Four Seas Fish Balls Co Ltd v. Yeung Hung Sin
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HCA 4550/2003 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 4550 OF 2003 ____________ BETWEEN
____________ HCA 504/2004 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 504 OF 2004 ____________ BETWEEN
____________ (Consolidated pursuant to the order of Master Levy dated 29 March 2004) Before: Deputy High Court Judge To in Court Dates of Hearing: 13 - 17, 20 - 21 and 23 November 2006 Date of Judgment: 12 January 2007 _______________ J U D G M E N T _______________ INTRODUCTION 1.In this action, Four Seas Fish Balls Company Limited (the “Plaintiff”) seeks to recover from the Defendant, one of its former directors, an amount of $1,482,333.34 being part of the retirement benefit paid to him under a retirement agreement (the “Agreement”) for the latter’s breach of the Agreement. It is common ground that on 10 October 2002, the board of directors of the Plaintiff approved the Agreement to pay retirement benefit to the Defendant in the total amount of $4,100,000 by instalments from 31 October 2002 to 30 June 2005. The Plaintiff stopped all payments to the Defendant since 5 April 2003. As a result, the Defendant was only paid $1,482,333.34 with a balance of $2,617,666.66 outstanding. The Plaintiff is now seeking to recover the said sum paid to the Defendant and a declaration that the Defendant is not entitled to be paid the unpaid balance while the Defendant seeks to counterclaim for the outstanding balance. 2.The Plaintiff’s case is that it was a term of the Agreement that the Defendant would sign or execute documents of the Plaintiff and satisfactorily explain the affairs handled by him when reasonably required by the Plaintiff. The Plaintiff alleged that the Defendant was in breach of both of these conditions of the Agreement. Thus, the factual issues before this Court are: (1) whether it was a term of the Agreement that the Defendant would sign the documents and provide explanations when reasonably required and (2) whether the Defendant was in breach of the above conditions. If the Defendant was in breach, the Plaintiff shall be entitled to judgment, otherwise the Defendant shall be entitled to succeed in his counterclaim. 3.However, a host of other allegations, including the Defendant’s handling of the Plaintiff’s accounts, known as the Cash Account(現沽帳)and the Li Yuen Account(利源日記帳), dating back to the early years of the Plaintiff’s incorporation and the reason for the Defendant’s retirement have been raised by the Plaintiff. Strictly speaking, those are collateral matters and are irrelevant, except as to credibility. I shall deal with those collateral matters as part of the background. In the eventual analysis, those collateral matters shed light on the motive of the Plaintiff as well. CREDIBILITY OF WITNESSES 4.The Plaintiff called two witnesses, Mr Tong Hoi Tung (“Hoi Tung”) and Mr Chan Chor Wing (“Chan”). The Defendant, his wife (“Mrs Yeung”) and his daughter (“Miss Yeung”) gave evidence for the defence. 5.Having considered the totality of the evidence, I find the Defendant, Mrs Yeung and Miss Yeung are truthful witnesses. I find Hoi Tung and Chan are not credible witnesses. Their evidence is inherently incredible and is contradicted by other incontrovertible evidence. Hoi Tung’s credibility is completely dented by his evidence about the Cash Account and the Li Yuen Account. Chan’s credibility is completely destroyed by his evidence about Mrs Yeung’s tax matter. He has shown himself to be ruthless in acting for the Plaintiff’s interest. Back in August 2003, in response to the Defendant’s then solicitors’ demand for payment of the retirement benefit, Chan instructed the Plaintiff’s then solicitors to reply that there was never any concluded agreement to pay retirement benefit to the Defendant. That was contrary to the Plaintiff’s own case, and Chan knew that the instructions he gave was false. Chan explained that the purpose was to stall for time for negotiation with the Defendant. In fact, not only that the Plaintiff took no steps to negotiate with the Defendant for settlement, the Plaintiff instituted the present action in December 2003 seeking to recover all money paid to the Defendant under the Agreement. It is obvious that Chan’s answer was untrue and irresponsible. The nine queries Chan raised in respect of the Li Yuen Account were not bona fide and his censorious behaviour showed he was just a professional hired gun fighting for whatever cause his master instructed him with whatever means he could think of (see paragraphs 62 to 74 below). In a related action instituted by the Plaintiff against Mrs Yeung (the “Wui Sang Tong Action”), in which Hoi Tung and Chan gave evidence, Chung J found that these witnesses were prepared to put forth false allegations to advance the Plaintiff’s purposes. My assessment of their credibility has not been coloured by that finding, but with that finding, I fully resonate. I shall demonstrate the basis of the above conclusion as I analyse the evidence. 6.In assessing the credibility of Hoi Tung and the Defendant, I have borne in mind that both of them engaged themselves in some very serious tax evasion activities involving the Cash Account and the Li Yuen Account which impinged on their honesty and credibility. But, in the ultimate analysis, I consider the Defendant more credible than Hoi Tung. THE BACKGROUND The Plaintiff 7.The Plaintiff is a company incorporated in July 1987 under the Companies Ordinance, Cap 32. Its principal business is selling fish balls. Prior to its incorporation, the business had been carried on in the form of a partnership consisting of four brothers, Mr Tong Hoi Tung, Mr Tong Hoi Tai (“Hoi Tai”), Mr Tong Hoi Pun (“Hoi Pun”) and Mr Tong Hoi On (“Hoi On”) (collectively, the “Hoi Brothers”) since March 1977. Initially, the Hoi Brothers operated on the ground floor of a public housing estate in Tin Wan in Aberdeen of which the Defendant was the registered licensee with the Housing Authority. In July 1977, the Defendant joined the partnership. Each of the Hoi Brothers and the Defendant held about 20% of the shares in the partnership. In 1978, Hoi On sold all his shares to the other Hoi Brothers. In 1982, Mr Cheng Chi Yung was admitted into the partnership. The Defendant’s shareholding was then reduced to 15.73%. When the partnership was incorporated in 1987, the partners were allotted shares in the Plaintiff proportionate to their respective shareholding in the partnership. 8.In 1990, Hoi On repurchased some shares from the Hoi Brothers and became one of the six shareholders of the Plaintiff. In 1994, Cheng Chi Yung retired and sold all his shares to the remaining shareholders. In 1996, Hoi Tai also retired and sold 3% of his shares to an employee, Mr Cheng Sui Kei (“Cheng”) and the balance to Hoi Tung. In April 1999, Hoi Tung transferred 1,500 shares to Mr Chan Tong Wing who is the brother-in-law of the Defendant. Hoi Tung, nevertheless, retained his status as the majority shareholder holding 57% of the shares in the Plaintiff. 9.All the shareholders of the Plaintiff other than Hoi On, were appointed as directors of the Plaintiff. Hoi Tung, with his majority shareholding, is the chairman of the board of directors of the Plaintiff. He is the general manager and in overall charge of the Plaintiff, in particular, in respect of its production and marketing. He is recognised as the “Big Boss”. The Defendant was the deputy general manager and, until December 2001 when Chan joined the Plaintiff as accounting manager, had particular responsibility for the accounts of the Plaintiff as he used to be in the partnership prior to its incorporation. Hoi Pun is in charge of the warehouse in Hong Kong. He was recognised as the “Second Boss”. Chan Tong Wing is in charge of the Plaintiff’s operation in Shenzhen under the supervision of Hoi Tung. Cheng’s duty was to assist the Defendant in all aspects of management. 10.In early 2002 and in preparation for the Plaintiff’s listing on the Hong Kong Stock Exchange, the Plaintiff was restructured. A British Virgin Islands (“BVI”) company, Dollars Dragon Developments Limited (“Dollars Dragon”), became the Plaintiff’s majority shareholder holding 98,500 shares of the Plaintiff, while another BVI company, Top Logistics Development Limited, holds 1,500 shares of the Plaintiff upon trust for all the five shareholders in the same proportion as their previous shareholdings in the Plaintiff. Shenzhen Yuben Food Co Ltd 11.In about 1993, the Plaintiff set up a factory in Shenzhen known as Shenzhen Yuben Food Co Ltd (“Yuben”) to produce fish balls for sale to the Plaintiff in Hong Kong. The factory was a joint venture between the Plaintiff and a mainland party for a term of ten years. The Defendant was one of its directors. Yuben was managed by Hoi Tung and Chan Tong Wing who was stationed full time in Shenzhen. Duoyu Food (Shenzhen) Co Ltd 12.In April 1999, the Plaintiff incorporated a Mainland company known as Duoyu Food (Shenzhen) Co Ltd (“Duoyu”). Duoyu was held by Dragon Gold Properties Limited (“Dragon Gold”), which is in turn owned by the five shareholders of the Plaintiff and in the same proportion as the shares they held in the Plaintiff prior to the restructure in 2002. It was also managed by Chan Tong Wing under the supervision of Hoi Tung. It was to eventually replace Yuben upon the expiry of Yuben’s term in 2003. The Cash Account(現沽帳) 13.The Cash Account was an accounting record prepared by the Defendant. It was not a record of cash transactions in any particular bank account. It recorded receipts from three sources: (1) a stall in Aberdeen known as On Kee owned by Hoi On’s wife; (2) a wholesale company called Kam Kee in Macau and (3) the Plaintiff. 14.On Kee purchased fish balls from the Plaintiff. Instead of paying the Plaintiff, On Kee’s payments were deposited into a joint current account in the names of Hoi Tung and Hoi Pun with the Tin Wan Branch of The China & South Sea Bank Limited (the “Joint Bank Account”). At a later stage, the payments were deposited into the personal bank accounts of Hoi Tung’s wife, Hoi Pun, Cheng and the Defendant as nominees of the Plaintiff (collectively the “Nominees”). The total receipts from this source were $9,081,406 for the period from 3 September 1993 to 31 March 2001. 15.Kam Kee purchased fish balls from the Plaintiff. Likewise, the payments were deposited into the Joint Bank Account instead of the Plaintiff’s bank account. The total payments from this source were $1,287,644 for the period from 5 February 1999 to 1 April 1999. 16.Yuben sold fish balls locally in China as well as to the Plaintiff in Hong Kong. The proceeds from sales in China were treated as part payments by the Plaintiff in respect of Yuben’s sales to the Plaintiff. Thus, in respect of Yuben’s sale to the Plaintiff, the Plaintiff only paid Yuben the difference between the invoiced amount and the proceeds of sales in China. The Plaintiff then deposited an amount equivalent to the proceeds of sales in China into the Joint Bank Account and later transferred into the bank accounts of the Nominees. The total receipts from this source were $30,953,658 for the period from 19 August 1993 to 29 April 2002. 17.The Cash Account recorded a total receipt of $41,322,707.46 from the three sources over a period of eight years and eight months from 19 August 1993 to 29 April 2002. The funds recorded under the Cash Account were used to pay some of the Plaintiff’s expenses and the directors’ perks. The general way in which the Cash Account operated was not in dispute. The main disputes between the Plaintiff and the Defendant are who was in control of the Cash Account, who had custody of the Joint Bank Account and bank passbooks of the Nominees’ bank accounts into which the funds held under the Cash Account were deposited and whether the entries in the Cash Account were accurate. On this last issue, the Plaintiff does not dispute about the total amount received under the Cash Account but says that the money received had not been properly accounted for by the Defendant and that the Defendant withheld the bank passbooks of the Nominees and other source documents such as bank statements, deposit slips etc making it impossible for the Plaintiff to verify the correctness of the entries in the Cash Account. 18.On the average, the funds thus siphoned off from the Plaintiff by this means throughout the eight years and eight months amounted to $4,768,005 per year (i.e. $41,322,707.46 ÷ 8 8/12), or $397,334 per month. While the payments-in were recorded in the Cash Account, the money was deposited into the Joint Bank Account or the personal bank accounts of the Nominees. Some of those payments were by cash, but the majority of the payments equivalent to the proceeds of Yuben’s sales in China were effected by cheques drawn on the Plaintiff’s bank account. Though the payments by the Plaintiff under this arrangement were not proper business payments, they were effected by cheques signed by Hoi Tung and drawn from the Plaintiff’s bank account. Those payments must have been supported by the Plaintiff’s bank statements and documented in some disguised manner in the Plaintiff’s books, ledgers and payment vouchers authorised by Hoi Tung. Hoi Tung must have made or caused to be made false entries in the ledgers to justify the issue of those cheques. With all those cheques he signed or payments he authorised, it is impossible that Hoi Tung knew nothing about those huge payments made by the Plaintiff. In view of the huge amount involved, it is incredible that Hoi Tung was not interested enough to check the bank passbooks of the Nominees every now and then to make sure that the deposits were made and the amounts were correct. It is also incredible that he knew nothing about the Cash Account and that it was the Defendant who alone was in control of the Cash Account to the exclusion of Hoi Tung. Li Yuen Account(利源日記帳) 19.The Li Yuen Account was also an accounting record prepared by the Defendant. The accounting record covered a period from 3 November 1997 to 2 May 2002. It was not a record of cash transaction in any particular bank account. It recorded payments by the Plaintiff into bank accounts of the Nominees. The payments represented the price difference between what the Plaintiff should pay Yuben for its purchase of fish balls and what the Plaintiff actually paid Yuben (the “Price Difference”). Hoi Tung explained that the Customs Department of the Mainland set the price of exports and such price was relevant for determination of the net profit of Yuben for tax purposes. The price fixed by the Customs Department for Yuben’s export had been declining. It was then agreed among the directors that the Plaintiff would, for its accounting purposes, record in its accounts the Customs price fixed at a higher level at an earlier stage as the cost of its purchases from Yuben though in fact the Plaintiff paid Yuben the then current Customs price fixed at a lower level. Usually, Cheng advised the Defendant the Price Difference and then the Defendant made an entry in the Li Yuen Account. From time to time, Hoi Tung signed cheques drawn on the Plaintiff’s bank account for amounts equivalent to the Price Difference. Those cheques were deposited into the bank accounts of the Nominees according to the instruction of Hoi Tung, including time accounts for the purpose of earning higher rate of interest. The funds in those accounts were withdrawn mainly for remittance to the bank account of Yuben in China as capital for Duoyu in which the shareholders held an interest proportionate to their shareholding in the Plaintiff. The total receipts of the Price Differences recorded in the Li Yuen Account for the four and half years from 3 November 1997 to 2 May 2002 was $52,821,799 and the total amount of remittance to Yuben and Duoyu recorded was $36,256,638. As in the case of the Cash Account, it is obvious that the arrangement under the Li Yuen Account is another means of siphoning profit out of the Plaintiff to evade its tax liability. 20.The above facts are not disputed by the Plaintiff. They are incontrovertible. The disputes between the Plaintiff and the Defendant are: who was in control of the Li Yuen Account, who had custody of the bank accounts of the Nominees into which the funds recorded in the Li Yuen Account were paid and whether the entries in the Li Yuen Account were correct. On this last issue, the Plaintiff does not dispute the total receipts under the Li Yuen Account but says that the money received had not been properly accounted for by the Defendant and that the Defendant withheld the bank passbooks of the Nominees and other source documents such as bank statements, deposit slips etc making it impossible for the Plaintiff to verify the correctness of the entries in the Li Yuen Account. 21.Hoi Tung said that the purpose of reporting the higher Customs price fixed at an earlier date was to keep the accounts of the Plaintiff stable and that he did not realise the arrangement was a tax evasion scheme. Keeping the accounts stable is a non-reason and served no useful purpose to the Plaintiff or its directors. It only distorted the true financial position and performance of the business. Hoi Tung said that he examined the accounts of the Plaintiff every month but not the Li Yuen Account. It is incredible that in examining the Plaintiff’s account and in assessing the Plaintiff’s business performance he could have wholly ignored or overlooked the massive secret profit siphoned out of the Plaintiff under the arrangement of the Li Yuen Account. It is also incredible that he never checked the Li Yuen Account. I accept the Defendant’s evidence that while he maintained the Li Yuen Account, Hoi Tung checked it twice a month. 22.In four and half years, through the arrangements under the Li Yuen Account, funds amounting to $52,821,799 were siphoned off from the Plaintiff into the Joint Bank Account and bank accounts of the Nominees. As in the case of the Cash Account, Hoi Tung must have signed cheques in the region of almost $1 million every month transferring the Plaintiff’s funds into his and the Nominees’ bank accounts. He must have made or caused to be made false entries in the ledgers to justify the issue of those cheques. Of those funds, $36.26 million were remitted to Duoyu in which he had 57% interest. Thus effectively, Hoi Tung pocketed $20.67 million of the profit from the Plaintiff during those four and half years. He was the major beneficiary under the Li Yuen Account. He must have a keen interest in the account, kept a close watch on it and had control of it through the Defendant. His evidence is an insult to common sense of anyone who heard it. Hoi Tung’s evidence about the Li Yuen Account and the Cash Account caused fatal damage to his credibility. The Wui Sang Tong Action 23.The Defendant’s wife, Mrs Yeung, used to practise as a Chinese herbalist under the name of Wui Sang Tong(回生堂). In April 1997, at the suggestion of the Defendant, it was agreed that Wui Sang Tong would supply the Plaintiff ground white pepper powder for manufacturing fish balls. Similarly, in August 1998, it was agreed that Wui Sang Tong would supply the Plaintiff curry powder, five-flavour powder and other spice for manufacturing curry fish balls. It is the Plaintiff’s case that in both agreements, Mrs Yeung promised to supply the spice at fair market price without charging any profit. According to the Plaintiff, it then transpired that Mrs Yeung was charging the Plaintiff $20 per unit over and above what it considered to be the fair market price of between $6 and $8 per unit. The Plaintiff stopped purchasing white pepper powder from Wui Sang Tong in November 2002, a month before the Defendant formally retired from his directorship and stopped purchasing all other spice from Wui Sang Tong altogether in April 2003, four months after the Defendant’s retirement from the Plaintiff’s board. 24.The Plaintiff then instituted action against Mrs Yeung for breach of contract and against the Defendant for breach of fiduciary duty in High Court Action No 4159 of 2003 in November 2003 (the “Wui Sang Tong Action”) and against the Defendant in the present action on 16 December 2003. The Plaintiff’s claims in the Wui Sang Tong Action were dismissed by Chung J on 25 August 2006. In essence, Chung J found the Plaintiff’s witnesses, namely Hoi Tung, Hoi Pun, Cheng and Chan, incredible and hence the Plaintiff failed to discharge the burden of proof. THE FACTS An overall view of the parties’ case 25.The Plaintiff’s case is that in July 2002, the Defendant intimated his desire to retire from the Plaintiff’s board of directors because Mrs Yeung was being questioned by the Inland Revenue Department and he was worried that the inquiry would be extended to the Plaintiff. This started a series of board meetings which ended with the board’s approval of the retirement benefit for the directors’ retirement, including the Defendant. It was a term of the Agreement that the Defendant would sign documents and explain the affairs handled by him when reasonably required by the Plaintiff. Subsequently, as the Plaintiff discovered that Mrs Yeung made huge profits out of her sale of spice to the Plaintiff, the Plaintiff’s suspicion over the Defendant’s handling of the Cash Account and Li Yuen Account was aroused. Chan formulated nine queries about the Defendant’s handling of the Li Yuen Account. The Plaintiff alleged that the Defendant breached the Agreement by refusing to attend a meeting on 13 March 2003 to pass a resolution of Yuben’s board of directors and thereafter refused on a number of occasions and specifically on 10 July 2003 to answer queries about the Li Yuen Account. 26.The Defendant’s case is that he was being forced to retire from the board of directors, his retirement had nothing to do with Mrs Yeung’s tax matter and it was not a term of the Agreement that he would sign documents or assist the Plaintiff in enquiries. He admitted that he was unable to attend the meeting on 13 March 2003 but had not been informed that the meeting was convened for the purpose of passing a resolution of Yuben’s board. He attended the meeting with Hoi Tung and Chan on 10 July 2003 with a view to answer queries about the Li Yuen Account, but neither Hoi Tung nor Chan could particularise any queries. 27.Hereunder is a chronology of events leading to the dispute:
Except for the events in italics, the above chronology is not in dispute. The setting in which the disputes arose 28.It would be helpful to set out the scene in which the parties’ disputes arose. December 2001 is a convenient starting point. Hitherto, the Plaintiff adopted a traditional Chinese style management and was run by directors who had no formal management or managerial training. In December 2001, Chan who is a Chartered Accountant, joined the Plaintiff as an accounting manager to enhance the quality of general and manpower management so as to cater for future business development. 29.Chan quickly won the confidence and trust of Hoi Tung and the Defendant. He had conflicts with Chan Tong Wing about the manner Chan Tong Wing managed Yuben. He threatened to resign in March or April 2002. This earned him a promotion to the position of personnel and administration manager. At about the same time, the Defendant and Chan floated the idea of having the Plaintiff listed on the Hong Kong Stock Exchange. 30.In July 2002, in order to facilitate the reform of the Plaintiff, the board resolved that all directors, except Hoi Tung, would proceed on six months’ full pay leave so as to allow Hoi Tung and Chan a free hand in carrying out reforms the Plaintiff, including Duoyu. It was under this setting that the issue of the Defendant’s retirement arose. The Defendant’s reason for retirement and Mrs Yeung’s tax matter 31.The Plaintiff’s case is partly built on the hypothesis that the Defendant volunteered to retire because of the tax problem of Mrs Yeung. The Defendant denied. He said that since May 2002 Hoi Tung had been pressurising him to retire. In my view, the reason for the Defendant’s retirement is irrelevant except, as counsel says, as to credibility. 32.According to Chan, sometime before 18 July 2002, the Defendant sought his advice because Mrs Yeung had received enquiries from the Inland Revenue Department about her tax returns. The Defendant presented him with a whole file consisting of Mrs Yeung’s tax returns for seven years of assessment. After perusing the documents, Chan told the Defendant that the Inland Revenue Department might investigate on how Mrs Yeung managed to acquire her South Horizon apartment when her sole proprietorship business of Wui Sang Tong was repeatedly reporting loss. Chan asked the Defendant to show him all Mrs Yeung’s chargeable income as computed by the Inland Revenue Department for his study. Then two dinner meetings with Mrs Yeung in the absence of the Defendant were arranged to discuss Mrs Yeung’s tax problem, but no solution could be found other than the vain hope that the Inland Revenue Department would pursue the enquiry with less vigour if Mrs Yeung resigned from Wui Sang Tong. Then, according to Hoi Tung, towards the end of July, the Defendant intimidated to Hoi Tung and the other directors his desire to retire from the board of directors as he was afraid that the Inland Revenue Department’s inquiry would spill over to the Plaintiff and as he was doing the Plaintiff a favour, he wanted a substantial payment for his past contributions and long service. 33.The Defendant and Mrs Yeung gave a wholly different explanation as to why Mrs Yeung’s tax returns and tax documents were handed over to Chan. According to the Defendant, Chan told him that since Wui Sang Tong had been doing business with the Plaintiff, the Plaintiff would like to see the tax documents of Mrs Yeung to help the Plaintiff with its own tax problem. Chan did not say what the Plaintiff’s tax problem was. At the time, the Defendant had confidence in Chan and hence he gave Mrs Yeung’s tax returns and tax documents to Chan. He did not attend the two dinners as he thought Mrs Yeung would feel uncomfortable to disclose her income to Chan in his presence. 34.Mrs Yeung’s evidence is slightly different but is in line with the Defendant’s. She said that she was informed by the Defendant that the Plaintiff was planning to be listed on the Hong Kong Stock Exchange, that the Plaintiff’s account involved tax evasion which could not be exposed and as Wui Sang Tong had been doing business with the Plaintiff, the Plaintiff wished to peruse her tax documents. So Mrs Yeung gave her tax returns, tax documents and her saving passbooks to the Plaintiff for perusal. At the time, the Defendant and Chan had been floating the idea of having the Plaintiff listed. In that light, I think Mrs Yeung’s evidence as to the Plaintiff’s reason for perusing her tax documents makes more sense than what the Defendant said. I think the inconsistency between the Defendant’s evidence and Mrs Yeung’s is due to failure of memory on the Defendant’s part. I prefer Mrs Yeung’s evidence. 35.Mrs Yeung did not have much recollection about the dinner at San Bo Restaurant while Miss Yeung had no recollection about that dinner at all, but they did not seriously dispute if they had attended that dinner. According to the Plaintiff, Mrs Yeung’s tax matter was discussed during the two dinners. Chan’s and Hoi Tung’s evidence about what was discussed during the two dinners is scanty in details. Having looked at the tax returns and tax documents, it appears to me that there was really nothing much to talk about and at two dinners which were just four days apart. I believe Miss Yeung’s evidence that there was only one dinner meeting and not two. 36.According to Mrs Yeung and Miss Yeung, during the dinner at Kam To Restaurant on 22 July 2002, Hoi Tung said that if Chan was not going to continue working with the Plaintiff, he would have no mood to work too and would like to sell all his shares in the Plaintiff. He told Mrs Yeung that he had approached Café de Coral for the sale of his shares in the Plaintiff but his offer was turned down because the Plaintiff’s accounting records were messy. He asked if Mrs Yeung would purchase all his shares for $30 million. Mrs Yeung replied that Hoi Tung had worked so hard in the Plaintiff that she did not believe he would sell his shares in the Plaintiff. Then Hoi Tung said that he had tolerated the Defendant for a long time and could stand him no more. He criticised the Defendant as being “ terrible「核突」”, by which he probably meant the Defendant was disgusting. Mrs Yeung argued back and left with indignation. 37.The Plaintiff’s evidence about the Defendant’s reason for retirement is very inconsistent. In his witness statement filed in February 2005, Hoi Tung alleged that the Defendant’s decision to retire was probably induced by his personal conflicts with Chan Tong Wing and his age. He mentioned nothing about Mrs Yeung’s tax matter. In his supplemental witness statement filed in October 2005, he alluded to the Defendant intimating to Chan that Mrs Yeung was being questioned by the Inland Revenue Department. In Chan’s supplemental witness statement filed in June 2005, Chan alleged that the Defendant had told him that Mrs Yeung was being questioned by the Inland Revenue Department about the properties which they had acquired over the years. In his second supplemental witness statement filed in November 2006 just a few days before trial, Chan particularised the Inland Revenue Department’s enquiry as to how Mrs Yeung managed to acquire the South Horizon apartment. But in his evidence in Court, Chan departed from all his witness statements. He admitted that Mrs Yeung had never received any enquires by the Inland Revenue Department as to how she managed to acquire the South Horizon apartment. He sought to explain the inconsistency between his evidence and his witness statements by saying that the enquiry he mentioned in his supplemental witness statements was only what he thought Mrs Yeung might be subjected to. That explanation is only to be rejected because Chan had said unequivocally in his supplemental witness statements that he learned of such inquiry from the Defendant and not that he thought such inquiry might be raised by the Inland Revenue Department. Clearly, Chan realised that in the light of Mrs Yeung’s tax returns and tax documents, he could not mount a case that Mrs Yeung was being enquired by the Inland Revenue Department as to how she could have financed the purchase of the South Horizon apartment when Wui Sang Tong was reporting loss. Chan’s departure from his witness statements casts serious doubts on the veracity of his evidence that the Defendant sought advice from him about Mrs Yeung’s tax problem. It also supports the Defendant’s evidence as being closer to the truth. 38.Furthermore, there was only one proforma letter among Mrs Yeung’s tax documents in relation to the South Horizon apartment. In that proforma letter, the Inland Revenue Department informed Mrs Yeung that she had not completed the part of her tax return in respect of details of the properties owned or let by her. This is far from suggesting that the Inland Revenue Department was enquiring as to how Mrs Yeung could have financed the purchase of the property when Wui Sang Tong had been reporting loss. There was nothing for Mrs Yeung or the Defendant to worry. What they had to do was to report to the Inland Revenue Department whether they were residing in the property or had it let out or kept vacant. The enquiry from the Inland Revenue Department was unlikely to have aroused such a concern in the Defendant that he had to seek Chan’s advice and to retire from the Plaintiff’s board. This shows Chan’s evidence that the Defendant sought his advice on Mrs Yeung’s tax problem had no basis at all. 39.The Plaintiff sought to fortify its case by arguing that Mrs Yeung’s tax matter was indeed discussed at the board meeting on 7 October 2002 and it was recorded in the minutes of the meeting that the board had resolved that “it would find better solution for Mrs Yeung’s matter”. According to Hoi Tung, the Defendant insisted that the Plaintiff should be responsible for paying Mrs Yeung’s tax and then after consultation with Chan the minutes were toned down to the present form. The Plaintiff argues that this resolution supports Chan’s evidence that Mrs Yeung’s tax matter was a real concern for the Defendant. On the other hand, it is the Defendant’s evidence that he considered his wife had no tax problem and felt that the Plaintiff was being over sensitive about Mrs Yeung’s tax matter. He denied ever making such unreasonable demand that the Plaintiff should pay Mrs Yeung’s tax and that he sought help from the Plaintiff about Mrs Yeung’s tax matter. According to Mrs Yeung’s evidence, her tax returns and tax documents were only shown to the Plaintiff at Chan’s request in the context of the Plaintiff’s intended listing on the Hong Kong Stock Exchange. 40.Chan’s allegation about the Defendant’s demand that the Plaintiff should pay Mrs Yeung’s tax was never disclosed in his witness statements, not even his very lengthy one filed shortly before this trial, or in Hoi Tung’s witness statements. In view of the importance the Plaintiff placed on this incident, it is only natural that had the demand been made, Hoi Tung and Chan must have mentioned it in their very lengthy and last minutes supplemental witness statements. I think Hoi Tung’s and Chan’s evidence bears all the indicia of a recent fabrication. I reject their evidence. 41.The Defendant had worked for almost thirty years with the Plaintiff. He and the Hoi Brothers had turned the Plaintiff from a humble shop in a housing estate into a successful company with office and warehouse in Hong Kong and a factory in China. In the preceding four and half years, the Plaintiff generated $52,821,799 secret profit for its directors through the Li Yuen Account. The Defendant’s share of 15.73% was in the region of $8.31 million or $1.85 million per year, not to mention his lawful income as a deputy general manager, his director’s perks and dividend. He might not have received his share of the secret profit wholly in the form of cash. Part of his share was in the form of his shareholding in Dragon Gold which represented the share of his investment in Duoyu. Through his influence and supervision, his wife’s Wui Sang Tong had been trading ludicrously with the Plaintiff. As perceived at that time, the Plaintiff was about to be listed on the Hong Kong Stock Exchange. There could hardly be any reason why the Defendant would wish to retire from his directorship, not even if the tax problem of his wife were a real one. 42.The above analysis suggests that Hoi Tung and Chan made use of the fact that the Plaintiff was planning its listing and the fact that Wui Sang Tong had been doing business with the Plaintiff as a pretext to see Mrs Yeung’s tax returns and tax documents. The Defendant did not realise this pretext. Mrs Yeung frankly admitted that she failed to see how her tax matter could be related to the Plaintiff’s. The Defendant’s feeling at the time was that Hoi Tung and Chan were being over sensitive. I think Hoi Tung and Chan must have some reasons best known to themselves why they made up such an excuse to see Mrs Yeung’s tax returns and tax documents. Mr Man, counsel for the Defendant, suggests that the motive of Hoi Tung and Chan was to find out how much the Defendant could offer to buy the Plaintiff’s shares. I think it is more probable that Hoi Tung had realised that Wui Sang Tong had been making ludicrous profit through the supply of spice to the Plaintiff and wanted to confirm his suspicion by examining Mrs Yeung’s tax returns and the tax computation by the Inland Revenue Department. The resolution about Mrs Yeung’s tax matter was probably passed for the purpose of keeping the pretext alive. However, I do not think I need to speculate. Suffice it is to say that for the above reasons, I do not believe in the evidence of Chan and Hoi Tung and I accept the Defendant’s and Mrs Yeung’s evidence. I find that it was Chan who requested to see Mrs Yeung’s tax returns, tax documents and in particular the Inland Revenue Department tax computation. I find it was in the context of the Plaintiff’s listing on the Hong Kong Stock Exchange that Mrs Yeung’s tax matter was discussed at the board meeting on 7 October 2002. In that context it was plausible for a resolution to be passed to the effect that the Plaintiff would provide Mrs Yeung with advice on her tax matter if required. The alleged demand by the Defendant that the Plaintiff should pay Mrs Yeung’s tax is utterly illogical as to be impossible of belief. I find it was not the Defendant who sought advice from Chan about Mrs Yeung’s tax matter and that the Defendant was not at all troubled by Mrs Yeung’s tax matter that he wanted to retire from the Plaintiff’s board. I am therefore driven to the conclusion that Hoi Tung who had been putting pressure on the Defendant to retire. But, as I said, these findings are unnecessary for this trial. The above findings are only relevant as to credibility. I find that Hoi Tung’s as well as Chan’s credibility is seriously dented by this issue which they raised. The board meetings on 7 and 10 October 2002: The terms of the Agreement 43.Eventually, the Defendant submitted to Hoi Tung’s ever escalating pressure for his retirement and said in view of his old age he would retire if the offer was reasonable. Then Hoi Tung prepared a proposal note setting out his proposed retirement benefit for the Defendant’s retirement and discussed his proposal with the Defendant in September 2002. His proposal was rejected by the Defendant. 44.It is common ground that at meeting on 7 October 2002 attended by Hoi Tung, Hoi Pun, Cheng and Chan Tong Wing and the Defendant, the board discussed a more generous proposal for retirement benefit for all directors, the Defendant’s handing over of his work in the Plaintiff and Mrs Yeung’s tax matter. That proposal was again rejected by the Defendant. The board agreed in principle to make further revisions to the proposal. Eventually, at the board meeting on 10 October 2002, the board finalised and formally approved the revised retirement benefit for all the directors, including the Defendant. In respect of the Defendant, his retirement package totalled $4,100,000 and was made up of the following payments:
The board signed the minutes of meeting back-dated to 7 October 2002 recording its approval of the retirement benefit for all its directors. The minutes were recorded by Cheng and read as follows:
45.It is the Plaintiff’s case that it was expressly agreed at the meeting of 7 October 2002 that payment of retirement benefit was subject to the conditions that the recipient would execute such documents and assist the Plaintiff with answering enquiries as might reasonably be required. The Defendant denied that those conditions had been discussed at the meeting. Hoi Tung’s evidence about the board meeting on 7 October 2002 formed the entire basis of the Plaintiff’s case. Despite the importance of those two conditions, neither of those conditions has found its way into the resolution dated 7 October 2002 or any of the contemporaneous documents, nor were they mentioned in his first three witness statements or in the Re-Amended Statement of Claim. It was only in his third supplemental witness statement, filed within a week before trial, that he sought to further embellish his case by saying that not only were those two terms specifically agreed, the payments of retirement benefit to the Defendant were in fact conditional upon the Defendant honouring those two terms. Under cross-examination, in a desperate attempt to defend his credibility, Hoi Tung said that he had told his former counsel about those conditions and put the blame on his former counsel for the lack of mention of those conditions in his witness statements. In my view, any reasonable lawyer must have realised that the evidence about those express conditions is absolutely essential for the Plaintiff’s case. It is simply incredible that the Plaintiff’s former counsel and its then and current solicitors could have been so negligent as to have failed to include such important evidence in Hoi Tung’s witness statements and pleadings when they had been so instructed by Hoi Tung. This aspect of Hoi Tung’s evidence is clearly another recent concoction. 46.Hoi Tung’s demeanour in Court also betrayed him. Under cross-examination, he was asked if the conditions precedent had been specifically and expressly discussed at the meeting. His first answer was that those conditions precedent were common knowledge, implying that there was no discussion and no express agreement but an understanding. It appeared that the idea of an express agreement had never occurred to him. However, after the distinction between express agreement and implied agreement or understanding had been explained to him, he asserted that there was express discussion and agreement on 7 October 2002 that if a director refused to answer questions or execute documents when called upon, that director would not be paid any of the retirement benefit. He was obviously making up his evidence in the witness box. 47.For the above reasons, I reject Hoi Tung’s evidence that it was an express term of the Agreement that payment of the Defendant’s retirement benefit was subject to the Defendant signing documents and answering enquiries reasonably required by the Plaintiff. This finding would be sufficient for me to dispose of this action. However, I shall complete my analysis of the other factual disputes raised by the Plaintiff. Meeting on 27 February 2003: discussion on sale of Defendant’s shares 48.The Defendant’s retirement took effect on 1 January 2003 after expiry of the six months’ leave. On 27 February 2003, the Defendant and the other directors had a meeting with Hoi Tung when they returned to the Plaintiff’s office to collect their payments. A discussion about the sale of the Defendant’s shares in the Plaintiff ensued. What happened at the discussion is in dispute. It should be noted that at the time, Hoi Tung’s relation with the Defendant could not have been cordial because about a month before the Defendant’s retirement took effect, the Plaintiff had already stopped purchasing white pepper powder from Wui Sang Tong in November 2002. 49.The Plaintiff’s case is that at the meeting on 27 February 2003, Hoi Tung offered to sell all his shares in the Plaintiff on the basis that the Plaintiff had a net asset value of $32 million after allowing $58 million for contingent liability. This evidence is consistent with Mrs Yeung’s evidence about Hoi Tung’s offer at the Kam To Restaurant on 22 July 2002, about seven months before that meeting. Then the Defendant counter-offered to sell all his shares at that valuation. But, according to Hoi Tung, an agreement was almost reached in early March for the Defendant to sell all his shares to Hoi Tung and the other shareholders at $6.5 million. 50.According to the Defendant, at the meeting Hoi Tung demanded to buy out the Defendant at a price of $6,099,600 because Hoi Tung said he would not do business with the Defendant any more. The Defendant disagreed with the net asset value of the Plaintiff as suggested by Hoi Tung. He thought his shares were worth $13.5 million based on a net asset value of $90 million. Thus, no agreement was reached. 51.No evidence has been adduced by the Plaintiff on its net asset value. Despite that, I have not the slightest difficulty in rejecting Hoi Tung’s evidence for the following reasons. The Plaintiff was operating a very profitable business. The secret profit siphoned off through the Li Yuen Account was on the average $11.74 million per year (i.e. $52,821,799 ÷ 4 6/12), not to mention the value of the Plaintiff’s plant and machinery, goodwill and lawful profit etc. How could one honestly say that the net asset value of the Plaintiff was just $32 million? Likewise, the Defendant’s share of secret profit from the Li Yuen Account was in the region of $1.85 million per year ($11.74 million x 15.73%). Though the Defendant could not have received his share of secret profit wholly in the form of cash but partly in cash and partly in the form of investment in Duoyu in which he had 15.73% interest, the benefit he derived from the Li Yuen Account must be very substantial. In addition, the Defendant was entitled to his share of the lawful profit of the Plaintiff. He was the keeper of the Cash Account and the Li Yuen Account. He must know how much his shares in the Plaintiff were worth. Even though the unlawful activities through those accounts will no longer be continued, the profit will not cease to be generated. The amount will be reduced fractionally because of the tax element, but will nevertheless be very substantial. The Defendant must be out of his mind to agree, as Hoi Tung alleged, to sell all his shares in the Plaintiff for about three years’ secret profit which he had hitherto been receiving in cash and in kind through the Li Yuen Account alone. I reject Hoi Tung’s evidence and accept the Defendant’s. 52.The finding in respect of this incident is not relevant to the present dispute. However, it supports the Defendant’s evidence that he was being firstly forced to retire from the board and then being forced out of the Plaintiff altogether. It also casts doubts on the bona fide of the Plaintiff’s subsequent complaints against the Defendant for breach of the Agreement, which I shall next turn to. 13 March 2003: Allegation of Defendant’s refusal to sign Yuben documents 53.Then two weeks after the unsuccessful bargain, the Plaintiff alleged that the Defendant refused Cheng’s request to sign an important resolution of the board of directors of Yuben to increase its share capital which was necessary for its subsequent winding up. The Plaintiff relied on Cheng’s witness statement filed for this purpose and on what Hoi Tung said as having been reported to him by Cheng. 54.According to Cheng’s witness statement, he telephoned the Defendant on 12 March 2003 to request the Defendant to come to the Plaintiff’s office to attend a meeting on 13 March 2003 and to sign a document, but before he could say anything further about the nature of the document to be signed, the Defendant replied that he would not attend the meeting or sign any document and told Cheng to wait for his then solicitors’ letter. Hoi Tung’s evidence is that Cheng had told the Defendant that the document to be signed was a very important board resolution of Yuben. Of course, Hoi Tung’s evidence, apart from being hearsay, is inconsistent with Cheng’s witness statement. Though the Defendant had, through its former solicitors, sent a letter to the shareholders of Dollars Dragon offering to sell all his shares in Dollars Dragon for $13.5 million, that does not tie in with the tone of the conversation alleged. On the other hand, Cheng was not called to give evidence. Hoi Tung’s explanation is that Cheng was admitted to hospital for having a blocked blood vessel in the brain and was not sober enough to give evidence. The Plaintiff did not produce any medical evidence in support of Cheng’s medical condition. In the Wui Sang Tong Action in which Cheng gave evidence, Chung J commented him as a person with “indications of an untruthful witness”. I, too, would view Cheng’s evidence with grave suspicion and reject Hoi Tung’s evidence as exaggeration which is not to be believed. 55.The Defendant admitted having had a telephone conversation with Cheng on 12 March 2003 during which Cheng asked if he had time to attend a meeting on the following day. But when the Defendant enquired what the meeting was about, Cheng replied that he did not know. At that time, the Defendant had to assist Mrs Yeung in moving her clinic and suggested to have the meeting postponed. He did not refuse to attend the meeting nor had he been told that he had to sign any important document. 56.Subsequently, on 22 March 2003, the Plaintiff removed the Defendant as a director of Yuben and procured the necessary resolution to be passed by a newly constituted board. This shows that the Defendant’s attendance at the meeting of 13 March 2003 was not indispensable and the reason not to pay his retirement benefit for the alleged breach of this condition, even if there was such a condition, was just a lame excuse. 57.In view of the very adverse view I formed of Hoi Tung’s credibility, I reject his evidence. I also give no weight to the evidence of Cheng as contained in his witness statement. I accept the evidence of the Defendant. But even if I do not, the Plaintiff has failed to prove the Defendant’s refusal to sign the Yuben document and what damage flowed from such refusal. 3 April 2003 to 10 July 2003: Queries on the Li Yuen Account 58.Having stopped purchasing white pepper powder from Wui Sang Tong in November 2002 and having stopped purchasing curry powder and other spice in April 2003 altogether, the Plaintiff also withheld the instalment payment of retirement benefit to the Defendant which fell due on 5 April 2003. According to Hoi Tung, through Miss Yeung, he had invited the Defendant to have a dialogue with him. Miss Yeung denied there was such an invitation. I prefer Miss Yeung’s evidence. Though the relation between Hoi Tung and the Defendant was bad because of the share negotiation and the spice business, there was nothing to prevent Hoi Tung from contacting the Defendant directly if he wished to. Miss Yeung also resigned on 22 April 2003, understandably because of the obviously strained relation between Hoi Tung and the Defendant. 59.On 28 April 2003, Mrs Yeung and Miss Yeung went to the Plaintiff’s office to enquire about the payment of the Defendant’s retirement benefit. Hoi Tung informed Mrs Yeung that he wished to make enquiry from the Defendant about the accounts of the Plaintiff. By a letter dated 30 April 2003, the Plaintiff’s solicitors informed the Defendant’s then solicitors that the Plaintiff was investigating the Defendant’s involvement in the Plaintiff’s purchasing activities with Wui Sang Tong. At a meeting on 15 June 2003 among Hoi Tung, Mrs Yeung and Miss Yeung, Hoi Tung intimated that there was some confusion in the Li Yuen Account which required the Defendant’s explanation. 60.Eventually on 10 July 2003, the Defendant, Mrs Yeung and Miss Yeung had a meeting with Hoi Tung and Chan at the conference room of the Plaintiff. According to Hoi Tung and Chan, when the subject of the Li Yuen Account was broached, the Defendant threw into a fit of temper and pushed his cup of tea on the conference table and left. But, according to the Defendant, he asked Hoi Tung what was the confusion in the Li Yuen Account. He reminded Hoi Tung that the accounts had been properly handed over and explained to Chan who had verified the accounts and confirmed that they were satisfactory. Then as someone was bringing tea to him, he happened to knock over the tea-cup and tea was spilled on the table. He left as Hoi Tung and Chan were unable to pin point to any queries in the Li Yuen Account. 61.Hoi Tung’s evidence is that in January 2002 he discussed the Cash Account and Li Yuen Account with Chan who advised that the related activities might amount to unlawful tax evasion. Then Hoi Tung instructed the Defendant to hand over the Cash Account and Li Yuen Account to Chan for him to have the matter put right. To begin with, it is utterly incredible that Hoi Tung did not know that those accounts involved tax evasion activities, that he did not know anything about those accounts and that he did not check those accounts himself. Tens of millions of dollars were paid into and out of his Joint Bank Account and his wife’s bank account, funds were remitted to China for Duoyu of which he must be aware and he signed cheques from the Plaintiff’s bank account to effect those fund movements. At the time, Chan had only joined the Plaintiff for a month. In the absence of any prior relation between him and Chan, it is simply incredible that Hoi Tung could have so much trust in Chan as to reveal to him his unlawful tax evasion activities and instruct the Defendant to hand over important evidence of those unlawful activities. I reject this aspect of Hoi Tung’s evidence. I find the Defendant’s evidence more credible. I find that it was not until May 2002 that Hoi Tung was comfortable enough to instruct the Defendant to handover those accounts to Chan. The Defendant took a few days to tidy up the accounts and handed them over to Chan on 5 May 2002. 62.While it is common ground that the accounts were handed over to Chan in May 2002, the Plaintiff alleged that the Defendant did not hand over source documents; such as bank statements, bank passbooks, deposit slips etc for Chan to verify and that it was only until discovery of the huge profit Wui Sang Tong made out of the sale of white pepper powder and spice to the Plaintiff that sparked off suspicion as to the Defendant’s integrity. Then as a result of Chan’s opinion, the remaining directors of the Plaintiff decided that the Plaintiff should seek detailed explanation from the Defendant as to the questions raised by Chan in respect of the Li Yuen Account and to request the Defendant to hand over the source documents for verification. In his second supplemental witness statement dated 6 November 2006 filed within a week of trial, Chan formulated nine queries on the Li Yuen Accounts. Those queries are:
63.Before turning to the above queries, it should be recalled that in the minutes of the meeting on 7 October 2002, it was noted that the board made a resolution to the effect that the Defendant had duly accounted for all work handled by him during his term of office. The second resolution implies that the board was satisfied that the Defendant had properly handed over his work, duly accounted for the Cash Account and Li Yuen Account, had handed over the source documents and that the Defendant did not have possession of any of the bank passbooks connected with those two accounts. Hoi Tung explained that at the meeting on 7 October 2002, the Defendant insisted to add in the second resolution words to the effect that he had duly accounted for all his work during his term of office and his vouching of support for the future development of the Plaintiff. Hoi Tung said at the time all the directors trusted the Defendant and raised no queries about his handing over. The Defendant disputed Hoi Tung’s evidence. He said that his resignation and handing over were in fact properly discussed at the meeting and denied having insisted to add those two limbs to the second resolution. Hoi Tung admitted under cross-examination that those resolutions were discussed and that the Defendant had duly handed over what he had at the time. Thus this dispute is one of no difference. Whether the Defendant insisted adding the two limbs to the second resolution is immaterial, the Defendant’s handing over had been discussed and agreed. Having made this general observation, I now turn to the individual queries. 64.The thrust of Query (1) is that there ought to be a special bank account into which the Price Differences were paid. It can be readily appreciated that this query was raised in total disregard of the arrangement under the Li Yuen Account. Even according to Hoi Tung, there was not a specific bank account to receive the payments recorded in the Cash Account and the Li Yuen Account. In his third supplemental witness statement filed within a week of the trial, Hoi Tung said that the funds were paid into the bank accounts of the Nominees. This largely agreed with the Defendant’s evidence, except that Hoi Tung mentioned nothing about payment into his Joint Bank Account with Hoi Pun. The full particulars of that Joint Bank Account were stated by the Defendant in his witness statement. This aspect of the Defendant’s evidence was not traversed by Hoi Tung. If there was not such an account, Hoi Tung could have easily said so in his witness statements or obtained evidence to that effect from the bank. If there was such an account, Hoi Tung as the joint account holder could have obtained certified bank statements to contradict the Defendant’s evidence about payment in of such huge amounts of cash under the arrangements in the Cash Account and the Li Yuen Account. I have no doubt that the Plaintiff’s funds had been paid into that Joint Bank Account and Hoi Tung was only telling partial truth to dwarf his involvement and knowledge of the Cash Account and the Li Yuen Account. 65.The Plaintiff’s case is that Hoi Tung trusted everything to the Defendant who kept all the bank passbooks and operated the Nominees’ bank accounts with pre-signed withdrawal slips but Defendant did not hand over the bank passbooks of the Nominees and the source documents when he handed over the Cash Account and the Li Yuen Account to Chan. The Defendant’s case is that the bank passbooks were all along kept by the individual Nominees and if necessary he was given the bank passbooks and pre-signed withdrawal slips to effect transfers from account to account or remittance to Yuben or Duoyu. He also said that Hoi Tung checked the Cash Account and the Li Yuen Account twice a month. The operation of the Joint Bank Account was convenient as it was a current account. Withdrawals could be easily effected by cheques signed by Hoi Tung or Hoi Pun. Payments into the Joint Bank Account or any of the Nominees’ banks accounts could be easily effected without bank passbooks. The Defendant said that all source documents were handed over to Chan when he handed over the Cash Account and the Li Yuen Account to Chan on 5 May 2002. 66.There is no objective or independent evidence to support the case of either party. It is all a matter of one man’s words against the other. However, the incontrovertible circumstances support the Defendant’s evidence. If the Defendant had custody of the Nominees’ bank passbooks and pre-signed withdrawal slips as the Plaintiff alleged, the Defendant would have access to hundreds of millions of dollars siphoned off from the Plaintiff. Hoi Tung would certainly not have allowed this. If indeed it was intended that the Defendant should have custody of all the bank passbooks, it would be unnecessary for the funds to be paid into the various bank accounts. It would have been more convenient for the funds to be paid into a single bank account held in the name of the Defendant or a joint account between the Defendant and Hoi Tung or simply into the Joint Bank Account of Hoi Tung and Hoi Pun which was already in existence. 67.Furthermore, the Cash Account and the Li Yuen Account were handed over to Chan on 5 May 2002. Chan prepared a report confirming the correctness of the two accounts on 25 May 2002 and sought Hoi Tung’s approval to pay the balance of $1,900,122.06 due to the Defendant under the Li Yuen Account together with interest in the amount of $97,360.52. Hoi Tung authorised the payment. In his report, Chan noted that there was a fixed deposit together with interest in the amount of $1,726,201.30 held in the name of the Defendant, which would be transferred back to the Plaintiff upon maturity on 15 August 2002. The fact that Chan could furnish such details in his report suggests that he must have verified them against bank statements and other source documents in respect of the bank accounts under the Defendant’s name in which funds recorded in the Li Yuen Account were kept. On the other hand, the lack of mention by Chan of the bank accounts of the other Nominees suggests that the bank passbooks and relevant source documents in respect of those bank accounts were either in his possession or in the possession of the respective Nominees. His report indicates that he must have possession of all bank passbooks and supporting documents which had proved to his satisfaction that the Li Yuen Account was correct. This evidence destroyed Chan’s credibility altogether. 68.On the other hand, Hoi Tung would not have paid the Defendant the sum of $1,900,122.06 with interest due to the Defendant if the balance of the funds represented by the Li Yuen Account were not sitting comfortably in their and his wife’s respective bank accounts and that he, his wife and the other directors had custody of their respective bank passbooks. Those bank accounts were the keys to treasures of tens of millions of dollars. If the Defendant had custody of those bank passbooks and had not handed them over in May 2002, it is inexplicable why Hoi Tung did not demand their return upon the Defendant’s proceeding on six months’ leave in July 2002 or at the latest by December 2002 when the Defendant formally retired from the board. Instead, the board passed a resolution in October 2002 acknowledging that the Defendant had duly handed over his work. It is simply incredible that after more than four years, the Plaintiff could have suddenly woken up and asked where were those bank passbooks. The Plaintiff’s case bears every sign of recent concoction. It is devoid of common sense, common prudence and is simply incredible. 69.In the light of the background of the Cash Account and Li Yuen Account, my view of the credibility of the witnesses, my various finding of fact hitherto, I have no difficulties in accepting the Defendant’s evidence that there was not a single bank account for receiving the funds recorded in the Cash Account and the Li Yuen Account, that the funds were paid into the Joint Bank Account and bank accounts of the Nominees and that the bank statements and bank passbooks were kept by the individual holders of those bank accounts. This query was raised in total disregard of the arrangement under the Li Yuen Account even on the basis of the evidence of Hoi Tung. This query is not raised in good faith. 70.Query (2) is in respect of an insignificant but irreconcilable amount over a period of almost ten years, which Chan had earlier recommended to ignore. This shows the Plaintiff’s lack of good faith in resurrecting the query. 71.Queries (4) and (5) relate to payment to Yuben and Duoyu for the purpose of capital investment. According to the Defendant, those payments were remitted principally to Yuben through the directors with funds from the Li Yuen Account as capital injection into Duoyu. Chan’s basis for raising those queries were that according to Chinese investment laws, such remittance were not recognised by the Chinese authority as capital investment and that such remittances were outside the purposes of the Li Yuen Account. Hence Chan said he was not satisfied that such funds were remitted. He was obstinately ignoring the reality that those funds had been remitted albeit they may not be recognised for Chinese customs purposes as capital injection. That is besides the point. The question is whether the funds had been remitted and received by Yuben or Duoyu and not whether the remittance was within what Chan thought was the purpose of the Li Yuen Account or whether the remittance would be recognised by the Chinese customs authorities as capital investment. The Plaintiff having possession of the books of Yuben and Duoyu could have no difficulties in ascertaining if the remittance had been made. Furthermore, if the funds had not been received by Yuben or Duoyu, it is incredible that Hoi Tung would not have realised that at the material time, especially on my finding that he checked the Cash Account and the Li Yuen Account twice a month. This query was obviously not raised in good faith. 72.The other remaining queries are, in my view, raised in total ignorance of the arrangement under the Li Yuen Account. Given the nature of the arrangement under the Li Yuen Account, the instructions as to the amounts to be entered in the account and the transfer of funds must have come from Hoi Tung in Hong Kong and Chan Tong Wing in Shenzhen. I accept the Defendant’s evidence that the instructions were usually given orally and sometimes the instructions were evidenced by some informal and brief notes which could only be understood by those who were parties to the arrangement. Some such notes had been produced by the Defendant in evidence. Those nine queries were raised solely for the purpose of raising them and were not bona fide. 73.Chan took three weeks to check the Cash Account and Li Yuen Account and reported on 25 May 2002 that the two accounts were in order. Though he put down a rider that part of the accounts could not be verified due to lack of detailed breakdown, he never put down any rider that he was unable to verify the correctness of the accounts due to lack of source documents such as pay-in slips, deposit slips or bank passbooks. He was satisfied with the amount due to the Defendant and sought approval from Hoi Tung for payment of the amount due plus interest to the Defendant. Hoi Tung also approved the payments in May 2002. Being a professional accountant, Chan could not have so confirmed the correctness of these accounts without even checking some source documents, such as bank passbooks, bank statements and deposit slips etc. There is no substance in those nine queries. Chan was just finding fault when there was none. Those nine queries should not have been raised by anyone who had knowledge of the operation of the Li Yuen Account. 74.Furthermore, it is remarkable that those nine queries were only mentioned in Chan’s third supplemental witness statement filed less than a week before trial. If he had those nine queries in his mind at the meeting on 10 July 2003 on which basis the Plaintiff launches its case of breach of the Agreement, Chan would have set them out in his first witness statement and would not have to wait till a few days before trial to release them for the first time. I find those queries were not bona fide but were afterthoughts recently concocted to support a fabricated case of breach of the Agreement against the Defendant. This finding supports the Defendant’s evidence that when he confronted Hoi Tung at the meeting on 10 July 2003, neither Hoi Tung nor Chan could identify any confusion in the Li Yuen Account. Those nine queries also demonstrate that Chan was a professional hired gun ready to shoot anybody for the purpose of his master. 75.In conclusion, I find that none of those nine queries existed at the time of the meeting on 10 July 2003. Those queries had never been raised. They were lame excuses not to pay the Defendant his retirement benefit and were created for the purpose of this proceeding. Even if it were a term of the Agreement that the Defendant would answer enquiries, the Plaintiff has failed to prove that it had raised any queries or that the queries were reasonably raised as required to be answered at all. Summary of facts 76.I now summarise the facts of this case as follows. After Chan joined the Plaintiff in December 2001, the idea of having the Plaintiff listed on the Hong Kong Stock Exchange was being floated. Since May 2002, Hoi Tung had been persuading the Defendant to retire from the board and he instructed the Defendant to hand over the Cash Account and Li Yuen Account to Chan for the purpose of remedying the Plaintiff’s illegal tax evasion activities. The Defendant handed over the accounts together with source documents on 5 May 2002. After studying and verifying the accounts, Chan reported on 25 May 2002 that the accounts were in order. The Defendant’s handling of the accounts was concluded when an amount of $1,900,122.06 due to the Defendant under the Li Yuen Account together with interest in the amount of $97,360.52 were paid to the Defendant upon the recommendation of Chan. 77.In July 2002, in the context of preparation for the Plaintiff’s listing on the Hong Kong Stock Exchange and under the pretext that the Plaintiff had been trading with Wui Sang Tong for a long time, Chan requested to see Mrs Yeung’s tax returns and tax documents. Hoi Tung arranged a dinner with Mrs Yeung and Miss Yeung, but in the absence of the Defendant, in Kam To Restaurant on 22 July 2002. At the dinner, Hoi Tung suggested selling all his shares in the Plaintiff to the Defendant for $30 million for the reason that he could no longer do business with the Defendant because the Defendant was terrible. Mrs Yeung and Miss Yeung left the dinner with indignation. 78.Towards the end of July 2002, the Defendant eventually submitted to Hoi Tung’s escalating pressure and agreed to retire if conditions were agreeable. After some negotiations with the Defendant, Hoi Tung worked out a proposal for payment of retirement benefit in consideration for the Defendant’s retirement. The proposal was agreed in principle at a board meeting on 7 October 2002 and approved with some revision at a subsequent board meeting on 10 October 2002. The payments were to be made by instalments. No condition was set down for the payment of the retirement benefit. In the meantime, the Plaintiff stopped its purchase of white pepper powder from Wui San Tong in November 2002. The Defendant formally retired with effect from 1 January 2003. 79.On 27 February 2003, when the Defendant collected payment for his retirement benefit, Hoi Tung demanded to purchase the Defendant’s shares in the Plaintiff for $6,099,600. The Defendant counter-offered to sell for $13,500,000. No agreement was reached. His relation with Hoi Tung deteriorated further. 80.On 12 March 2003, Cheng requested the Defendant to attend the Plaintiff’s office for a meeting on 13 March 2003, but without telling him the purpose of that meeting. The Defendant declined and suggested that the meeting be postponed as he had to assist his wife in moving her clinic on that day. 81.At about the same time, the Plaintiff stopped all spice purchases from Wui Sang Tong and stopped payment of the Defendant’s retirement benefit which fell due on 5 April 2003. Following that, Miss Yeung resigned from the Plaintiff on 22 April 2003. 82.On 28 April 2003, when Mrs Yeung enquired about payment of the Defendant’s retirement benefit, Hoi Tung told her that he wanted to make enquiries from the Defendant about the accounts of the Plaintiff. By a letter dated 30 April 2003, the Plaintiff’s solicitors informed the Defendant that the Plaintiff was investigating into the Defendant’s involvement in the Plaintiff’s purchasing activities with Wui Sang Tong. On 15 June 2003, at a meeting among Hoi Tung, Mrs Yeung and Miss Yeung, Hoi Tung intimated that there was some confusion in the Li Yuen Account. A meeting was held on 10 July 2003 amongst Hoi Tung and Chan on the one part and the Defendant, Mrs Yeung and Miss Yeung on the other. The meeting ended abruptly when Hoi Tung and Chan failed to particularise the confusion in the Cash Account or the Li Yuen Account. In November 2003, the Plaintiff instituted the Wui Sang Tong Action. A month later, the Plaintiff instituted the present action. 83.I have assessed the credibility of all the witnesses and made finding of fact. Having set out all these facts in their proper context, the following inference could be drawn. In 1997, Hoi Tung, the Defendant and the other directors of the Plaintiff started an arrangement to defraud the Inland Revenue Department by evading tax. The illegal activities involved in the arrangement were recorded in the Cash Account and Li Yuen Account kept by the Defendant. Since May 2002, Hoi Tung started to pressurise the Defendant to retire from the Plaintiff’s board. Having achieved that, Hoi Tung set his eyes on the Defendant’s shares in the Plaintiff and demanded to buy out the Defendant for $6,099,600. When that attempt failed, Hoi Tung exerted further pressure on the Defendant by stopping all spice purchases from Wui Sang Tong, stopping payment of the Defendant’s retirement benefit, intimating that the Plaintiff was investigating the Defendant’s involvement in the Plaintiff’s purchasing activities with Wui Sang Tong, intimating inquiries into the Li Yuen Account previously kept by the Defendant and eventually the institution of the Wui Sang Tong Action. All those actions were retaliations for the Defendant’s refusal to sell his shares. A month later, Hoi Tung made up a case that the payment of retirement benefit to the Defendant was subject to two conditions, when no such conditions had been discussed at the board meetings on 7 and 10 October 2002. The Defendant’s failure to attend the meeting on 13 March 2003 was a fortuitous event which Hoi Tung used to frame up a case of breach of conditions of the Agreement. The nine queries raised by Chan were not bona fide queries. They had never been raised with the Defendant, but were false allegations created for the purpose of further supporting a fabricated case of breach of condition against the Defendant. conclusion The Plaintiff’s claim 84.On the first issue, I find that the Agreement was an agreement for payment of retirement benefit in consideration for the Defendant’s retirement from the board of the Plaintiff and it was not a condition of the Agreement that the Defendant would sign any documents of the Plaintiff or would explain the affairs handled by him when reasonably required by the Plaintiff. On this finding of fact, it must necessarily follow that the Plaintiff has failed to prove its case, the Plaintiff’s action must be dismissed and the Defendant’s counterclaim be allowed. 85.On the contrary hypothesis that those conditions were terms of the Agreement, the Defendant’s failure to attend the meeting on 13 March 2003 and to pass a resolution in respect of Yuben would be a breach of the Agreement. As for the alleged failure on the part of the Defendant in answering queries, on my finding of fact, the Plaintiff had not raised any queries at the meeting on 10 July 2003. Even if those nine queries had been raised, they were not genuine and not reasonably raised as required to be answered at all. The Defendant was not in breach of this condition of the Agreement. 86.Even on this contrary hypothesis, the Plaintiff is not entitled to recover payments already made under the terms of the Agreement, unless the conditions were conditions precedent to the payments being made or if there was a total failure of consideration. The Plaintiff has not pleaded that those conditions were conditions precedent. Even assuming it was a term of the Agreement that the Defendant would sign the Yuben document, the breach did not go to the root of the Agreement, which was the Defendant’s retirement from the Plaintiff’s board. In my view, the Agreement had been substantially performed by the Defendant retiring from the board with effect from 1 January 2003. Thus, even if the Defendant was in breach by failing to execute the Yuben document, the breach was not a fundamental breach and there was no total failure of consideration. The Plaintiff is only entitled to such damages as it could prove. The Plaintiff promptly removed the Defendant from the board of Yuben and caused the necessary resolution to be passed by a newly constituted board within nine days of the scheduled meeting. The Plaintiff has not proved any damage it suffered as a result of the Defendant’s breach. Any damages to be awarded for such breach would only be nominal. Thus, even on the contrary hypothesis, the Plaintiff is not entitled to recover the payments made. The Defendant’s counterclaim 87.In respect of the Defendant’s counterclaim, the Defendant has wholly performed his part of the Agreement. The Defendant was not in breach of any conditions of the Agreement. There is no dispute that the Defendant was owed the outstanding balance of $2,617,666.66. He is hence entitled to judgment for this amount with interest. The total sum of $2,617,666.66 was payable in various amounts at different times. The third instalment of long service payment in the amount of $571,666.66 and special payment in the amount of $100,000 were payable on 30 June 2003. Director’s fees at the rate of $69,500 per month for the balance of 28 months were payable monthly with effect from 1 April 2003, totalling $1,946,000. Accordingly, I award interest to be paid on the sum of $671,666.66 with effect from 30 June 2003 at judgment rate, on the sum of $1,946,000 with effect from 1 April 2003 until 30 June 2005 at half judgment rate and thereafter at judgment rate. Conclusion 88.For the above reasons, the Plaintiff’s claim is dismissed and judgment is entered in favour of the Defendant on his counterclaim in the amount of $2,617,666.66 with interest in the above terms. 89.The entirety of the Plaintiff’s case is fabricated. The pleaded conditions of the Agreement never existed. The alleged queries in respect of the Defendant’s handling of the Li Yuen Account had been raised. They were afterthoughts fabricated as an excuse for not paying the Defendant his retirement benefit and for recovering payments already made. The action was malicious. The trial was unduly prolonged by the numerous irrelevant issues raised by the Plaintiff. It is a proper case for costs to be ordered on an indemnity basis. I therefore make an order nisi that the Plaintiff shall pay the Defendant’s costs of this action on an indemnity basis, to be taxed if not agreed.
Mr Maurice J Chan, instructed by Messrs Fung, Wong, Ng & Lam, for the Plaintiff Mr Bernard Man, instructed by Messrs Philip Tsui & Jackson Cheung, for the Defendant |
Further hearings and rulings under HCA 4550/2003