yip and Sing Yip would have exceeded $6 million, a very substantial sum.

67.Relevantly, when questioned whether he had made any demand for repayment, Mr. Lau replied affirmatively that he had done so in about July or August 2003.  As is now obvious, the demand must have been ignored and not complied with.  In those circumstances, one would have expected that at the time Mr. Yip was asked to acknowledge Sing Yip’s indebtedness on 10 September 2003, some similar acknowledgment would have been required from Mr. Yip as to his personal loans.  In response to questions on the absence of any documented acknowledgment on Mr. Yip’s personal loans, Mr. Lau merely explained, by reference to the counterfoils in relation to 2 of the 5 cheques, that he had considered them to be sufficient evidence of those loans.  I have to say I find the absence of any written acknowledgment surprising.

68.Furthermore, as already noted earlier, the Company was still effecting transfers of interim payments to Sing Yip even after the “acknowledgment letter”.  I have previously expressed the view that such transfers do not alter my finding that Sing Yip was indebted to the Company to the extent of over $3.5 million as set out in the “acknowledgment letter”.  I have done so on the basis of clear documented evidence of an acknowledgment.

69.However, if in addition to Sing Yip’s indebtedness, 5 further sums were indeed advanced as personal loans to Mr. Yip who had allegedly failed to comply with the repayment demand, I would be even more surprised to find the Company to have continued to effect substantial transfers of interim payments to Sing Yip without first making a deduction for the outstanding sums.

70.Further still, though of lesser relevance, in the Company’s accounts prepared for the period up to 31 March 2003, it would have been expected to find an entry reflecting the first of the 5 supposed advancements (made on 30 January 2003).  No reference to any director or shareholder’s borrowings was found in the accounts, however.  I am here referring to 2 sets of accounts, one prepared by Lau & Au Yeung CPA Limited dated 26 April 2004, and the other by T Y Ying & Company dated 23 July 2004.  Both contained Mr. Lau’s signature.  In contrast, in the accounts prepared for the year 2003/2004 dated 26 August 2004 (again containing Mr. Lau’s signature), the entry for “Loan to Director” increased from nil for 2003 to $5,747,828 for 2003/2004.  To me, what these accounts showed is that before July 2004, neither Mr. Lau nor anyone on the Company’s behalf had treated the advancements as personal borrowings by Mr. Yip.  The change of instructions came about only some time between July and August 2004.  This change of instructions would obviously have to be considered in the light of the steps taken to remove Mr. Yip from his position as director, a question which will be discussed later in this Judgment.

71.I have pondered over the question regarding these 5 sums.  As is clear from the matters discussed above, my decision either way will leave some aspects of the evidence unexplained or not satisfactorily resolved.  In the end, I have come to the view that the 5 payments were, on balance, made by Mr. Lau to Mr. Yip not as personal loans or advancements.  Nor were they payments specifically referable to any particular items of expenditure that Mr. Yip might have incurred.  I find, on balance, that they were payments by Mr. Lau, being someone in control of the Company’s account, as a gesture from time to time in recognition of the fact that Mr. Yip had made no drawings from the Company, had accommodated the Company in the use of Sing Yip’s premises, and as sums to Mr. Yip as a director and shareholder for miscellaneous non-accountable expenditure, including entertainment.

72.Accordingly, the 5 payments having been made with the consent of the only 2 directors and shareholders of the Company are binding on the Company and therefore not recoverable from Mr. Yip.

73.I propose now to turn to Mr. Yip’s complaints about Mr. Lau’s dealings with the Company’s account.

The 144 cheques

74.One of the allegations in Mr. Yip’s Re-Re-Amended Petition concerned the questionable withdrawals from the Company’s account to the extent of $41,081,800.  Mr. Yip believed that Mr. Lau had improperly dissipated Company’s assets. 

75.In a report prepared by Conpak & Co. on Mr. Yip’s instructions, some of the irregularities identified related to a large number of cheque-payments which were not supported by documents such as subcontractors’ agreements, quotations, debit notes, invoices or receipts.  Based on the report, Mr. Yip sought by way of interrogatories an explanation from Mr. Lau in relation to a total of 144 cheques.  Mr. Lau admitted that 24 of those cheques were paid to him, totalling $10.54 million.  Mr. Lau had also produced copies of the 144 cheques, some showing also the endorsement at the back. 

(1) 24 cheques received by Mr. Lau

76.Mr. Lau explained that the sums received by him were mostly reimbursements for payments to subcontractors and suppliers which he had made on behalf of the Company.  Some were occasionally received by him “on account” for future payments.  He said that very often he had to pay the subcontractors and suppliers in cash.  It was also common for materials to be paid on an urgent basis.  Cheques would not be the preferred mode of payment for these subcontractors and suppliers.  He said the need to discharge these payments in cash required him sometimes to carry a lot of cash in the boot of his vehicle.  In cross examination, Mr. Lau explained that the cash payments related mostly to 4 types of expenses, namely, for payment of subcontractors’ fees, suppliers’ charges, workers’ wages, and other miscellaneous expenses such as payment for meals, transportation and occasional advancements to workers etc. 

77.Mr. Lau produced 4 lists setting out the particulars of the cheques issued out of his personal account at the Kwangtung Provincial Bank which, according to him, evidenced payments to various subcontractors and suppliers.  The value of the cheques set out in the 4 lists totalled just under $9.4 million.  However, only the months and the dates were set out in the lists.  Although it was apparent that these cheques were not made out within the same year, it was not possible to tell exactly in which years these payments were made.

78.Mr. Lau identified 5 major subcontractors of the Company to whom, he said, he had personally made disbursements on the Company’s behalf.  The total sum exceeded $15 million during the period between March 2002 and March 2003.  The 5 major subcontractors were Lam Chi Kwai, Siu Ting Kin, Leung Ping Hung, Lai Tung Sing and Sun Yip Man.  He believed that the 24 cheques represented partial reimbursement of the payments he had made to these 5 subcontractors.

79.Mr. Lau explained why the payments received by him were in round figures.  It was because, he said, he claimed these reimbursements largely out of reconstruction from memory and sketchy records.  Some of them were sometimes noted only on the back of some Mark Six slips.  He was questioned as to the manner in which his reimbursements were calculated.  It was obvious that he was unable to explain clearly whether it was a mere process of reconstruction or estimation from memory, or to what extent it was a process of reconciliation on the basis of records, or the manner in which the latter was done.  His evidence was that there would probably be no record for small sums of $50,000 or so.  For the larger sums of $200,000 or more, he did not clearly say whether they would have been supported by documents.  His evidence was that any records there might have been had already been given to Mr. Leung Ping Kong who, in turn, would have reconciled the sums with the subcontractors.

80.In his affirmation, Mr. Lau mentioned that some records such as receipts and invoices of the suppliers and subcontractors should have existed although not all Company’s payments were “properly vouched or invoiced”.  He used to entrust Mr. Yip with the task of handling the Company’s tax affairs.  For that purpose, Mr. Yip had on several occasions taken documents away from the Company’s site office, including those receipts and invoices.  It was only after the appointment of the new auditors in 2004 that he became aware that the records were incomplete. 

81.On this issue, Mr. Leung Ping Kong’s evidence was that after he had collated the so-called records of payment on Mark Six slips or other slips of paper from Mr. Lau, and after verifying the various sums payable to subcontractors, these slips of paper were returned to Mr. Lau.  He would make a proper record to evidence the payments.  He also said Mr. Yip had taken documents away from the Company’s site office for the purpose of enabling the Company secretary, Mr. Chiu, to handle the tax returns for the Company.  However, the relevant documents were not returned to the Company.

82.An examination of the 24 cheques revealed that Mr. Lau had obtained the following sums:  $100,000 in June 2002, $100,000 in October, $60,000 in December, $1.9 million in January 2003, $200,000 in February, $980,000 in March, $250,000 in May, $50,000 in June, $5.7 million in July, $1 million in August, $200,000 in April 2004.  It has to be observed that 6 of these cheques were of very substantial amount, one for $2 million, one for $1.8 million, one for $1.5 million and 3 others for $1 million each.  Some of the cheques were in consecutive numbers and issued on the same day, for example, the 2 cheques dated 18 March 2003 of $50,000 and $500,000 respectively, the 2 cheques dated 8 July 2003 of $1.5 million and $50,000 respectively.  Two of the $1 million cheques were issued on successive days in July 2003.

83.As noted above, all the 24 cheques were in round figures, and most of them of substantial amounts.  As admitted by Mr. Lau, the sums incurred were reconstructed largely from memory and sketchy records and reimbursements in exact sums were rare.  No documents in the form of contracts, invoices, or signed receipts were produced to support the payments that Mr. Lau had allegedly incurred on the Company’s behalf.  

84.Mr. Lau sought to prove his disbursements by a process of deduction.  He compared the total receipts of the 5 major subcontractors with the amounts of Company cheques issued to these subcontractors.  The difference, he claimed, could only be explained by the fact that he had personally made payments to these subcontractors.  For this purpose, he had produced a number of tax returns which evidenced the amounts of fees received by the various subcontractors.  However, this method of deduction would only serve Mr. Lau’s purpose if it could be shown that the cheques issued by the Company to the subcontractors represented the whole of the Company’s payments to them.  Only if that were the case could it then be said that the remainder must have been attributable to Mr. Lau’s personal payments.  For this purpose, it would have been necessary for Mr. Lau to adduce evidence to explain the large number of cash cheques that had been issued by the Company out of its account (as evidenced by the bank statements of the Company).  It would be necessary to exclude the possibility that these cash payments might already have been applied to satisfy the subcontractors’ fees or some parts thereof.  Such an exercise had obviously not been carried out, and I am therefore unable to accept the conclusion so deduced, namely, that Mr. Lau had made personal payments to the subcontractors for a sum of over $15 million in the course of 2002 to March 2003.  

85.Mr. Yau on behalf of Mr. Lau and the Company submitted 2 sets of calculations in his final submissions purportedly to demonstrate Mr. Lau’s personal contribution to the Company’s finances.  The difference between the 2 sets lies mainly on the fact that one of them was based on the financial statements prepared by T Y Ying & Co., and the other on the draft statements by Lau & Au Yeung CPA Limited.  I understand that the methodology adopted in both sets of calculation is the same.  These calculations seek to compare, first, the total deposits into the Company’s bank account with the Company’s “cash outlay”, and secondly, the total withdrawals from the Company’s bank account with its “cash outlay”.  According to these calculations, both the deposits and the withdrawals exceeded the “cash outlay”, and therefore it was concluded that the differences must have been attributable to the contributions of Mr. Lau. 

86.The calculations of the “cash outlay” were derived from the Company’s financial statements.  To ascertain the “cash outlay” according to these calculations, one of the main items relied on was the “Direct Costs” allegedly incurred by the Company.  In turn, a significant item making up the “Direct Costs” was the “Subcontracting Fee”.  The amount of “Subcontracting Fee” and the propriety of a number of such payments is in fact the subject matter of dispute in these proceedings.  In my view, the method of proof with reference to the 2 sets of calculations is unsatisfactory because it assumed the propriety of the very thing which is the subject of the challenge. 

87.I am unable to accept either of those methods of deduction as satisfactory proof of Mr. Lau’s personal contribution towards the Company’s expenses.  I would turn to Mr. Lau’s evidence on the cash payments he had allegedly made on behalf of the Company.  His evidence that he only recorded the payments on scrap pieces of paper was completely unconvincing, considering that those were supposedly cash payments to subcontractors, suppliers and workers.  Even if I were to accept that some of these payments were indeed made in cash, I fail to understand why only sketchy records were made of such payments.  To the contrary, dealing in cash is precisely the reason why one would expect the paying party to procure some form of signed receipt as evidence.  To say that either no record or only sketchy records existed because the payments were made in cash flies in the face of common sense.  Moreover, considering that those were supposedly payments to subcontractors, suppliers and workers, the impression that Mr. Lau endeavoured to give of the casual dealings without proper documentation, in my view, defies reason and is unworthy of belief.   

88.Furthermore, according to Mr. Lau, even his payment by personal cheques only “accounted for the comparatively minor portion of the sums [he] disbursed for the Company”.  In other words, a large proportion of such disbursements were made in cash.  I find this surprising.  The improbability of such an assertion is highlighted when one looks at the records produced in support of the Company’s claim for remedial costs incurred in relation to the Kam Chin Village and Hang Hau sites.  In that connection, the Company has set out in tabulated form the recipients of various payments.  Apart from a couple of relatively small sums and also a sum received by one Hung Ying Engineering Co. (which will be discussed later), the very large majority of those payments were apparently all effected by cheques.  Those tables did not indicate that a large number of cash payments were made to the recipients at all. 

89.Of the 4 lists (produced by Mr. Lau as personal payments to various subcontractors and suppliers), there is no objective evidence to establish the connection between the payments identified in those lists and the payments he now claimed to be disbursements on behalf of the Company.  Curiously, the names of the recipients appearing in the 4 lists did not include Leung Ping Hung or Lam Chi Kwai, 2 of the 5 major subcontractors whom Mr. Lau had identified as recipients of his disbursements.  If Mr. Lau were to rely on the 4 lists, it would be incumbent upon him to give a satisfactory explanation as to the absence of the 2 names.  In view of the substantial sums in question, I do not regard as satisfactory an assertion simply that they had mostly received their payments in cash.  Such an assertion, at least on its face, is inconsistent with the “computer information” kept by Mr. Leung which suggested that a substantial part of the payments to these 2 subcontractors had been made both in cash as well as Mr. Lau’s personal cheques.  In view of the unsatisfactory nature of the evidence, I do not derive much assistance from these lists one way or the other.  In this connection, I also have in mind the fact that Mr. Lau had admittedly undertaken similar works as a sole proprietor before the use of the Company to conduct the business.  Nothing on the face of the lists would help to show that the entries therein related exclusively to payments having been made for the purpose of the Company, and not to the business previously carried on by Mr. Lau under sole proprietorship. 

90.Turning to the availability of the records, the explanation given for the non-production of the supporting documents was that Mr. Chiu and his secretarial and accounting firm had failed to return them.  I have to say I am thoroughly unimpressed by such an excuse.  The following is what Mr. Lau said in his affirmation:

“When the Company changed its auditors in mid 2004 after it found out that the tax return had not yet been prepared by the former auditor chosen by the Petitioner, it was found out by Mr. Leung that the records which were passed to the new auditor were incomplete.  Most of these receipts and invoices were missing.” (emphasis added)

91.I do not understand Mr. Lau to be saying that all the relevant receipts and invoices had gone missing after having been left in the possession of the former accountants.  If some are still available, the court is bound to be very sceptical when none of them has been produced at all.

92.In any event, I do not accept the allegation that either Mr. Yip or Mr. Chiu had misplaced the relevant documents.  Nor do I accept the insinuation that either or both of them had done so to undermine Mr. Lau’s case for reimbursements.  First, so far as the allegation against Mr. Yip was concerned, it was said that he had removed documents from the site office at a time before he fell out with Mr. Lau.  But if he had indeed taken documents before their relationship had become strained, it would be most unlikely that the documents were removed for an improper purpose.  If, on the other hand it was suggested that having taken documents away, Mr. Yip together with Mr. Chiu had deliberately withheld the documents, then no evidence has been adduced to show that Mr. Chiu had any reason to act improperly in collusion with Mr. Yip.  I am not prepared to make that finding without some objective evidence.  Moreover, I have not been referred to any correspondence from the Company to Mr. Chiu or to his secretarial firm to complain about the non-return of documents.  To shift the blame to Mr. Yip or Mr. Chiu is, in my view, but a poor excuse to divert attention from the real cause for the non-production of relevant materials. 

93.Having regard to the totality of the evidence on this issue, the inference I draw from Mr. Lau’s failure to produce documents to support a proper claim for reimbursements was that he knew well that such documents as might be available did not support his claim to the amount he had obtained personally from the Company.  The excuses he put up to account for such failure bore all the hallmarks of a party who would go to great lengths to conceal the truth. 

94.It is not for the court in these circumstances to speculate whether some parts of the money received by Mr. Lau under the 24 cheques might indeed have qualified for reimbursements.  Mr. Lau had chosen not to put forward credible evidence to support his assertions in relation to the substantial sums he had received from the Company.  His failure to give a proper account in these circumstances could only lead to the conclusion that he had misapplied those funds for his own benefit, and I so find.

(2) Cheques to Siu Ting Kon

95.In addition to the above, Mr. Yip had questioned the propriety of 15 cheques naming Siu Ting Kon as payee.  These 15 cheques bore various dates.  Some but not all of them were bearer cheques.

96.Mr. Yip pointed out that the available evidence showed that payment under only 4 of those cheques to have been received by Mr. Siu.  In fact 2 other ones (644304, 700290) showed that the recipients of the money were not Mr. Siu, but Leung Ping Kong and Mr. Lau respectively.  Mr. Yip urged the court to infer impropriety on the part of Mr. Lau in relation to these 2 cheques, and the same to those without evidence of endorsement.

97.As to the cheque with Leung Ping Kong’s signature appearing at the back (644304), while I would accept that payment of the $100,000 was probably obtained by Mr. Leung, it does not appear that questions had been directed to either Mr. Lau or Mr. Leung specifically on this cheque.  I am therefore not prepared to draw any inference of impropriety with regard to this payment. 

98.For the other cheque with Mr. Lau’s endorsement (700290), it was a bearer cheque and clearly Mr. Lau was the person who had received the sum of $250,000 directly.  Mr. Lau was questioned on this but he had not given any explanation as to the purpose for which he had obtained payment beyond saying it was “not unusual”.  In the circumstances, I would treat the payment under this cheque on the same footing as the other 24 cheques whose payment Mr. Lau had admittedly received.

99.As for the remaining 9 without evidence of endorsement, the complaint regarding the absence of endorsement was made only after commencement of the trial.  No specific discovery was sought in advance.  At the trial I did not entertain the request for discovery favourably.  I am not prepared to draw any inference of impropriety solely on the basis of the absence of endorsement.  Accordingly, apart from the one with Mr. Lau’s endorsement, I do not accept Mr. Yip’s challenge in relation to the other cheques made out in the name of Mr. Siu. 

(3) Cheques to Lai Tung Shing and Sun Yip Man

100.Mr. Yip made a similar challenge in relation to the cheques issued to Lai Tung Shing and Sun Yip Man.  For the same reason as above, I do not make any finding of impropriety on the basis solely of the absence of evidence of endorsement.

(4) Cheque to Chu Kwai Chun

101.One other cheque that was challenged by Mr. Yip in the course of cross-examination was the one dated 9 June 2003 naming Madam Chu Kwai Chun as payee (644051).  This was not a bearer cheque.  Nothing suggested that Mr. Lau obtained payment directly under the cheque.  In fact it appears that the cheque was first given to Madam Chu who had endorsed it in favour of Mr. Lau.

102.Details of dealings between Madam Chu and Mr. Lau were not known but there was nothing to suggest that the cheque was improperly issued to Madam Chu.  There was also nothing to suggest collusion between them to enable Mr. Lau to obtain funds improperly from the Company.  I do not find that any case of improper dealings in respect of this cheque has been made out.

Remedial Costs for Projects at Kam Chin Village and Hang Hau

103.I now turn to the remedial costs for the 2 sites.  Two related but separate issues arise in respect of these costs.  First, the propriety of a number of such payments had been called into question and they were the subject of Mr. Yip’s complaint that Mr. Lau had misapplied Company’s funds.  Secondly, it is part of the Company’s case that as a result of Mr. Yip’s absence from the Kam Chin Village and Hang Hau sites since late October 2003, the Company having resumed control had to incur substantial expenses in completing the works left unfinished by Sing Yip.  The expenditure so incurred exceeded the interim payments received from the respective principal contractors.  A question therefore arises as to the quantum of the Company’s claim.

104.The Company had produced the cheques made out to various parties, some of which were accompanied by vouchers to explain the purpose of the payment.  The Company had also compiled 2 tables itemizing the various cheque-payments.

105.I propose first to examine the specific items alleged to have been the subject of misapplication before dealing with the quantum of the Company’s claim.

106.As a general observation, it is noted that when questions were put to Mr. Lau in cross-examination, he said that he was not clear about the details of the sums set out in the respective tables of expenses.  According to him, the payments were dealt with by Leung Ping Hung and Leung Ping Kong.  The same denial of personal knowledge was repeated in response to most questions put to him respecting the cheques and the documents produced in support of the expenses.  Mr. Lau’s evidence was that when he was asked to sign the cheques, the amount payable to the payees would already have been calculated and the cheques prepared. 

(1) Cheque nos. 700616 to 700634

107.First, a number of cheques were presented for payment on or shortly before 2, 3 and 4 June 2004.  It was Mr. Yip’s contention that those cheques were not genuinely made out for Company’s expenses. 

108.There was a series of 19 cheques in consecutive numbers 700616 to 700634, all of them having been presented for payment on or within a few days of 2, 3 and 4 June 2004.  All of them were bearer cheques.  According to the bank statement, cash had been obtained for all these 19 cheques.  It would be noted that Leung Ping Hung was the named payee on 12 of them (700616 to 700624, and 700632 to 700634).  Lok Yan Yim was the named payee for 700625 to 700627, Lee Chun Kau for 700629 to 700631 and Chan Chi Keung for 700628.

109.For the 12 cheques with Leung Ping Hung as payee, the accompanying vouchers suggested that the first series of 9 cheques (700616 to 700624) were paid for works in the Kam Chin Village site, and the other series of 3 cheques (700632 to 700634) for works in the Hang Hau site.  For the first 9 cheques, the accompanying vouchers further suggested that they were made out for works in respect of 6 consecutive months (700616 & 700617 for works in November 2003; 700618 & 700619 for works in December 2003; 700620 for January 2004; 700621 for February; 700622 for March; 700623 & 700624 for April).  For the other 3 cheques, the accompanying vouchers suggested that they were made out for works in Hang Hau in respect of February 2004, January 2004 and December 2003, in that sequence.  The consecutive numbering on these cheques strongly suggested that they were all made out on the same occasion.  Certainly, the months of work in succession on the accompanying vouchers, is entirely consistent with that suggestion.

110.However, the series of cheques bore different dates on their face.  The dates in the first series varied between 10 March and 29 May 2004, and those in the second series between 19 February and 17 April 2004.  It is, however, obvious that the dates on the cheques were inserted on them arbitrarily.  Take for example, the cheque numbered 700622 dated 10 March 2004.  According to the accompanying voucher, the cheque was supposed to be payment for the workers’ wages for the month of March 2004.  If the cheque were indeed made out on 10 March, it would mean that it was made out at a time even before the March wages actually accrued and the exact number of man-days could be accurately ascertained.  How was it then possible to know in advance the exact amount of March wages to be paid?

111.Mr. Leung Ping Hung’s evidence was that he was not the person who made out the cheque although it was he who wrote the voucher.  He suggested that the cheque might have been made out by Leung Ping Kong.  According to Leung Ping Kong’s 2^nd Supplemental Statement, generally when he wrote out a cheque for Mr. Lau’s signature, the date on the cheque would be the date on which he was instructed by Mr. Lau to make out that cheque.  It was obvious that neither Mr. Lau nor the two Mr. Leungs could explain coherently as to the circumstances of the making out of the cheque and its purpose.  The same applies to the cheques numbered 700623 dated 6 April, and 700624 dated 10 April 2004.  Both purported to represent payment to workers for wages in the month of April, but both bore dates before the end of the month. 

112.Furthermore, as already noted, the first 2 cheques of the series (700616, 700617) were purportedly payment for November 2003 wages.  Both cheques however bore a date in May 2004.  In answer to questions why the reimbursement for November wages was only effected 6 months later, Leung Ping Hung said he did not know why but Mr. Lau told him that he (Mr. Lau) had no money.  He was not able to recall when Mr. Lau said so.  However, the monthly bank statements showed that the Company had a credit balance of over $2.1 million in November, over $2.8 million in December 2003, over $2.2 million in January 2004, and over $1.3 million in February.   

113.The evidence referred to above cast serious doubts on the reliability and genuineness of the vouchers accompanying these 12 cheques made to Leung Ping Hung.  I am unable to accept them as credible evidence of the purpose for which the 12 cheques were made out.  My findings as to these 12 cheques will follow after I have dealt with the other questionable ones.

114.I turn now to the 3 cheques with Lok Yan Yim as the named payee (700625, 700626, 700627).  The vouchers for the first 2 of them purported to refer to payment of wages for the months of January and February 2004 respectively.  The signatures appearing as recipients on the vouchers did not in fact belong to Mr. Lok, but were admitted to have been signed by Mr. Leung Ping Hung.  Leung gave the explanation that Mr. Lok might be too busy to collect the cheques and might have telephoned Mr. Lau for the cheques to be brought to him.  It was Mr. Lau who instructed Mr. Leung to collect the cheques or the money to be handed to Mr. Lok.  He signed the vouchers in Mr. Lok’s name because Mr. Lau gave him approval to do so.  However, Mr. Leung was unable to tell when he had collected the 2 cheques in question, not even the month in which he had allegedly done so.  He was unable to tell whether the 2 cheques were collected on the same or separate occasions.  He was unable to tell whether he had sought instructions from Mr. Lau as to the signing of the vouchers on the same or different occasions. 

115.Having seen how Mr. Leung’s admission relating to the signatures unfold and having heard his evidence at the trial, I have no hesitation to reject the whole of his explanation on this question.  One of the vouchers was supposed to relate to wages for January, and the other for February 2004.  The cheques purported to bear a March and an April date respectively, but were not immediately presented for payment until June.  The explanation that somehow Mr. Lok might be too busy to collect the January and February wages and had to leave Mr. Leung to collect them is anything but credible.  I have grave misgivings about the fact that the acknowledgments were signed in Mr. Lok’s name without any indication as to the true author of the signatures, as well as the fact that the admission concerning the signatures only emerged after Mr. Yip had mounted his challenge during the trial.  The 2 vouchers cannot be accepted as credible evidence as to the purpose of the 2 cheques to which they purported to relate, or the fact that the cheques had been received by Mr. Lok.

116.As to the third cheque in that series (700627), it is obvious to me that it was made out contemporaneously with the other 2 mentioned above.  I do not believe the signature appearing on the voucher accompanying this third cheque was actually signed by Mr. Lok.  I also reject this voucher as unreliable.

117.I now come to the 3 cheques with Lee Chun Kau as the named payee (700629, 700630, 700631).  The dates on them were obviously arbitrary as I have no doubt that they were made out on one and the same occasion.  No satisfactory explanation was given as to the circumstances in which the 3 cheques came to be issued.  Nor was it satisfactorily explained why a cheque was apparently only made out in May for payment of January wages.  Suffice it for me to say that I find these vouchers also unreliable.

118.As for the cheque payable to Chan Chi Keung (700628), it bore the date 18 April 2004, but according to the accompanying voucher, was supposed to be payment for April wages.  Mr. Leung Ping Hung explained that he wrote the voucher at the beginning of May but did not explain how the cheque came to be bear an April date.  He said the signature on the voucher appeared to be Chan’s but he did not know when that signature was put on voucher.  He did not know whether Mr. Chan collected the cheque.  In view of the unsatisfactory nature of the evidence, my finding is that most probably this cheque was not collected by Mr. Chan.  I do have in mind that this was a bearer cheque after all.       

119.Before I draw any conclusion as to the 19 cheques in question, I have considered the endorsements produced for the 12 cheques with Leung Ping Hung as payee.  Of the 12 endorsements, 7 indicated that funds had been received by Leung Ping Hung, 3 by Leung Ping Kong (allegedly on Leung Ping Hung’s behalf), 1 by Mr. Lau, and another by Li Chi Yan whom I was told was an employee of the Company.  Other than the vouchers which I have already found not to be reliable, there was no other satisfactory evidence regarding the use of the funds for these cheques.  My view is that the endorsements have in fact thrown up more questions.  Take for instance, the cheque endorsed to Mr. Li.  According to the voucher, that cheque was supposed to be payment for 200 man-days of work which Leung Ping Hung had already paid for.  It had not been explained why Mr. Li, an employee, should receive that $100,000, which was not an insubstantial sum.  Similarly, there was nothing to explain why Mr. Lau should receive the money under a cheque made out to Leung Ping Hung, when even the voucher made no mention of Mr. Lau.  

120.I have also taken into account the fact that these 19 cheques were presented for payment within a short space of a few days.  The circumstances obviously cried out for explanation. 

121.Mr. Yau submitted that as of the beginning of June 2004, there was no reason for Mr. Lau to suspect that Mr. Yip would take an antagonistic stance towards him or the Company.  There was no motive for Mr. Lau to effect these payments to the detriment of the Company.  I disagree.  In fact, in the notice convening a shareholders’ meeting to be held on 28 May 2004, the Company had already alluded to the possibility of replacing Mr. Yip as director.  Mr. Yip did not attend the meeting but appointed his daughter to act as his proxy who made it known that Mr. Yip would return within a month.  Contrary to Mr. Yau’s submissions, the timing of the series of withdrawals indicated to me clearly that Mr. Lau had wanted to do so by taking advantage of Mr. Yip’s absence.  It was no mere coincidence that the first of the series of withdrawals was effected on 29 May, the day after the meeting.  I do not think at the time Mr. Lau had seriously applied his mind or cared much about the steps Mr. Yip might take to investigate the financial affairs of the Company upon his return.

122.As noted, the circumstances relating to these withdrawals call for explanation.  Given the wholly unsatisfactory nature of the evidence given in relation to these 19 cheques, I have little doubt in my mind that they were issued for purposes unconnected with the Company.  I find that the funds represented by those cheques had been misapplied by Mr. Lau.

(2) Series of withdrawals under cheque nos. 700508 to 700522

123.An examination of the bank statements of 30 June and 30 August 2004 revealed that a series of cheques numbered consecutively from 700508 to 700522 (with the omission of 700514) had all been presented for cash payment, 12 of them within a single day on 13 August 2004.  A number of them had been subject to specific challenge in cross-examination.

124.Among them, 4 consecutive cheques (700519, 700520, 700521, 700522) were made out to Lam Yuen Wai, bearing dates however in reverse order: 10 June, 18 May, 8 April, and 26 March respectively.  Leung Ping Hung was unable to explain why that was so.  None of the accompanying vouchers produced for these 4 cheques were signed.  These 4 cheques were all bearer cheques.

125.There were 3 others bearer cheques also in consecutive numbers made out to Lam Yuen Wai (700515, 700516, 700517).  The accompanying vouchers relating to 2 of them were unsigned and one was not supported by any voucher at all.

126.Further in the series, one cheque was made out to Ng Siu Keung (700511) and another one to Lam Wing Sum (700512), both apparently dated 10 June 2004 (the dates on the photocopies are not very clear).  They were also bearer cheques, and as already noted, were among those presented for cash payment on 13 August 2004.  Mr. Leung Ping Hung admitted in his Supplemental Witness Statement that the accompanying vouchers relating to these 2 cheques could have been signed by him in Ng and Lam’s name.  He was not sure of the reason why but surmised that Ng and Lam might have been occupied at the site and he therefore obtained payment for them from the bank.  It suffices to say that I do not find such explanation satisfactory, especially in the light of the fact that cash payment was obtained on the same day for a number of other cheques issued in consecutive numbers, apparently to different payees. 

127.In this connection, it is noteworthy that according to the returns filed by the Company to the Inland Revenue for the years 2003/04 and 2004/05, neither the name Ng Siu Keung nor Lam Wing Sum appeared as recipients of subcontract fees.  Mr. Leung could not proffer any explanation in cross-examination.  His evidence was that he was not responsible for dealing with the Company’s tax affairs.  However, the fact that none of the tax returns related to these 2 persons is, in my view, significant.  This fact cast doubt not only on the genuineness on the accompanying vouchers relating to the 2 cheques in their names, but also the whole question relating to the purpose of the payments of this series of cheques.

128.Another 2 cheques in the series were made out to Ho Hing (700513 & 700514).  Both were bearer cheques.  The one numbered 700513 was among those presented for payment on 13 August.  The payment date for 700514 was not identified.   

129.As was pointed out in cross-examination (though in the context of a cheque numbered 700575 which I will deal with below), the name Ho Hing similarly did not appear in the Company’s tax returns for the years 2003/04 and 2004/05.  Leung gave the same explanation that he was not responsible for tax matters.

130.The many anomalies associated with the series of withdrawals cry out for an explanation.  I fully appreciate that not all of the cheques in this series (700508 to 700522) had been specifically challenged in cross-examination.  However, at least respecting some of these cheques the witnesses had been given an opportunity to explain, and I am in little doubt that if there had been an innocent explanation for any of them, the witnesses would have already provided it.

131.In this regard, I have not overlooked the fact that 2 cash sums respectively of $100,000 and $600,000 had been deposited into the Company’s account on 3 and 13 August 2004.  This and the several subsequent pages of the bank account were made available at a rather late stage of the trial.  As no evidence had been directed towards these deposits, I do not take them into account.  By disregarding these deposits, I do not believe I have been unfair to Mr. Lau.  If any prejudice was occasioned by his not being able to give a full explanation, it was the result of his late production of this document.  In any event, I have little doubt that if it were a case of Mr. Lau making personal contributions to meet the withdrawals of these cheques, he and/or either of the Mr. Leungs would already have said so in evidence. 

132.The only evidence adduced to demonstrate the purpose of the withdrawals were the accompanying vouchers.  To me, the evidence that emerged was such that I am far from being assured of the vouchers’ reliability.  I feel unable to take the vouchers at face value.  In the end, the series of withdrawals remain highly questionable, and I have received no convincing or satisfactory explanation for the same.  In the absence of other objective evidence as to the use of the money involved, I have come to the view that with respect to the withdrawals under the series of cheques in question (except 700514), a case of misapplication of the Company’s funds by Mr. Lau had been made out.

(3) Other Cheques to Leung Ping Hung in Sequence

133.Three other cheques in consecutive numbers were identified as having been made out to Leung Ping Hung (700538, 700539, 700540).  They were all bearer cheques.  They bore dates respective in June, July and August 2004, and the accompanying vouchers suggested that they were payments for wages accrued in the months of May, June and July 2004.  The date or dates of their presentation for payment had not been identified, and therefore there is insufficient basis for me to draw inference of impropriety in relation to these 3 cheques.

(4) Other Cheques to Ho Hing

134.The cheque made out in the name of Ho Hing (700575) dated 16 August 2004 was also subject to challenge.  It was a bearer cheque.  Mr. Yip’s challenge was based first on the absence of Mr. Ho’ name in the Company’s tax returns, and secondly, there was quite a significant error in the calculation of wages on the accompanying voucher.

135.In this connection, although not subject to specific challenge, it is noted that there was one other cheque made out to Mr. Ho (700533) about the same period of time which was also a bearer cheque. 

136.However, according to the Company’s bank statement, it appears that there was no record of payment having been obtained under either of these cheques.  There is insufficient basis to support any finding of misapplication of Company’s funds in relation to them.

(5) Other Cheques to Lam Wing Sum

137.Three other cheques to Lam Wing Sum (700565, 700569, 700572) all dated 16 August 2004 were also subject to challenge.  There was also another one (700534) dated 21 July 2004.  These were all bearer cheques of substantial sums.  However, again it appears that there was no record of payment under these cheques.  There is insufficient basis to support any finding of misapplication of Company’s funds in respect of these cheques.

(6) Cheques to Chan Kam

138.Three cheques to Chan Kam bearing dates between 2003 and March 2004 were referred to (700218, 700231, 700259).  Mr. Leung Ping Hung was cross-examined as to why the fees reported for tax in relation to Mr. Chan for the year 2003/04 was in excess of the sum total of the 3 cheques.  However, the fact that more fees had been reported for tax does not raise a prima facie case of impropriety in relation to the 3 cheques in question.

139.Five other cheques bearing dates which fell within the year 2004/05 were also referred to (700307, 700298, 700502, 700451, 700570).  It is noted that the last one (700570) was a bearer cheque whereas the other 4 all had “bearer” crossed out.  The fees reported for tax for that year totalled $528,155, which was the aggregate of the first 4 cheques only.  The supporting vouchers were not signed.

140.For the first 4 cheques, unsigned vouchers alone do not amount to a sufficient basis for making a finding of impropriety, and I would decline to do so.  As for the last one (700570), as the payment date was not identified and I do not know if it had been paid out of the Company’s account, I also do not consider there to be a sufficient basis for a finding of misapplication.

(7) Payments in the month of August 2004

141.Mr. Yip queried the amount of payments made in the month of August 2004 for both the Kam Chin Village and the Hang Hau sites.  He invited the court to compare the figures mentioned in Mr. Lau’s affirmation which was prepared for the application of the validation order on the one hand and the actual claim now put forward by the Company on the other.  In Mr. Lau’s affirmation dated 31 August 2004, he stated that the Kam Chin Village project “was already completed in July 2004” and made no reference to any expenditure expected to be incurred.  For the Hang Hau project, he asked the court to sanction payments for $720,000 expected to be incurred in August, and $520,000 in September 2004.  The expenses now alleged to have been incurred for both sites have substantially exceeded those estimates.

142.I have examined the Company’s cheques bearing an August date issued in connection with both the Kam Chin Village as well as the Hang Hau site.  According to the bank statements, there was no record of payment under any of these cheques out of the Company’s account.  In the circumstances, there is no basis to support any finding that Company’s funds had been misapplied in respect of those cheques.

143.As will be apparent later in this Judgment, although I have concluded that a case of misapplication of funds had not been made out, I will need to return to this question when it comes to dealing with the Company’s claim for damages.

(8) Payment obtained by Hung Ying Engineering Co.  

144.Hung Ying Engineering Co. was a business belonging to Mr. Leung Ping Hung.  The documents relating to the 11^th and 12^th instalments of the interim payment relating to the Hang Hau site showed that the sums of $901,609.70 and $543,716.80 were directly paid into Hung Ying’s account respectively on 14 October and on 22 December 2004.  Quite how this was possible was not clear as these documents were only discovered towards the end of the trial and as a result cross-examination had not focused properly on these payments.  

145.Although the receipt by Hung Ying of sums rightly due to the Company appeared highly irregular, in the absence of an opportunity for Mr. Lau and the Leung brothers to explain the circumstances, it would not be right for me to conclude that the sums had been misappropriated.  Having said that, however, Mr. Lau is not relieved of his liability as director to properly account for the sums which ought to have been received by the Company.  This is relevant when it comes to considering the question of relief.

(9) Bearer cheques

146.Mr. Yip queried why a substantial number of the cheques were bearer cheques.  I have considered them and could discern no specific pattern or obvious indication of impropriety simply by reason that “bearer” had not been crossed out on a number of them. 

Company’s claim for damages

147.I will now turn to the question of the Company’s claim for damages.  The quantification of the claim has been adjusted in the light of documents produced towards the end of the trial.

148.It will be recalled that I have declined to accept the Company’s version of the terms of the “back-to-back subcontract arrangement”.  I would therefore disregard the 10% reduction from the supposed subcontract price in considering the quantum of the Company’s claim.

149.Accordingly, the Company’s claim in relation to the Kam Chin Village site is calculated as follows:  $6,935,995 being the total expenditure after resumption of control of the site, less $5,084,813.19 being the total receipt of interim payments from the principal contractor, yield the figure of $1,851,181.81 as the claim for the excess expenditure outlay.

150.As for the Hang Hau site: $10,144,005 being the total expenditure, less $8,071,275.90 in respect of interim payments received, yield the sum of $2,072,729.10 as the claim for the excess expenditure outlay.

151.As a general challenge, Mr. Yip in cross-examination had put a number of questions to the witnesses concerning the progress of works, no doubt, with a view to eliciting answers that would support his contention that not all the items claimed were genuinely incurred.  Moreover, in relation to the Kam Chin Village project, Mr. Yip had specifically invited the court to compare the extent of the present claim with the sum which Mr. Ku, the proprietor of Lei Keung Engineering Company, had accepted for the sub-subcontract for that project.  By reference to the sub-subcontract sum together with the sum which the Company subsequently paid to settle the wages of Mr. Ku’s workers, it was contended that the Company’s claim must have been inflated. 

152.While I understand the purpose of this line of questions, I have to say that they do not assist me in the determination of the issue.  Such evidence as is now available does not enable me to assess with any degree of accuracy the extent and nature of the unfinished work when Mr. Yip departed; the extent of extra costs required for a newcomer in mobilizing workers and materials to bring the unfinished work to completion; and the extent of defective works which needed rectification. 

153.I propose to turn to the specific aspects of the claim.

(1) Sums misapplied

154.In respect of the payments which I found to have been misapplied, those items will obviously have to be disallowed from the Company’s claim.

(2) Payments in the month of August 2004

155.As already noted above, Mr. Yip queried the amount of payments made in the month of August 2004 for both the Kam Chin Village and the Hang Hau sites.  He made a point that the expenditure now claimed to have been incurred was substantially greater than the figures put forward for sanction when the Company applied for a validation order. 

156.Indeed, that is so.  Questions were directed in cross-examination to the fact that at the time of the application for validation order, the projected expenditure for the Hang Hau site for the month of August was only $720,000.  The Company’s claim now amounted to over $1.8 million for that month.

157.In this regard, I have noticed that the date of Mr. Lau’s affirmation in support of the application was 31 August 2004.  By the time he made his affirmation, most if not all of the August cheques should already have been issued.  He should be able readily to ascertain the amount of the expenses required for the Hang Hau site for that month.

158.I do not accept the explanation that the substantial discrepancy was due to the fact that the figure adopted at the time of the application was a mere projection.  In view of the substantial discrepancy, I do not think it right to simply accept the supporting evidence at face value.  Upon an examination of the supporting vouchers (where available), however, it is noted that a number of them were unsigned.  I feel unable to place reliance on these unsigned vouchers.  Accordingly, I would reject the claim for the following payments: $168,000 to Lee Chun Kau; $249,166.50 to Lee Chun Kau; $76,030 to Chan Kam; $50,000 to Lam Yuen Wai; another $50,000 to Lam Yuen Wai and $151,200 to Lam Wing Sum.  I would further reject 2 other payments purportedly made to Lam Wing Sum, of $150,460 and $187,200 respectively.  As already noted, no returns were filed in respect of Lam.  For sums of these amounts, I do not accept oversight to include them in the return as a credible explanation.  Save the above, however, I am prepared to uphold the claim for some of the smaller payments despite the absence of supporting vouchers.

159.For the Kam Chin Village site, as already noted, Mr. Lau made no reference to any expenditure at all in his application.  This stands in stark contrast to the present claim that over $1 million had been incurred in the August month. 

160.After a similar examination of the supporting vouchers, I have come to the view that I should reject the claim for the following payments: $50,000 to Lam Yuen Wai, $122,500 to Lok Yan Yim; $133,500 to Leung Ping Hung; $198,000 to Ho Hing; $140,000 to Lok Yan Yim; $123,788.80 to Lok Yan Yim; and $147,249.70 to Lee Chun Kau.

(3) Payment to Hung Ying of $1.6 million

161.An entry in the table of expenditure showed that the Company had paid $1.6 million to Hung Ying.  There was no breakdown of the items of work supposedly undertaken by Hung Ying.  Mr. Leung failed to give any satisfactory explanation and there was also complete absence of other objective evidence as to the work involved.  In the circumstances, I am unable to accept that the Company had established that expenditure to the tune of $1.6 million had been properly incurred.  I have no difficulty in rejecting this item of the Company’s claim.

Assignment of West Kowloon project to Brother Eng. Co.

162.The Company was awarded another subcontract by China Overseas at a site at Hoi Fai Road at the West Kowloon area.  It was a substantial subcontract worth over $31 million.  The subcontract work commenced at the beginning of October 2003.

163.It was common ground that sometime in about November 2003, Mr. Lau assigned this subcontract to Brother Eng. Co.  A written agreement between the Company and Brother Eng. dated 28 March 2004 was produced in evidence.  According to the terms of the agreement, the subcontract was transferred to Brother Eng. for $200,000.  Brother Eng. was to conduct the works on its own account and the Company would not seek payment of any other fees, including transfer fee or bonus.  

164.According to the business registration certificate, Brother Eng. was a business under the sole proprietorship of Mr. Siu Ting Kon.  However, the business address of Brother Eng. was the same as that of the Company.  Moreover, Mr. Lau was an authorized signatory to operate Brother Eng’s bank account singly on his own.

165.The transfer was effected without prior consultation with Mr. Yip.  The transfer price was less than 1% of the subcontract sum.  Mr. Lau’s explanation was that the Company was fully occupied in dealing with the aftermath as a result of Mr. Yip’s disappearance.  The resources of the Company would not allow it to cope with several sites at the same time.  The assignment would at least enable the Company to obtain $200,000.

166.However, on further examination, it became apparent that the Company had not in fact received even that $200,000.  When Mr. Lau was cross-examined on this, he said he did not have any knowledge about it but if that were the case, Mr. Leung would have to chase up for it or he would have to make it up personally.  Mr. Leung Ping Kong on the other hand, said in his supplemental statement that because Mr. Siu had passed away in June 2005, it was not felt appropriate to press Mr. Siu’s widow for the payment.  It left unexplained why for all that time before June 2005 the sum $200,000 remained unpaid.

167.In this connection, 3 other sums, respectively $1.5 million, $1 million and another $1 million had been transferred from the Company’s account to Brother Eng. on 30 March, 31 March and 1 April 2004.  Mr. Lau was cross-examined on these transfers, but was unable to give a clear explanation beyond surmising that these sums might have been transfers of interim payments which the Company had received from the principal contractor.  It was obvious that he was unable to give a satisfactory account for the nature of these payments or in respect of which interim payments the Company had allegedly received.

168.Having regard to the evidence on this issue, I am left in no doubt that Mr. Lau did have an interest in Brother Eng. Co.  His explanation that he was a signatory to its bank account merely to prevent its mishandling defies common sense.  It also did not make commercial sense for a potentially profitable project to be assigned away at less than 1% of its contract price.  Although I have taken into account the need to deal with the problems arising from Mr. Yip’s departure, I do not accept that was the true reason for the transfer of this subcontract.  I believe, and I do find, that the reason for the transfer was to enable Brother Eng., in whose business Mr. Lau had a real interest, to take the benefit of the West Kowloon subcontract.  That also explains why he had not seen fit to obtain payment of even the relatively meagre sum of $200,000 for the Company.

169.It is my view that Mr. Lau was liable for improperly diverting business from the Company, and had derived a secret profit from such conduct.

170.As for the sums totalling $3.5 million mentioned above, they were not pleaded in Mr. Yip’s petition as an instance of misappropriation of the Company’s assets.  I do not propose to make a finding to that effect.  That said however, this is a matter which obviously needs to be taken into account when it comes to the question of relief.

Appointment of additional director and removal of Yip

171.As already mentioned, Mr. Yip left Hong Kong at the end of October 2003 and did not return.  I accept that he was prevented from returning to Hong Kong because of his detention on the Mainland between 22 October 2003 and 21 June 2004.  I also accept that soon after Mr. Yip’s detention, Mr. Lau was notified of that fact by Mr. Yip’s wife.  The reason for Mr. Yip’s detention is not relevant. 

172.Mr. Yip’s absence from Hong Kong had no doubt caused considerable problems for Mr. Lau and the Company, not least, to deal with the unfinished work at the 2 sites as well as outstanding wages to the workers.  I do not underestimate the extent of these troubles.

173.I have already referred to the notice dated 20 May 2004 given to convene a shareholders’ meeting.  I have also referred to the meeting on 28 May at which it was resolved (i) that Mr. Yip should sign the audited accounts within 14 days; (ii) that he should return to Hong Kong to perform his duties as director; (iii) that a further meeting was to be held on 28 June. 

174.It is clear enough that Mr. Lau was concerned that the financial statements had not been signed by Mr. Yip and the deadline for filing the tax returns for the year 2002/03 had long passed.  At the meeting of 28 May, Mr. Yip’s daughter was asked to bring the audited accounts to Dongguan for Mr. Yip’s signature.

175.There is a dispute as to what Mr. Yip was actually asked to sign.  Mr. Lau referred to a draft audited report prepared by Lau & Au Yeung CPA Limited which contained an unqualified opinion of the auditors.  However, Mr. Yip said that the report given to him was from the same auditors but with a qualified opinion.  Mr. Yip said he was asked to sign the “tax copy” of those accounts with the omission of the auditors’ report.  On this factual dispute I prefer Mr. Yip’s version.

176.The auditors’ qualified opinion was to the effect that the auditors were unable to form a view whether the balance sheet and the notes were properly drawn up to give a true and correct view of the state of the Company’s affairs.  They were also unable to express an opinion on the stated profits in relation to contracts in progress due to inadequacy of information.  They were also unable to determine whether proper books of account had been kept.  Having been alerted to the heavily qualified opinion, I think Mr. Yip could hardly be faulted for refusing to endorse the accounts pending investigation.  Indeed, as a director it was his duty to ensure that the accounts presented were accurate.

177.An extraordinary general meeting was held on 28 June 2004.  By then Mr. Yip had returned to Hong Kong and he attended that meeting in person.  According to the minutes, it was resolved that Wong Kwong Hing would be appointed as an additional director because of Mr. Yip’s refusal to sign the audited accounts.  Mr. Yip was against the resolution but he was outvoted.  I will return to the validity of Mr. Wong’s appointment later.

178.On 29 June 2004, Mr. Yip’s solicitors wrote to Mr. Lau demanding inspection of the Company’s books and accounts.  By a letter of 5 July, Mr. Lau’s solicitors replied that Mr. Yip’s directorship was suspended due to his long absence. 

179.On 7 July, Mr. Lau transferred 1 share to Mr. Wong so that the latter became a shareholder of the Company.  On 8 July, a notice of another extraordinary general meeting was given, proposing an “ordinary resolution” to remove Mr. Yip as director.  An extraordinary general meeting was held on 31 July 2004 with the attendance only of Mr. Lau and Mr. Wong.  The meeting resolved that “Mr. Yip would be removed from his director-office with immediate effect”.

180.I would set out the relevant Articles of Association of the Company:

“6.   A Director shall hold office until either: -

(a)   He is removed from office by a special resolution of the Company, or

(b)   Notice is given to the Company by any Member at lest seven days before the Annual General Meeting of intention to propose a resolution that some other person be appointed in his place and such resolution is duly passed as an ordinary resolution.”

8.    Unless otherwise determined by the Directors, the quorum of a Directors’ Meeting shall be two directors personally present or represented by their substitutes appointed under Articles 11 hereof.

13.  The Directors shall have power at any time, and from time to time, to appoint a person as an additional Director.

14.  The Company may by a special resolution remove any Director and may by an ordinary resolution appoint another person in his stead, provided that the minimum number of Directors shall not, in any circumstances, be less than two.”

181.It is clear that the appointment of Mr. Wong as an additional director was invalid.  Article 13 gave power to the Board of Directors to make the appointment, not shareholders.  The meeting on 28 June was not a directors’ meeting even though both Mr. Lau and Mr. Yip were present.  Even if the meeting could be treated as a directors’ meeting (which I hold cannot be), because of Mr. Yip’s objection no resolution of the Board could have been validly passed.             

182.Turning to the removal of Mr. Yip from his directorship, it is clear that neither Article 6(a) nor (b) applies.  Only an ordinary resolution was proposed in the notice for the meeting of 31 July and, therefore, the resolution at that meeting failed to meet the requirement laid down in Section 116 of the Companies Ordinance for a special resolution.  On the other hand, the meeting was not an Annual General Meeting and as a result Article 6(b) does not apply either.  None of the other Articles assist Mr. Lau.

183.Although the resolution to remove Mr. Yip was ineffective, the move by Mr. Lau to cause Mr. Yip’s removal was nonetheless unfair in the context of the relationship between the parties.  In the light of the circumstances in which Mr. Yip was initially appointed as a director when he joined the Company, Mr. Yip had a legitimate expectation to participate in the management of the Company.  The relationship between the parties could fairly be regarded as a quasi-partnership.  It was, however, submitted on behalf of Mr. Lau that Mr. Yip’s long period of absence from Hong Kong and the manner in which the Kam Chin Village and Hang Hau projects were handled by Sing Yip amply justify Mr. Yip’s removal.

184.I disagree.  In my view, to override his legitimate expectation of participating in the Company’s management, the default would have to be of a nature whereby his continued presence on the Board would undermine good management of the Company.  In the circumstances of the present case, a distinction should be drawn between Sing Yip’s duty as a party to contract with the Company and Mr. Yip’s duty as a director.  Sing Yip’s default in the performance of its contractual duties would no doubt ground a claim for damages against Sing Yip.  But its default is not to be treated as a derogation of Mr. Yip’s duty pertaining to his directorship of the Company.  Furthermore, even if Sing Yip’s default were to be regarded as a default on the part of Mr. Yip in the supervision of Sing Yip’s performance, I do not consider the default to be of such a nature that Mr. Yip’s continued presence on the Board would be detrimental to the good management of the Company, so as to justify overriding his legitimate expectation of participation in the Company’s management. 

Refusal of access to accounts

185.There is no dispute that Mr. Lau had denied Mr. Yip’s request for access to the accounts, as evidenced by the correspondence already referred to.  On behalf of Mr. Lau, it was submitted that the denial was only temporary.  But the fact remained, as I find, that copies of the relevant documents was only made available in January 2005, and inspection of the documents later in May 2005. 

186.Mr. Lau explained that he had refused Mr. Yip’s request initially out of excessive caution, being afraid that Mr. Yip would interrupt the Company’s business unnecessarily.  I find this to be a wholly groundless excuse.

187.The denial of Mr. Yip’s request for access to the accounts should not be viewed in isolation, but in the context of the course of conduct first, in seeking to appoint an additional director so that the Company’s accounts could be endorsed despite Mr. Yip’s refusal to do the same, secondly, to install Mr. Wong as a shareholder with a view to enabling a shareholders’ meeting to be held, and thirdly, the passing of the purported resolution to remove Mr. Yip as a director.  It is clear to me that the true reason for withholding the financial records and other documents from Mr. Yip, together with this course of conduct, was to prevent the many instances of misapplication of Company’s funds from being uncovered. 

Unfairly Prejudicial Conduct

188.As I have already noted in the course of this Judgment, the nature of the relationship between Mr. Lau and Mr. Yip was one of a quasi-partnership.  My finding against Mr. Lau of having misapplied Company funds in a number of instances as well as his wrongful diversion of the West Kowloon subcontract to Brother Eng. Co. are undoubtedly conduct both unfair to Mr. Yip as well as prejudicial to his interest as a shareholder of the Company.  Such misconduct was further compounded by Mr. Lau’s wrongful move to seek a removal of Mr. Yip from his directorship and the refusal to give Mr. Yip access to Company’s information.  In the circumstances, I am satisfied that Mr. Yip has established a case of unfairly prejudicial conduct under Section 168A.         

Other Findings

189.I have found that the Company has established its claim against Sing Yip, but not against Mr. Yip, in the sum of $3,247,828.

190.As to the Company’s claim for damages for excess expenditure, after disallowance of the items indicated, the quantum of that claim becomes nil in relation to both the Kam Chin Village and the Hang Hau sites.  

191.The Company’s claim against Mr. Yip for the sum of $2.5 million is rejected.

Relief

192.Mr. Yau had invited me to take into consideration the letter by Mr. Lau’s solicitors dated 1 March 2005, offering to purchase Mr. Yip’s shares.  It is not necessary for me to set out in detail the terms of the offer.  In the light of the findings above, it suffices to say that the offer fell far short of the reliefs that Mr. Yip could reasonably expect to achieve or obtain in these proceedings: see Prudential Enterprises Ltd. (2002) 5 HKCFAR 375.  The offer is insufficient as a defence to preclude the granting of reliefs on Mr. Yip’s successful petition under Section 168A. 

193.On the basis my findings:

(1)     that Mr. Lau had misapplied the funds belonging to the Company as represented by the following:

(a)    the payment that he had received under the 24 cheques made payable to himself;

(b)   the payment that he had received under the cheque (700290) to Mr. Siu Ting Kon;

(c)   the payment under the 19 cheques numbered 700616 to 700634;

(d)   the payment under the cheques numbered 700508 to 700513 and 700515 to 700522;

(2)     that Mr. Lau had wrongfully diverted the West Kowloon subcontract to Brother Eng. Co., and had made secret profits by reason of his interest in Brother Eng. Co.,

it is clear that Mr. Lau will have to repay the Company the sums referred to in (1)(a) to (d) above, plus all sums which the Company would have received under the West Kowloon subcontract but for its wrongful diversion less any amount which Mr. Lau is able to establish with proper documentation as expenses properly incurred in relation to that project. 

194.In his final submissions, Mr. Yip invited the court to make an order directing payment to him of half of the funds found to have been misapplied by Mr. Lau.  I do not consider this to be an appropriate relief because Mr. Yip is not entitled to have direct compensation of the reflective loss suffered by the Company: Section 168A(2C).  What I do regard as most fair and appropriate in the circumstances of this case is an order that Mr. Lau should purchase the shares of Mr. Yip on a proper valuation of those shares to reflect my findings above.

195.However, before I formally make an order to that effect, I would invite further submissions on the questions relating to the valuation of the shares, the appropriate date of valuation and the parameters thereof.  I will also consider any consequential directions that need to be given.

196.In the circumstances, I propose not to make any formal orders in either set of proceedings at this stage.  I will also deal with any question of costs at the further hearing.

The Applicant (in HCMP 375/2005) and 1^st Defendant (in HCA 2183/2004) in person, Yip Kwai Chor (Present)

Mr Albert Yau instructed by Messrs Yip, Tse & Tang for the 1^st and 2^nd Respondents (in HCMP 375/2005) and for the Plaintiff (in HCA 2183/2004)

The 2^nd Defendant (in HCA 2183/2004) in person, Sing Yip Construction Engineering Ltd. represented by So Chi Ming (Present)