Jenho Development Ltd v. Pensonic Technology (HK) Ltd
Read the full judgment text of DCCJ 4402/2009 on BabelCite. This District Court judgment was delivered on 17 December 2012.
1. The plaintiff (“ Jenho Development ”) commenced the present action against the defendant (“ PenTech (HK) ”) for cost of goods sold and delivered. PenTech (HK) then commenced third party proceedings against the 1 st third party (“ Tse ”) and the 2 nd third party (“ EXA ”). The claim and the counterclaim in the main action have been settled. This is the trial of the third party action.
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DCCJ 4402/2009 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION CIVIL ACTION NO. 4402 OF 2009 ________________________
Before: His Hon Judge Leung in Court Date of Hearing: 30 and 31 July; 1 to 3 August 2012 Date of Judgment: 17 December 2012 ________________________ J U D G M E N T ________________________ 1.The plaintiff (“Jenho Development”) commenced the present action against the defendant (“PenTech (HK)”) for cost of goods sold and delivered. PenTech (HK) then commenced third party proceedings against the 1st third party (“Tse”) and the 2nd third party (“EXA”). The claim and the counterclaim in the main action have been settled. This is the trial of the third party action. BACKGROUND 2.Much need to be said about the background. It started with Chew Chuon Jin, Dixon (“Chew”), Cheung Hok Kuen, David (“Cheung”) and Tse who came to know each other as students in the same university in Taiwan in the late 1980s. Chew is a Malaysian national, whose family’s business is based in Penang, Malaysia. His family’s group of companies in Malaysia include:
3.In 1995, Chew and Tse incorporated Pensonic (Hong Kong) Corporation Limited (“PenCorp (HK)”) in Hong Kong. PenCorp HK carries on the business of marketing the “Pensonic” brand of electrical and electronic products, including home appliances. 4.In 2004, Tse and Cheung incorporated PenTech (HK) in Hong Kong, which soon became a wholly owned subsidiary of PenTech (Malaysia). PenTech (HK) was set up primarily for the development and marketing of a new product, namely, heater bag for delivering take-away hot food items to the customers. PenTech (HK) shares the same office and staff of PenCorp (HK). 5.Subsequently, Pensonic Trading (Shenzhen) Company Limited (“Pensonic (SZ)”) and Pensonic Technology (Zhuhai) Limited (“PenTech (ZH)”) were set up in Shenzhen, the Mainland. Pensonic SZ was a wholly owned subsidiary of PenCorp (HK) and was the operating arm of PenCorp (HK) in the Mainland. PenTech (ZH) was principally engaged in the development and marketing of the heater bags. 6.Tse and Cheung were directors of PenCorp (HK) and PenTech (HK). Both were officially the employees of the PenCorp (HK). Tse was also the authorised representative (法人代表) of Pensonic (SZ). Chew is the Group Managing Director and a director of PenCorp (HK). Chew resides in Malaysia; but would pay occasional visits to Hong Kong. The daily operation and management of the related companies in Hong Kong and the Mainland were left into the hands of Tse and Cheung. 7.PenTech (HK) used to place purchase orders for the heater bags to the companies of Ng Koon Man (“Ng”), who is Tse’s brother in law. These included Jenho Limited (“Jenho”) and its branch business Kei Lok Handbag Company (“Kei Lok”). In May 2008, Jenho formed Jenho Development; and PenTech (HK) began placing purchase orders for the heater bags with Jenho Development. 8.The principal customer of PenTech (HK)’s heater bags was one Chaogu Business Development (Shanghai) Co Ltd (“Chaogu”), which was the agent of a group known as Yum! China (“Yum”). Yum runs chains of restaurants and eateries including the better known “KFC” Restaurants in the Mainland. 9.In late November 2008, the Malaysian head office appointed Kang Pang Kiang Alex (“Kang”) as the new Group Chief Financial Officer. Kang soon started to look into the affairs of the group’s associated companies in Hong Kong and the Mainland. This ended up in a surprise visit by the team from Malaysia led by Chew and Kang with others to the office of PenCorp (HK) and PenTech (HK) on 11 May 2009. The visit did not go smoothly and the police was summoned. 10.Control of the companies has since been taken over from Tse and Cheung. Tse was removed from the directorship of the companies in May 2009. By then, Cheung had also resigned from the directorship. Tse and Cheung, together with others, were dismissed from employment by PenCorp (HK). 11.The group then took Tse, Cheung and others to the court. In August 2009, PenCorp (HK) and Pensonic (SZ) as the plaintiffs commenced action in the Court of First Instance (“HCA 1707/2009”). Besides Tse and Cheung, Lau Siu Ping Kenneth (“K Lau”) and Wong Tin Yew Marcus (“Wong”) were among the defendants named. K Lau was the Accounting Manager of PenCorp (HK) until his dismissal in May 2009 while Wong was the Art Director/Designer of PenCorp (HK) until he left the company earlier in January 2009. 12.In the meantime, these defendants in HCA 1707/2009 whose employment with PenCorp (HK) had been terminated filed their respective claims against their former employer in the Labour Tribunal. Their claims were subsequently transferred to the Court of First Instance to become HCA 2036/2009, HCA 2037/2009 and HCA 2113/2009 respectively. They were eventually ordered to be tried together with HCA 1707/2009. Where appropriate, they will collectively be referred to as the High Court actions. HCA 1707/2009 13.In HCA 1707/2009, PenCorp (HK) and Pensonic (SZ) found their claim against Tse and the other defendants on the following bases:
THE PRESENT ACTION The claim 14.In October 2009, Jenho Development commenced the present action. It claims against PenTech (HK) for cost of goods sold and delivered as well as cost of repair of goods at PenTech (HK)’s requests. The goods in question were precisely the heater bags that PenTech (HK) in turn sold to Chaogu on behalf of Yum as mentioned above. 15.The claim concerns the following purchase orders and invoices:
The defence and counterclaim 16.By pleading, PenTech (HK) repeats the background mentioned above including the commencement of HCA 1707/2009. It is contended that the above purchase orders were placed pursuant to a conspiracy, to which Jenho Development was a party, to injure PenTech (HK). By way of counterclaim, PenTech (HK) claims against Jenho Development, as a co-conspirator, for damages; and an account of the sums received in respect of the purchase orders so placed pursuant to the alleged conspiracy. 17.PenTech (HK) further contends that Jenho Development, Tse and others conspired together to commit malicious falsehood against PenTech (HK). By way of counterclaim, PenTech (HK) claims against Jenho Development, as a co-conspirator, damages for loss of profits from orders from potential customers or the alternatively the opportunity to make such profits as a result of the tort. It also seeks an injunction restraining Jenho Development from continuing or repeating the alleged malicious falsehood. The third party claim 18.By pleading, PenTech (HK) essentially repeats its allegations in its defence and counterclaim, now against Tse as the third party. For the alleged conspiracy to injure, PenTech (HK) claims against Tse, as a co-conspirator, for damages. 19.There was allegedly lack of record of delivery of the heater bags despite payments having apparently been made by PenTech (HK). There was also allegedly lack of record of income from the sale of the heater bags. PenTech (HK) contends that Tse has misappropriated such income from sale and therefore claims for an account by Tse of such sums allegedly misappropriated and the secret profits allegedly received in fraud of PenTech (HK). In respect of such sums, PenTech (HK) seeks a declaration that Tse is a resulting or constructive trustee. 20.For the alleged conspiracy to commit malicious falsehood in conjunction with EXA, the 2nd third party, PenTech (HK) claims against both Tse and EXA for damages; and injunction restraining them from continuing or repeating the alleged malicious falsehood. PECULIARITIES 21.Several features of the present case deserve attention. 22.First there are common factual allegations and claim for common reliefs against Jenho Development, Tse and EXA as parties to the same alleged conspiracy. One would have expected them to be named as defendants by way of counterclaim in the main action. But PenTech (HK) instead chose to proceed against Jenho Development in the counterclaim and then against Tse and EXA by way of third party action. 23.Now the main action has been settled whereby Jenho Development’s claim and PenTech (HK)’s counterclaim were simply discontinued. Tried now is the third party action but in reality an action on its own by PenTech (HK). Having discontinued the counterclaim against Jenho Development, PenTech (HK) nevertheless maintains the same contention against Jenho Development for the purpose of the claim against Tse and EXA; and therefore seeks the court’s determination of the allegation of conspiracy and malice against Jenho Development who is no longer a party to the trial. 24.Second, judging from the pleadings in the High Court actions and the present action, I say it is also apparent that the same conspiracy is alleged against Tse, Cheung, Lau, Wong and others in both sets of proceedings. There are of course differences; but they lie only in the specific instances of the alleged fraud, the alleged co-conspirators who are actually named as defendants and the members of the Pensonic group of companies that are said to have suffered as a result. To a material extent, the factual matrices in both actions remain in common. That the parties found it necessary to refer to the allegations pleaded in the HCA 1707/2009 during the trial here was testament to the common factual background. 25.Nevertheless the parties have maintained the separate actions. That was a conscious decision; and their legal representatives here (who are different from those acting in the High Court actions) actually confirmed to this court that they had no intention of seeking trial of this case, or issues in this case, together with the High Court actions in any way. In fact, the proceedings in the High Court actions (where all the relevant parties were named) have been left idle since late November 2010 whereas the parties here seek to bring the present action to a conclusion. 26.Third, EXA has never entered appearance. EXA was incorporated in early February 2009. But by the time when PenTech (HK) disclosed that in early October 2011, EXA had long been dissolved. The record of the Companies Registry shows that EXA was deregistered and dissolved on 30 April 2010 pursuant to section 291AA of the Companies Ordinance, Cap 32 (i.e., because the company was defunct). This fact was brought to light when Tse disclosed such public record in October 2011 at the latest. 27.Nevertheless nothing was done about the situation. Practically PenTech (HK) has since been proceeding against a dissolved company. There are the questions of whether and if yes how relief can be given against EXA, which does not exist. BURDEN OF PROOF 28.PenTech (HK) has pleaded various duties on the part of Tse as the director of the company at the material time. They include the duty to act in good faith and in the best interest of the company, to avoid conflict of interest, not to make secret profits, not to grant favour or benefit to third party, not to compete and not to act to the detriment of the company. I see no real dispute in respect of the existence of such duties. 29.However, as Mr Cheng, counsel for Tse, stressed, the case of PenTech (HK), though referring to the above general fiduciary duties of Tse, is premised upon the specific allegations of conspiracy and misappropriation mentioned above. The alleged conspiracy and misappropriation are what PenTech (HK) must prove as the key of its case. 30.Mr Cheng submitted that the more serious the allegation, the less likely it is that the event occurred, and therefore the stronger and more cogent should be the evidence before the court concludes that the allegation is established. That PenTech (HK) has the burden to prove the alleged conspiracy by evidence of commensurate cogency, I find, could not be in dispute. CONSPIRACY TO INJURE 31.The allegation is that during the period between June 2007 and March 2009, Tse and/or Cheung wrongfully and with intent to injure PenTech (HK) by unlawful means conspired and combined together with Jenho/Jenho Development and/or Ng and/or other unnamed person(s) to cause PenTech (HK) to purchase heater bags from Jenho/Jenho Development, which then sub-contracted the manufacturing of the heater bags to other manufacturers, in circumstances where PenTech (HK) was perfectly able to place purchase orders with the manufacturers direct. As a result, PenTech (HK) has allegedly suffered loss and damage. 32.PenTech (HK) has therefore pleaded conspiracy to injure and conspiracy to use unlawful means. The two are different forms of the tort of conspiracy: see Clerk & Lindsell on Torts (12th ed) at §24-91. During submission, Mr Fong, counsel for PenTech (HK), made clear that the contention of a conspiracy to use unlawful means does not apply under this heading. 33.PenTech (HK) must prove the combination of persons with the predominant purpose of injuring the company as alleged: see Lonrho Ltd v Fayed [1992] AC 448 at 464B-C; 465C; 465H-466A. For the tort of conspiracy to be complete, PenTech (HK) must also prove the resultant damage to the company as alleged: see Clerk & Lindsell (above) at §24-111. Contracting with Jenho/Jenho Development 34.According to the pleading, PenTech (HK) found its contention of the conspiracy to injure on the following bases:
35.In his evidence, Chew was adamant that he had never heard of Jenho or Jenho Development until the dispute. But according to Tse, PenCorp (HK) had shared the business address of Jenho as its registered office since 1995 for a few years. In court, Chew admitted that Tse introduced him to Ng in 1995; and that PenCorp (HK) shared Jenho’s address back then. He had visited PenCorp (HK) since. In the circumstances, that Chew had never heard of Jenho sounds less than realistic on the balance of probabilities. 36.According to Tse, the idea of developing the heater bag started in about 2001 together with the inventor Professor Andy Chan (“Chan”). In 2004, the development reached the stage where Chew was invited to invest and thus forming PenTech (HK) for such purpose. As mentioned, PenTech (HK) had since shared the office and staff of PenCorp (HK). 37.Chew was adamant that he was ignorant about the fact that purchase orders for the heater bags were placed with Jenho/Jenho Development. As mentioned, it is contended that the transactions with Jenho/Jenho Development were handled by Tse and Cheung (personally) in secret as opposed to the transactions with the other suppliers that were handled by the other staff of the company. A picture is therefore painted in that Tse and Cheung consciously kept Chew and the Malaysian associates in the dark about the involvement of Ng or Jenho/Jenho Development in the manufacturing of the heater bags. 38.On the contrary, Tse and Cheung gave evidence that Chew knew; and Cheung added in court that Chew must know from their actual discussion of the business. Whilst Chew’s evidence suggested that his visit to the Hong Kong companies remained occasional, Lau Chi Wai Simon (“S Lau”), who started to work for PenCorp (HK) and PenTech (HK) in October 2007, gave evidence that he witnessed visit by Chew to the Hong Kong companies almost every month. His evidence in this respect was not subject to serious, if at all, challenge. S Lau added that he saw Chew had meetings with Tse and Cheung in the office. 39.Specifically the various documents in connection with the orders for the heater bags placed with Jenho/Jenho Development specified that the orders were handled by various members of the staff of PenTech (HK) rather than Tse or Cheung personally as alleged. The existence of those documents, I find, is not controvertible. If really secretive as alleged, one would have expected those transactions to have been handled less in the open than that (unless all those in PenTech (HK) that handled those transactions were perpetrators of the alleged conspiracy, which is not the case alleged). 40.Considering the circumstances objectively, I do not accept the alleged complete ignorance on the part of Chew about Jenho or the involvement of Ng in the contracts for the heater bags. 41.But the key complaint of PenTech (HK) remains that contracting with Jenho/Jenho Development, whether known or otherwise, served no practical purpose whatsoever but merely to enable Jenho/Jenho Development or Ng to profit from it; and to do so at the expense of PenTech (HK) because PenTech (HK) ended up paying higher than what should have been the price for the heater bags. PenTech (HK) contends that PenTech (HK) could have contracted with the manufacturer directly and thus at a lower price. But Tse defended the decision to engage Ng’s companies. 42.As mentioned, the Pensonic group of companies, including PenCorp (HK) since the 90’s, carried on the business of manufacturing and sale of electronic and household appliances. There is no dispute that the heater bag was a new type of product; and PenTech (HK) was set up specifically for its development. Both Tse and Cheung explained that it was their lack of knowledge and experience in manufacturing the new product that caused Tse to consult Ng. Ng, through Jenho and its branch businesses, had years of experience in textile accessories and bag manufacturing. 43.There was, according to Tse and Cheung, also the concern about the protection of new technology and product when the patent was yet to be registered (which, according to the documents, did not happen until August 2008). Of course, the risk would remain when the manufacturing of the heater bags was contracted out anyway subsequently. However that does not discredit their explanation of the decision to entrust Ng, instead of any other third party, with the details of the new technology and product under development at the initial stage. 44.There is no effective challenge that Ng’s company was then entrusted with the making of prototypes/samples of the heater bags during the initial stage of development. Cheung considered that it was natural to accord Ng’s company with the priority in taking up the actual production subsequently. 45.Tse and Cheung also gave other explanations for the decision to retain Ng’s company. First, Ng always allowed a credit period for PenTech (HK) to pay for the heater bags. On behalf of PenTech (HK), it was rightly pointed out that the purchase orders placed with Jenho/Jenho Development (at least those produced at trial) invariably specified the payment of the balance of the price of each order by cash on delivery. Nevertheless, Tse and Cheung confirmed that Jenho/Jenho Development always accepted payment 3 to 4 weeks after delivery. Ng confirmed that in his evidence. There is no evidence that PenTech (HK) was ever demanded to settle the balance of the price of each order on delivery. The statements issued by Jenho Development to PenTech (HK) even provided for payment in 21 days. 46.Second, direct order by PenTech (HK) with the manufacturer might have led to relatively lower cost by saving the margin that might be earned by Jenho/Jenho Development. This was probably undeniable in principle; and Tse readily agreed in court. But Tse explained, and Ng confirmed, the role of Jenho/Jenho Development in sourcing the proper materials required for the manufacturing as well as providing technical instruction and supervision to the subcontractor factory. All those, according to them, had a bearing on the quality. 47.As to the alleged difference in cost, according to Kang, PenTech (HK) managed to contract out the manufacturing of the heater bags to another supplier at the unit price of HK$132 as opposed to HK$175 that the company had to pay under Tse’s management. The documents show that Jenho/Jenho Development used to charge PenTech (HK) the unit price of HK$140 or HK$149, never HK$175 as PenTech (HK) alleged. In court, Kang explained that the prices of HK$132 and HK$175 were hearsay from the staff of the company. Clearly there is no documentary evidence. 48.In any event, I would have thought that there were variables making up the unit price. The variation in the unit price between HK$140 and HK$149 charged by Jenho/Jenho Development, according to Tse and Ng, was due to the difference in cost of material from time to time. The alleged unit price of HK$132, even if true, was obviously not the price obtainable from an alternative manufacturer at the relevant time. 49.The terms of the contract could also vary from supplier to supplier. The terms on which PenTech (HK) allegedly managed to obtain the unit price of HK$132 from the alternative manufacturer after the dismissal of Tse and Cheung are unknown. There is no actual comparison of like with like. Mere price difference does not suffice for inferring a predominant intention to injure the company. 50.During the trial, reference was also made to the small paid up capital of Jenho and Jenho Development. The suggestion seemed to be that PenTech (HK) was exposed to the risk that its contractual counterpart would not be worth pursuing in the event of default. However there is no suggestion or evidence that Jenho/Jenho Development was financially unsound or had been unable to perform its contracts with PenTech (HK) so as to attract liability to PenTech (HK). This complaint is a non-starter. 51.Tse’s preference of Ng to seize the business opportunity may draw suspicion in view of their relationship. The decision of Tse to contract with Ng’s companies may draw criticism that it might be commercially unsound. Whilst these might be relevant considerations of Tse’s competence, they are not to be lightly equated with breach of fiduciary duty, let alone conspiracy with a predominant motive to injure PenTech (HK). 52.On the evidence, I am not satisfied that the decision to contract with Jenho/Jenho Development served no practical purpose whatsoever as alleged. Nor am I satisfied that it was a combination of persons set out to injure PenTech (HK) as alleged. Damage 53.As far as the pleading discloses (see §§7-9; 11; 13(a) of the third party statement of claim), the damage that PenTech (HK) has suffered as a result of the alleged conspiracy was the higher price that it had to pay than that payable if the manufacturer of the heater bags had been contracted directly. The evidence in this respect, or in fact the lack of it, was discussed above. 54.Though suggesting the price difference by referring to the unit price of HK$132, PenTech (HK) never sought to quantify its claim at the trial. Even assuming that PenTech (HK) managed to manufacture the heater bags at the unit price of HK$132 after the removal of Tse, I do not see how this helps proving the loss in the absence of evidence of the unit price that should have been payable at the material times had Jenho/Jenho Development not been engaged. MISAPPROPRIATION 55.According to the pleading, there is allegedly no record of delivery of heater bags or income received from the sale of heater bags pursuant to 7 purchase orders:
56.Of the above, ZPT-080185 and ZPT-080198 were actually the 2 purchase orders covered by the claim by Jenho Development in the main action. 57.As a matter of evidence, it became clear during the trial that Chew did not possess personal knowledge but essentially relied on the report of Kang in early 2009. Kang stated the following results of his investigation:
58.On the one hand, the above, according to Kang, was the result of his having checked the company records and obtained information from the staff. Sources of hearsay information allegedly obtained from the staff are actually unidentified. As none of them testified, there was also no verification. 59.On the other hand, the documents reveal that not only did the records of delivery of goods pursuant to the above purchase orders exist, but the delivery notes were also referred to in the email message from Jenho Development and within the office of PenTech (HK) in 2009. Kang had to accept that during the trial. 60.As to the shipping instruction, Kang was referring to sets of documents issued by PenTech (HK), each containing the vendor information and contact, product information and packaging instructions as well as shipment information. The information and instructions appeared to have been amended from time to time. Considering all the information contained in the sets of documents and their likely purpose as a whole, I do not consider that there was bound to be a specific time sequence between the shipping instructions and the purchase order so as to suggest the nonsense the Kang referred to. Kang apparently did not insist otherwise in this respect during the trial. 61.According to Tse and Cheung, the heater bags under the purchase orders set out in PenTech (HK)’s claim consisted of those supplied to the customer in replacement of defective ones and those indeed sold. The former were free whereas the latter did bring in business receipts. Chew denied knowledge about the replacement; but Tse and Cheung said otherwise. Cheung specifically remembered that Chew was informed once during a meeting with Chew in Malaysia towards the end of October or early November 2008; and once during another meeting with Chew at an airport. 62.A heater bag consisted of 2 major components: the heater core device and the nylon bag. Such a bag was produced and shown during the trial; but it transpired that it belonged to the later generation of the bags. According to Cheung, the early generation of the heater bags had the heater core device sewn into and as part of the bag. The bag had to be torn in order to retrieve the heater core device for repair or replacement. The later generation of the bag consisted of a compartment where the device was inserted and removable if necessary. 63.The documents reveal that since September 2008, the ultimate customer of the heater bags, Yum (or KFC in Shanghai), had complained that the heater core device caused the heater bag to burn. Investigation and inspection of the defective heater bags had been conducted. According to Cheung, attempts had been made to repair some but the early generation of the bags, for reason explained above, had to be discarded in any event. A so-called upgrade programme was eventually implemented whereby PenTech (HK) arranged to replace the heater bags with new ones to Yum. 64.According to Tse, 3,000 to 4,000 heater bags were replaced gradually under the upgrade programme. The replacement of the heater bags from “KFC” restaurants proceeded city after city in the Mainland in accordance with the time table requested by the customer. Some were delivered to Chaogu’s warehouse in Shanghai. The so-called upgrade programme was indeed documented in the contemporaneous email correspondence among PenTech (HK), Chaogu and Yum as well as minutes of meetings of these parties attended by numerous persons including Tse and Cheung. S Lau was aware of the upgrade programme as he also attended one of those meetings. 65.Irrespective of whether Chew and the Malaysian associates had been informed, the fact that the upgrade programme was discussed and implemented, I find, was beyond dispute. More importantly, the programme was conducted again in the open. 66.In respect of the heater bags that were sold, Tse and Cheung readily admitted that the proceeds of sale were paid into the personal accounts of not only Wong but also others including Tse himself. But they explained why. 67.According to Tse and Cheung, and the latter in greater detail, the arrangement was made at the customer’s request with a view to avoiding the 17% value added tax chargeable on businesses in the Mainland. Cheung added that that was widespread practice in the Mainland, though strictly unlawful. Even his present employer carried on such practice. 68.Personal accounts of various staff in the Mainland were therefore opened to receive such business income. Cheung was able to name those who had such personal accounts opened both before and after K Lau joined the company as the account manager. According to Tse, the accounts were managed by the accounting staff. He was not able to be specific about which sum had been paid into which colleague’s personal account. Nor was he able to tell the balance of his personal account. Nevertheless he did not dispute that the funds in those personal accounts, if any, should belong to PenTech (HK). 69.There is again dispute whether Chew and the Malaysian associated companies had been informed of this payment arrangement. As to that, Cheung specifically recalled an occasion on which the Malaysian holding company was requested to inject funds into such personal account of the staff to enable the company to meet its obligation. 70.The payment arrangement was not mentioned in Tse’s homemade pleading here. However it was in his pleading in the High Court actions (§36 thereof) where he was represented. True or not, this is at least not a recent fabrication. 71.More importantly, it again seems that Tse made no attempt to hide such payment arrangement. Among the documents are the minutes of meetings between PenTech (HK) and Chaogu held in Shanghai in 2008. The minutes actually recorded the parties’ resolution that Chaogu would make payment using what was described as the current payment method, namely, payment into the personal account of Tse for the goods before delivery. Tse, Cheung and other staff represented PenTech (HK) at the meeting. If the intention was to misappropriate business income or to make secret profits, one would not have expected open reference to and even record of such payment method like that. 72.I accept the explanation given on behalf of Tse. On the evidence, I am not satisfied that PenTech (HK) has proved the contention of secret profits or misappropriation of goods or business income. 73.As mentioned, Tse did not dispute that the business receipts in his personal account in the Mainland should belong to the company. Should an order nevertheless be made against Tse irrespective of whether the alleged conspiracy to injure or misappropriation is proved, as Tse was under the fiduciary duty to account in any event? In the circumstances of the present case, I think not. So Mr Cheng for Tse submitted as well. 74.This is not an action by the company against its director for an account and inquiry generally. PenTech (HK) pitches its case on the basis of the alleged conspiracy, secret profits and misappropriation of company funds (see §§13 and §(1) of the prayer of the third party statement of claim). The same could also be said in relation to the claim for breach of fiduciary duties on the basis of the alleged conspiracy to commit malicious falsehood (see §§14-17; 19 of the third party statement of claim). These are factual allegations that need to be established to trigger the right to the relief being prayed for. PenTech (HK) fails to do so. CONSPIRACY TO COMMIT MALICIOUS FALSEHOOD 75.It is alleged that in late 2008 to early 2009, Jenho/Jenho Development and/or Ng conspired and combined together with Tse and/or Cheung and/or EXA and/or other unnamed persons to commit an unlawful act, namely, the tort of malicious falsehood, against PenTech (HK) by falsely representing to PenTech (HK)’s customers that with effect from 1 January 2009, PenTech (HK) either would be or had been re-organised into EXA. Specifically the customer so falsely informed was Yum. For that, PenTech (HK) claims damages and asks for an injunction restraining the continuation or repetition of the alleged malicious falsehood. Conspiracy to commit malicious falsehood 76.Generally, for the tort of malicious falsehood, the plaintiff must prove:
See Hong Kong Wing On Travel Service Ltd v Hong Thai Citizens Travel Services Ltd [2001] 2 HKLRD 481 at 491G-492A. 77.In view of how the claim in the present case is framed, PenTech (HK) needs to prove, in addition, the alleged combination of persons consisting of, among others, Tse to commit the tort as alleged. 78.The first limb of the test of malice above needs no explanation. As to the second limb, it is not malice if the object of the writer was to push his own business, though at the same time it might incidentally injure another person’s business. To make the act malicious, it must be done with the direct object of injuring that other person’s business. The mere fact that it would injure another person’s business was no evidence of malice. Improper motive or the motive to injure has to be a direct and predominant one: see Dunlop Pneumatic Tyre Co (Ltd) v Maison Talbot & Ors (1903-4) 20 TLR 579 at 581; Hong Kong Wing On Travel Service Ltd (above) at 493H-J. 79.Having said that, I find that the real dispute raised by Tse in the present case is not whether the conduct complained about was tortuous and malicious, but whether Tse was in fact part of the alleged conspiracy involving EXA. 80.PenTech (HK) produced a copy of a printed document under the letterhead of EXA with what appeared to be a trademark “EXAHEAT”. The 3-page document consisted of 2 parts. 81.The first part of the document appears to be a letter to Alvin Ow of Yum in English and, paragraph by paragraph, what purported to be the Chinese translation. This part spoke of the re-organisation of PenTech (HK) and the establishment of EXA as the provider of its patented and exclusive delivery service solutions to Yum as its client with effect from 1 January 2009. It continued to inform Yum that with immediate effect, all documents from them would use the name of EXA and “EXAHEAT” would be the new trademark of the system of the heater delivery pouch. Yum was requested to inform its internal departments of the change of company name and contact details with effect from 1 May 2009. The new contact details consisted of what appear to be the email addresses, under the domain name of EXA, of 4 persons, namely, Chan, Tse, Cheung and Sun Xian Gjie (who was likely another staff of the Mainland office). This part of the printed document ended with name of Tse and thus appearing to be the sender. 82.Immediately following the above was the second part which appears to be a reply by Alvin Ow of Yum to Tse congratulating him on the formation of EXA. 83.The document has at the bottom of each page printed the address of EXA, which is without dispute the address of Jenho Development. 84.According to Chew, it was Alvin Ow who provided this 3-page document to him; and Ow allegedly explained that it came from Tse. Tse denied that categorically. Mr Cheng submitted that any person who wished to fabricate false information about PenTech (HK) to their advantage would have had the motive to also misrepresent that such message was endorsed by Tse as the director of PenTech (HK). 85.Company search indeed revealed that EXA was formed in February 2009 by Chan and Wong. None of Tse, Cheung and Ng was shareholder or director. In his statement, Tse admitted that in late 2008, Chan, as the inventor of the heater bag system, suggested that he planned to set up his own business using the invention; and Chan invited Tse to join. Considering his position with the Pensonic group then, Tse declined. He denied any knowledge about and involvement in EXA subsequently formed. So did Cheung. 86.According to Ng, he admitted having agreed to lend his address to Wong and Chan for their use at their request; but denied any other involvement in EXA. He also admitted allowing Tse and Cheung to use his address for correspondence in connection with their claims in the Labour Tribunal. 87.Chew in his evidence suggested that it was a letter. But the document was undated and unsigned. Whilst the first part took the form of a letter from Tse to Alvin Ow, the second part being a reply by Ow to Tse in the same letter is unexpected. Kang however stated that it was an email from Yum. Whilst that might explain what appeared to be the correspondence between Ow and Tse in the same document, it is strange for them to appear under the letterhead of EXA and without all the normal email correspondence details of the parties that one would have expected. If the document was an attachment to the email correspondence between the parties, none of the email correspondence to which the document was attached has been disclosed. 88.Mr Fong for PenTech (HK) submitted that the suggestion that these persons had nothing to do with EXA at that address is unbelievable. That one may be tempted by the submission on behalf of PenTech (HK) to suspect Tse, Cheung and Ng is probably not surprising. But the content of the 3-page document must have had an undeniable impact on those who so suspect. Yet the above features of the document cry out for explanation. 89.Indeed, on behalf of Tse, issue was indeed taken in respect of the veracity and evidential value of the document. Notice of non-admission of the document has been given to PenTech (HK) in November 2011. As a recipient, Alvin Ow might not be able to say more than the fact of his alleged receipt of it. Tse would have the chance here to say whether the document in fact came from him. But as to when and how this document came to exist in its current curious form, clearly neither Chew nor Kang is in a position to explain. Despite the notice of non-admission, Ow was not called as a witness. Nor has Ow been asked to provide further materials that might have helped verifying PenTech (HK)’s allegations by making use of that document. 90.At the end, I am left in doubt as to the allegations and evidence adduced by both parties with reference to this particular document. This brings me to consider the burden of proof. In the present case, it is PenTech (HK) which has the burden to adduce evidence with cogency commensurate with the seriousness of the allegation against, among others, Tse. In my judgment, PenTech (HK) fails in discharging such burden insofar as its attempt to rely on this particular document is concerned. 91.Tse was also cross-examined on his statement of defence originally filed in response to the third party notice but withdrawn subsequently. He explained that when he was referring to company re-organisation there, he thought PenTech (HK) was referring to the company restructure and cost cutting exercise. For the avoidance of doubt, I accept his explanation partly because of the documentary evidence in respect of such an exercise in early 2009 and partly because of Tse’s actual denial of knowledge and involvement in EXA in the same pleading. 92.PenTech (HK) also placed heavy reliance on another piece of evidence, namely, the discovery of EXA label inside the heater bag. This was a small washing label inside the heater bag. 93.Besides the washing instruction, the label contained the description of Chaogu and that of “Innovative Heater by Volcanic Heat” or “Innovative Heater by Pensonic Volcanic Heat”. The various shipping information and instructions mentioned above evidence that. 94.According to Kang, among the defective heaters bags returned from customer, some were found with washing labels bearing “EXA” as the manufacturer of the heater device. A copy of the image of such washing label was also produced. The evidence shows that the instructions in respect of the washing label had been varied. The set of instructions referred to by PenTech (HK) contained variation of washing label either in October 2008 or March 2009. 95.The documents show that the defective heater bags returned had been directed to be delivered to the PenTech (ZH). However, according to Tse, he had not personally seen the heater bags with the altered washing labels. He admitted coming across the first set of shipping information and instruction; but he denied approval of the subsequent alteration of the instructions including that in respect of the washing label. Whether for internal use or somehow sent to the factory, the instructions, according to him, had been handled by the staff including those in the purchasing or merchandising department. 96.Cheung denied knowledge about and responsibility for the approval or alteration of the washing label specification. He was mainly responsible for administration and personnel, not merchandising or production. 97.During submission, Mr Cheng acknowledged that the alteration of washing label and the discovery of heater bags with altered washing labels might well be true. Apparently the altered washing label evidences the emergence of EXA and the representation about the change in the maker and trademark of the heater device. The alteration, however, remained part of the instructions for the manufacturing of the heater bags by PenTech (HK). In other words, that per se was not representation of change in the supplier of the heater bags, i.e., PenTech (HK). 98.For its purpose in the present case, PenTech (HK) needs to also rely on other circumstances, particularly the 3-page document allegedly from Alvin Ow mentioned above, to paint the picture that there was representation that the supplier of the heater bags (not only the heater device) had changed to EXA and that Tse was involved in EXA. As discussed, there are problems with such proof. 99.In his submission, Mr Cheng warned against making findings and inference on the basis of conjecture. Perhaps one example is what PenTech (HK) alleges to have happened on 11 May 2009. It is not pleaded but mentioned in the witness statements of Chew and Kang. It is alleged that K Lau then tried then to hinder the investigation of Chew and Kang by calling for the police to complain about intrusion by unknown persons; and by making use of the delay so caused to tip off Tse and Cheung so as to give them time to destroy relevant evidence. 100.Mr Cheng for Tse pointed out the discrepancies in the version of event so stated and that pleaded in the High Court actions. More importantly, in their evidence in court, both Chew and Kang simply did not come up to proof of any part of such allegations. Chew had to resort to his own intuitive feeling – conjecture that Mr Cheng warned against. Suggestion about police investigation also led to nowhere as the documents show that both the police and ICAC had closed the files without further action. 101.In view of the seriousness of the allegations against Tse and many others who are not parties to this action, I think it is fair to exercise the caution that Mr Cheng advocated. The loss 102.The problem with PenTech (HK)’s case also exists in the relief sought for the alleged conspiracy to commit malicious falsehood. 103.Both counsel referred to the proof of loss in the claim for malicious falsehood. Mr Cheng for Tse submitted that under common law, an action for malicious falsehood would not lie where actual damage did not result. Mr Fong for PenTech (HK) submitted that allegation and proof of special damage is not required pursuant to section 24 of Defamation Ordinance, Cap 21. There is actually no conflict between their submissions. 104.Mr Cheng referred to Radcliff v Evans (1892) 2 QB 524 which was an action for false and malicious publication about the trade of the plaintiff. The appellate court held (at p.529; 533) that in an action for words not actionable per se, but constituting an untrue statement maliciously published about the plaintiff’s business, which statement is intended or reasonably likely to produce, and in the ordinary course of things does produce, a general loss of business as distinct from the loss of particular known customers, evidence of such general loss of business is admissible, and sufficient to support the action. 105.This does not materially differ from section 24(1) of Cap 21 that Mr Fong referred to:
106.However, one should also note what the appellate court in Evans said (at 531):
107.In a nutshell, under section 24 of Cap 21, PenTech (HK) can recover damages for probable pecuniary monetary loss. It need not, and actually cannot, adduce evidence of actual loss but the court may infer whether there was monetary loss. If such loss is proved, there will be an award of general damages: see Hong Kong Wing On Travel Service Ltd (above) at 499A-D. 108.Neither witness for PenTech (HK) said if the publication of the falsity went beyond the Letter to Yum. The evidence shows that Yum was the major, if not only, customer of the heater bags at the material times. No other customer, current or potential, was named during the trial. Unlike Hong Kong Wing On Travel Service Ltd (above at 499D-H), PenTech (HK) has not adduced any evidence from which inference of some other resultant monetary loss can be made. Assuming PenTech (HK) is claiming general damages, I would have difficulty in finding substantial damage that may warrant more than nominal general damages. 109.I proceeded on the above as an assumption because what PenTech (HK) has pleaded (at §18 and prayer (2)(a) of the third party statement of claim) is that due to the alleged malicious falsehood, it has lost profits from the orders it would otherwise have obtained from customers or potential customers, alternatively has lost the opportunity of obtaining such orders. Therefore, this is arguably a claim for special damage in reality, which, as explained in Evans (above) and submitted by Mr Cheng, should be properly particularised and proved. 110.There is no suggestion or evidence that Yum, or its agent Chaogu, had actually re-directed orders for the heater bags from PenTech (HK) to EXA as a result of the tortuous act. As Chew allegedly obtained from Yum the printed document, Chew presumably should have managed to ascertain from the top management of Yum, had there been such loss of orders. Assuming that PenTech (HK) is claiming for special damage, namely loss of business and orders from Yum, I would find that failure to prove actual loss means no award of special damages either. 111.Further, EXA was short-lived. The evidence is that application to de-register the company pursuant to section 291AA (i.e., that the company was defunct) was made within a year after its incorporation; and, as mentioned, the company was formally de-registered and dissolved in April 2010. In the circumstances, there will be no question of repetition of the falsehood. Mr Fong for PenTech (HK) acknowledged that in submission and conceded that the basis for granting injunctive relief is lacking. CONCLUSION 112.For the above reasons, I find PenTech (HK) fails in proving its claim against Tse as alleged. The third party claim against Tse is dismissed. EXA never put up a fight during its short lifespan. But it follows from the above conclusion as to facts that no order can be made against EXA. The claim against EXA is likewise dismissed. ORDER 113.I make an order in line with the above conclusion. 114.Following such event, costs should be awarded against PenTech (HK), which should be taxed, if not agreed, with certificate for counsel. This costs order is nisi; and shall become absolute in the absence of application within 14 days to vary. REMARKS 115.The differences between the contentions in the High Court actions and those in the present action or the difference in legal representation in these 2 sets of proceedings, in my view, do not justify refraining from considering whether it is necessary or desirable to have the actions or at least common factual dispute to be tried at the same time. Almost inevitably, this court has made findings of fact that formed part of the common factual matrices of both actions. There is no standing commitment by the various parties to abide by the findings of facts common to both actions. Nevertheless, I am certain that any attempt to re-open those issues in the High Court actions, even on the basis of different parties or arguments that would have been advanced differently by different legal representatives, would only invite the Court’s scepticism.
Mr Raymond FONG instructed by Messrs Fung Wong Ng & Lam for the defendant Mr Henry H G CHENG instructed by Messrs Alfred Lam Keung & Ko for the 1st third party The 2nd third party, absent Please refer to HCMP277/2013 for the relevant appeal(s) to the Court of Appeal. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Further hearings and rulings under DCCJ 4402/2009