Hong Kin Kau v. Perfect Promotions Co and Others

DCCJ2227/1998

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2227 OF 1998

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BETWEEN

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Coram: Deputy District Judge Frederick HF Chan (in Chambers open to public)

Date of hearing: 31^st October 2008

Date of ruling: 31^st October 2008

Date of handing down reasons for ruling: 3^rd November 2008

REASONS FOR RULING

Introduction

1.The story began in 1994 when Mr. Hong Kin Kau (the Plaintiff) and Mr. Tsang Kwok Wai (the 2^nd Defendant) agreed to form a partnership to transact fresh-water pearls through a firm named Perfect Promotion Co. (the 1^st Defendant). Things however did not go well as anticipated and their relationships turned sour. In 1998, they fell out with each other and were embroiled in this piece of acrimonious and adversarial partnership dispute.

2.In the recent Court of Appeal’s decision[1] of Heybridge Limited & Others v. Chan Sze Sze Gabrielle, CACV172/2007, unreported, 28^th September 2008 (“the Heybridge’s Case”), Mr. Justice Lam sagely stated at p. 13 that:

“33.           … The outcome of this appeal illustrates a fundamental principle of our law on partnership: in between the partners, upon dissolution of the partnership, an account has to be taken … For those who need enlightenment, reference can be made to the judgment of Lord Millett in Hurst v. Bryk [2000] 2 All ER 193, at p. 202 to 203. This is not the first time I encounter partners claiming against each other regarding partnership affairs as if it is a simple claim for damages arising out of a single transaction. Those advise and conduct litigations relating to partnership disputes should always bear in mind that it is wrong in principle to adopt a piecemeal approach in sorting out the position between partners in the winding up of the affairs of a firm …”.

3.About 5 years ago and in Leung Wing Yiu (suing in his capacity as partner of Jeb Shun Photographic Company and Jeb Shun Output Service Company) v. Siu King Yuen & Others [2003] 2 HKLRD 21 (“the Leung Wing Yiu’s Case”), Mr. Justice Lam[2] heralded the message at pp. 28-29 that:

“10.           … In my judgment, one has to start with the requirement that a partnership account has to be taken and the rationale behind. The rule has been stated by Warrington LJ in Meyer & Co. v. Faber (No. 2) [1923] 2 Ch 421 at p. 439:

‘… in an action by one or more partners, whether using the name of the firm … or not, against a co-partner alleging that money is due from the defendant to the plaintiffs in connection with the affairs of the firm, whether the claim arises in respect of transactions during the continuance of the partnership, or in the course of winding up of its affairs after dissolution, the only relief which the plaintiff could obtain would be an account of the dealings and transactions of the partners’.

And further at p. 441,

‘The result is that, in my opinion, neither moneys in the hands of a partner, as the result of his collection and distribution of the assets of a dissolved partnership, nor moneys standing to his debit in the books of the firm, are moneys due to, or held by him for, the firm or proprietors thereof. They could not be recovered by an action in the name of the firm, nor even by action by the other partners, except after an account has been taken of the dealings and transactions of the partners’.

The rationale of this rule can be found at p. 437, when Warrington LJ referred to the submissions before the court,

‘Secondly, he says further that money got in by one of the partners in a firm can only be recovered in an action by the other partners for an account of the dealings and transactions of the partners in which it would be open to the defendant to show that the money alleged to be in his hands belongs wholly or partially to himself, or even that a larger sum is due to him. That objection is of a substantial character’.

(See also para. 23-72 of Lindley & Banks on Partnership, 17^th Edn. stating the same rationale for the rule).

11.           To the same effect is the judgment of the Privy Council in Gopala Chetty v. Vijayaraghavachariar [1922] 1 AC 488. It was held in that case that if a partnership has been dissolved but no account has been taken, the proper remedy of a partner in respect of an asset received by another partner is to have an account taken. There was no separate right to sue for the recovery of the asset or share of it. Hence, if the remedy for an account was time barred, the partner cannot recover by suing for a share in an item as part of the partnership asset.

12.           Having regard to such rule and its rationale, it is clear that it is the right of one partner to demand for an overall account to be taken in respect of partnership dealings when he is sued by another partner regarding a specific asset or item in the partnership account. This is particularly so in the winding up of the partnership. In essence, it is a right of set off” (emphasis added).

4.I entirely agree with what was succinctly said by Mr. Justice Lam and would respectfully apply those legal principles accordingly in the present case[3].

The history

5.For the ease of reference, I would summarize the essential backgrounds to the present case as follows:

•   On 9^th February 1998, the Plaintiff issued the writ of summons in DCCJ. No. 2227/1998 against the Defendants;

•   The Statement of Claim was a home-made one and written in manuscript Chinese;

•   The Plaintiff alleges that he had paid a total sum of HK$100,844 on behalf of the 1^st Defendant (“the Partnership”) on various dates and he, therefore, asks the Defendants to recoup the said sum to him;

•   He says that the 2^nd Defendant was his co-partner in the partnership. By then, the Plaintiff was acting in person without legal representation;

•   Indeed, the Plaintiff also cited himself as the 3^rd Defendant as he admits that he was also a partner of the Partnership;

•   The Plaintiff’s net claim against the 2^nd Defendant was HK$50,422 whereas his net claim against the 1^st Defendant (the Partnership) was HK$100,844;

•   On 13^th March 1998, the 2^nd Defendant (through his solicitors, Messrs. Hui & Lam) filed his Defence & Counterclaim (‘the Counterclaim”);

•   He alleges that there was a credit balance of HK$80,000 in the Partnership’s 2 bank accounts;

•   The Plaintiff and 2^nd Defendant had carried out the business of the Partnership which, in the main, trades in fresh-water pearls;

•   They shared the loss and profit equally;

•   Like the Plaintiff, he had also made payments on behalf of the Partnership which totaled HK$302,051.20;

•   The Partnership only reimbursed him for HK$200,000;

•   He counterclaims the short-fall of HK$102,051.20 from the Plaintiff.

6.Here, it is crucial to note that:

(a)    The Plaintiff and 2^nd Defendant were equal partners in the business of the Partnership;

(b)   By way of the present legal proceedings, both of them want an account to be taken as to their respective entitlement of reimbursements by the Partnership and the other partner;

(c)    The Counterclaim of the 2^nd Defendant exceeds the Plaintiff’s claim by HK$51,629.20[4].

7.It is also common ground between the parties that the Partnership was dissolved in late December 1995. A short procedural narrative of the case may be tabulated thus:

The procedural skirmishes

8.As matters stand, the pleadings are closed, the parties have discharged their respective obligations of discovery of documents and filing and serving the relevant witness statements. However, on 13^th August 2008, the 2^nd Defendant decided to issue an inter parte summons (“the Summons”) to mount a two-prong attack against the Plaintiff’s claim:

(a)    Because the Plaintiff’s claim has been cocooned in an inertia of about 10 odd years, it should be struck out by the Court for want of prosecution under the Court’s inherent jurisdiction;

(b)   The Plaintiff’s claim should be dismissed by the Court under Order 18 r. 19 of the Rules of the District Court (Cap. 336, Sub. Leg.) (“RDC”) in view of the inordinate and inexcusable delay.

9.According to the Court’s file, the Summons was made returnable before District Court Master S. T. Poon who advised the parties that regardless of the outcome of the Summons, the Court may (at the end of the day) decide that an account should be taken in respect of the Partnership. Undeterred by that piece of timely advice, the parties insisted that the Summons should be determined once and for all and the learned Master gave some useful directions on the filing of affirmation evidence. With a view to jockeying for their respective and rival positions, the Plaintiff and the 2^nd Defendant have filed a number of affirmations.

The key issue

10.When the parties appeared before me on 31^st October 2008, they were in consensus that the fundamental issue for the Court to decide is:

“Whether, in the circumstances of the present case, the Court should dismiss the Plaintiff’s claim for want of prosecution” (“the Issue”)?

The 2^nd Defendant’s stance

11.Under the Summons, the 2^nd Defendant argues that:

•   The Plaintiff had been guilty of inordinate and inexcusable delay;

•   The extant disputes concerned the Partnership’s business which was conducted from 1994 to December 1995;

•   His memory of the crucial details and key events are fading fast and he has lost some documents;

•   His previous attempts in 1998 to appoint a firm of auditors to conduct an audit of the accounts of the Partnership had been refused by the Plaintiff;

•   In particular, his ex-solicitors (Messrs. Hui & Lam) issued a letter dated 7^th December 1998 to the Plaintiff and enclosed the names of 6 firms of local auditors to the Plaintiff yet he failed to pick one;

•   The Partnership had been dissolved for a long time;

•   He now asks the Court that a trial date be fixed for the determination of the present case and said poignantly:

“為了不再拖延，我懇求法院安排一個審訊的日期以了結這案件。”

The Plaintiff’s standpoint

12.The Plaintiff does not take issue with the fact that 10 years are a long period of delay but argues (through his affirmations) in the following fusillade that:

•   On 24^th December 1998, he had provided the names of another 6 firms of auditors to the 2^nd Defendant’s solicitors;

•   The 2^nd Defendant did not designate one of them as the auditor to conduct an audit of the accounts of the Partnership;

•   The 2^nd Defendant is equally to be blamed for dragging his feet to proceed with expedition the Counterclaim;

•   There is inordinate and inexcusable delay in the Counterclaim on the part of the 2^nd Defendant;

•   If the Plaintiff’s claim is to be dismissed by the Court, the Court should also dismiss the Counterclaim;

•   Put it bluntly, given that both the claim and the Counterclaim are inextricably linked, they should suffer the same fate – both the Plaintiff’s claims and the Counterclaim should perish together and end in common ruin under the Summons.

13.I interpolate here to say that neither the Plaintiff nor the 2^nd Defendant had taken the initiative of approaching the District Court to seek for further directions and orders regarding the audit exercise under the Order.

14.When considering the Issue, I found the Court of Appeal’s decision of Hymer v Mass Transit Railway Corp. & Others [2000] 2 HKLRD 589  (“the Hymer’s Case”) to be very instructive. There, the plaintiff worked for the Mass Transit Railway and suffered dysbaric osteonecrosis. He issued legal proceedings on 31^st August 1989 against the defendants to claim for damages for personal injury. The case only proceeded in fits and starts. On 18^th May 1999, the defendants applied to dismiss the action for want of prosecution and succeeded at first instance. The plaintiff’s subsequent appeal was allowed by the Court of Appeal. The plaintiff’s action was restored and put back on track.

15.In giving the unanimous judgment, Mr. Justice Riberio JA[5] (as he then was) held that a delay of more than 10 years in that case was very substantial and inordinate. His Lordship stated that:

“Whether a fair trial has become impossible

…

As soon as someone, particularly a professional man, is told that he is to be sued for negligence, it seems to me a matter of commonsense that he should use all reasonable diligence to review his position, to secure any evidence that may be relevant (by preserving documents and proofing witnesses) and to seek advice if necessary. Such a defendant can reasonably be regarded as being just as aware as anyone else that time is likely to dim his recollection of the events in question and that witnesses may disperse and documents lost. He can therefore be expected, particularly when considering the claim with his advisers, to record any relevant recollections at that stage and to take at least some basic steps to preserve relevant evidence.

This was the view taken by Hirst LJ in Hunter v. Skingley [1997] 1 WLR 1466 as follows:

I first consider diminution or dimming of memory. That is essentially a function of time. The first period, 1988 to 1990, over two years, is clearly very important in this context, as that would be the time when memories would be freshest and when full statements can and should have been taken from the witnesses by the defendant’s solicitors. I would add that, in the case of the three missing witnesses, had that been done there would have been statements which would no doubt have been admitted under the Civil Evidence Act 1968 (at p. 1472).

… the prejudice for which the plaintiff was responsible is, to my mind, at most marginal and notably less than the defendant’s contribution, especially in relation to the loss of memory during the first two years when collections must have been freshest and when statements should have been taken from everybody, including the three missing witnesses (at p. 1473)

...”.

16.It is self-evident from the Hymer’s Case that in respect of a defendant’s claims that a fair trial of an action was no longer possible, the Court must examine the circumstances of that particular case very carefully and decide whether a fair trial could still be conducted for both the plaintiff and the defendant. Needless to say, the Court will also scrutinize with circumspection the defendant’s claims that he/she was prejudiced by fading memories or missing documents or witnesses.

Claim v. Counterclaim

17.I have directed the parties’ attention of the English Court of Appeal’s decision[6] of Barrington Black Austin & Co. v. Andrew Dickson [1997] EWCA Civ. 1678 (unreported, 13^th May 1997). There, the English Court of Appeal affirmed that the court has the inherent jurisdiction to dismiss a claim of a plaintiff for want of prosecution and also to dismiss the counterclaim of the defendant on the same basis. Lord Justice Millett (as our NPJ of the Court of Final Appeal then was) pithily observed at pp. 5-6:

“Order 25, rule 1(4) provides:

‘If the plaintiff does not take out a summons for directions in accordance with the foregoing provisions of this rule, the defendant or any defendant may do so or apply for an order to dismiss the action’.

In Zimmer v. Zimmer [1968] 1 WLR 1349, there were cross-applications to dismiss for want of prosecution. The court struck out both action and counterclaim. It struck out the action for the failure to comply with Order 25, rule 1(4). It struck out the counterclaim under the inherent jurisdiction. Insofar as it is suggested in Owen v. Pugh[7] that the counterclaim was struck out for breach of Order 25, rule 1(4), the suggestion appears to me to be inconsistent with the express language of Order 25, rule 1(6) and to have arisen from a misunderstanding of what the court did in Zimmer v. Zimmer. In Zimmer v. Zimmer, the action and counterclaim were mirror images of each other. If the action succeeded the counterclaim must fail, and vice versa. In such a case it must seldom if ever be appropriate to dismiss one and leave the other standing, since this would achieve no useful purpose.

In the present case the plaintiffs sue to recover unpaid fees of £8,000 or so and the defendant pleads a defence of set off and counterclaim for £200,000. Most (though not, I think, all) of the matters relied on in the counterclaim were also pleaded by way of defence. The judge struck out the counterclaim. The defendant had not applied to strike out the action and the plaintiff had not then, as I understand it, undertaken to submit to an order striking out the action.

So the result of the judge’s order was to leave the action and defence standing but not the counterclaim. In a case where the plaintiff has himself been guilty of inordinate delay, this would scarcely be just. Moreover, it would serve little purpose, because virtually all the issues in the counterclaim would still remain live in the action. The only effect of the order would be to deprive the defendant of his claim insofar as it overtopped the claim against him.

Today, however, the plaintiff has offered to submit to an order dismissing his claim if the appeal is dismissed. This is a most material consideration. On this footing the counterclaim can sensibly be treated in substance as a true cross-claim. Agreeing, as I do, that a counterclaiming defendant is not guilty of breach of rules by failing to take out a summons for direction to or apply to strike out the action for want of prosecution, I would nevertheless hold that he is responsible for a failure to bring his claim on for trial with proper diligence. If he takes no steps to do so, he takes the risk that his counterclaim may be dismissed for want of prosecution under the inherent jurisdiction. In such circumstances, the most material considerations appear to me to be the length of the delay and the amount by which the defendant’s claims exceeds the plaintiff’s claim against him, together with the effect of the delay on the prospect of there being a fair trial of the counterclaim. The greater the amount by which the cross-claim exceeds the claim, the greater the responsibility upon a counterclaiming defendant to take such steps as are open to him to bring his claim for trial with diligence.

In a case as the present, where the delay is at least three years, the defendant is defending a claim for £8,000 by the plaintiffs but making the counterclaim some £200,000, the inference that the defendant was unwilling to progress the action himself unless the action came on for trial is well nigh irresistible. Where in addition the delay has prejudiced the plaintiff’s case, there is a strong case for dismissing the counterclaim.

In the absence of the plaintiff’s undertaking to submit to the action being struck out, I would not myself have struck out the counterclaim. But in the circumstances that the plaintiff has now given such an undertaking, I agree that the order should be varied by striking out both action and counterclaim” (my emphasis).

18.Similarly, as I have alluded to above, the Plaintiff’s claim and the Counterclaim of the 2^nd Defendant in the instant case are both aiming at getting their monies back from each other and the Partnership. As I have attempted to articulate, the legal footing of the Plaintiff’s claim and the Counterclaim of the 2^nd Defendant is a shared one of set-off and account.

19.At the hearing, I made an enquiry with the 2^nd Defendant (who was acting in person without legal representation) whether he would agree or undertake to have the Counterclaim be dismissed if the Court were to grant the relief he sought under the Summons and dismiss the Plaintiff’s claim for want of prosecution. The 2^nd Defendant gave a negative answer and maintained that he wanted to keep the Counterclaim alive for the Court’s determination as he was keen to have an account of the Partnership to be taken by auditors.

The pleaded case

20.As I see it, the pleaded cases of the Plaintiff and the 2^nd Defendant were framed wrongly and failed to take into account the legal principles of partnership law which I have summarized above. When properly analyzed, the Plaintiff and 2^nd Defendant are angling for the common goal i.e. same relief or remedy:

“An account of the Partnership should be taken by the Court”.

21.It is crucial to bear in mind the following statutory provisions of the Partnership Ordinance (Cap. 38) (“PO”):

“37.           Dissolution by the court

On application by a partner, the court may decree dissolution of the partnership in any of the following cases –

… (f) whenever in any case circumstances have arisen which, in the opinion of the court, render it just and equitable that the partnership be dissolved”.

22.Section 46 PO also provided detailed provisions on how an account of the partnership should be settled and the asset be distributed among the partners.

23.Against that statutory backdrop and heeding the judicious words of Mr. Justice Lam in the Heybridge’s Case, I would resort to the House of Lords’ decision of Hurst v. Bryk [2002] 1 AC 185 (“the Hurst’s Case”) where Lord Millett said:

“By entering into the relationship of partnership, the parties submit themselves to the jurisdiction of the court of equity and the general principles developed by that court in the exercise of its equitable jurisdiction in respect of partnerships (at p. 196) …

When a partnership is dissolved, its affairs must be wound up. This is the responsibility of the partners themselves (at p. 196) …

It would, in any event, be wrong in principle to have regard to the parties’conduct when taking the dissolution account. This is clearly the case where the account is taken in order to determine their respective entitlements to the surplus assets. These are in the nature of rights of property, and no matter how badly a partner may have behaved towards his partners he is not to be deprived of his accrued property rights. But the same must apply where there is a net deficit. It would take very clear words in the partnership agreement to require liabilities to be taken into account in ascertaining a partner’s entitlement to the partnership assets to the extent of reducing his entitlement to nil but no further. The injustice of exonerating the innocent partner from his share of the firm’s liabilities and throwing it upon the wrongdoers may not be apparent in the present case where there are 19 wrongdoers and only one innocent partner. But it would be very obvious in the converse (and probably more usual) case where there were 19 innocent partners and only one wrongdoer (at pp. 197-198)”(Emphasis added).

24.I have not lost sight of section 43 PO where it was provided that:

“Rights where partnership dissolved for fraud or misrepresentation

Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled –

…

To be indemnified by the person guilty of the fraud or making the representation against all the debts and liabilities of the firm”.

25.The pleaded cases of the Plaintiff and the 2^nd Defendant do not rely on section 43 PO. I also note that in their respective affirmations under the Summons, the Plaintiff and 2^nd Defendant have traded allegations of fraud and forgery of some invoices and commercial documents. With respect, I would observe that in order to advance any allegation of fraud, the pleadings must be amended to include the new pleas of fraud with sufficient particulars. Any allegations of fraud or dishonesty should not be housed in the affirmations.

26.So far, the Plaintiff and the 2^nd Defendant have not seen it fit to amend the pleadings to adduce new pleas of fraud and for the purpose of dealing with the Summons, I would firmly disregard those bald and bold allegations of fraud and forgery.

Case management - the additional power

27.It is to be recalled that the Order was made by Her Honor Judge Barnes (as Mrs. Justice Barnes then was) back in 1998 in the context of a pre-trial review. In fact, the District Court does enjoy some additional power on case management of civil cases under O. 34 r. 2 RDC which stipulates that:

“2. Plaintiff’s default in applying for pre-trial review

Where the plaintiff fails to apply for a pre-trial review within the period fixed by a direction made … or otherwise, any defendant may apply for a pre-trial review or may apply to the Court to dismiss the action for want of prosecution and, on the hearing of any such application, the Court may order the action to be dismissed or may make such order as it thinks just” (emphasis added).

28.The Summons was assigned to me and pursuant to O. 34 RDC, I have taken the liberty of consulting the Listing Office of the District Court and managed to locate the following dates for a Pre-trial Review and a 3-day trial:

Pre-trial review:      13^th November 2008;

3-day Trial: 18^th, 19^th and 20^th November 2008.

Change of tack

29.At the hearing, I put those dates to the Plaintiff and 2^nd Defendant and urged them to seriously consider taking up the trial dates to ventilate their respective cases in a trial proper with viva voce evidence and submissions bearing in mind that (after considering carefully the Court’s file) the present case is ready for trial.

30.Thereafter, the parties advisedly decided to opt for those dates for trial and it was also mutually agreed that the Summons should be withdrawn by the 2^nd Defendant with costs be reserved.

Orders

31.In the circumstances, I made an order that:

(a)    The 2^nd Defendant be granted leave to withdraw the Summons and another inter parte summons dated 28^th October 2008;

(b)   The costs of the said two summonses be reserved;

(c)    The present case be adjourned to 13^th November 2008 for a pre-trial review of one hour before a bilingual District Court Judge;

(d)   The present case is also adjourned to 18^th and 19^th November 2008 for full trial (with 20^th November 2008 be reserved) before a bilingual District Court Judge;

(e)    3 days before the 1^st day of the trial, the Plaintiff and 2^nd Defendant should file and serve (i) an agreed bundle of pleadings and court documents and (ii) an agreed bundle of documents and (iii) an agreed bundle of witness statements (with Chinese translations, if any);

(f)     3 days before the 1^st day of the trial, the Plaintiff shall file and serve a written chronology of events, a written opening and list of authorities.

Postscript

32.Before departing from the present case, for whatever value it may have, I would take this opportunity to express my most sincere wish that the parties should deal with the case expediently and efficiently given that a trial on the Fixture List of the District Court has now been made available to them.

Representations:

Mr.Chow Man Kui of Messrs. Chow & Choy, solicitors, for the Plaintiff;

2^nd Defendant appeared in person.

[1]Comprising of Mr. Justice Rogers V-P, Mrs. Justice Le Pichon JA and Mr. Justice Lam J.

[2]His Lordship was by then sitting as a Deputy High Court Judge.

[3]The self-same legal principles on partnership law were faithfully applied by Her Honor Judge M. Ng in her meticulous and repertoire judgment of Ho Lai Ming trading as Tung Hing Transportation Company v. Chu Chik Leung & Another, DCCJ2739/2003, 20^th September 2007, which regrettably was not reported.

[4]= HK$102,051.20 – HK$50,422

[5]The late Godfrey VP and Rogers JA (as he then was) in concurrence.

[6]Comprising of the Lord Chief Justice, Lord Bingham (as he then was), Hirst LJ and Millett LJ. (as he then was).

[7]See: [1995] 3 All ER 345.