Poon Ka Man Jason v. Cheng Wai Tao and Others

CACV 135/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 135 OF 2013

(ON APPEAL FROM HCA NO. 304 OF 2011)

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BETWEEN

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J U D G M E N T

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Hon Cheung JA :

The appeal and cross-appeal

1.1Itamae Sushi (「板 前 壽 司」) and Itacho Sushi (「板 長 壽 司」) are two well-known Japanese chain restaurants in Hong Kong.  Cheng Wai Tao, who is also known as Ricky Cheng (‘Ricky’), (the 1^st defendant in HCA 304/2011), is a talented chef of Japanese cuisine and was instrumental in setting up these restaurants. Each of the restaurants in the chain is operated by a different limited company.  The first Itamae restaurant is operated by Smart Wave Limited (‘Smart Wave’) (the 2^nd defendant in HCA 304/2011).  Ricky has always been its sole director.  Initially Smart Wave had nine shareholders including Ricky, Daisy Poon (‘Daisy’), Poon Ka Man Jason (‘Jason’) (the plaintiff in HCA 304/2011) and Shigemitsu Katsuaki (‘Shigemitsu’) and others.  By 12 March 2007, Shigemitsu transferred his shares to Ricky and the shareholdings of the three major shareholders are Ricky, 38%; Daisy, 24% and Jason, 10%.  The other shareholders of Smart Wave and their holdings are Kong Yiu Wai, 10%; Mak Kin Shing, 8%; Sato Akira, 4%; Teraguchi Tadayoshi, 4% and Wong Yiu To, 2%.

1.2After the establishment of the first Itamae restaurant, Ricky set up other Itamae restaurants operated by other companies (3^rd to 10^th defendants in HCA 304/2011) and later the Itacho restaurants also operated by other companies (11^th to 31^st defendants in HCA 304/2011).

1.3Jason, representing the shareholders of Smart Wave other than Ricky, commenced a derivative action against Ricky.  Jason claimed that Ricky as a director of Smart Wave, had been in breach of his fiduciary duty towards Smart Wave in operating the other Itamae and Itacho restaurants and failing to account for their profits to Smart Wave.

1.4After trial by Mimmie Chan J, she held that Ricky was liable for breach of fiduciary duty to Smart Wave in respect of the operation of Itacho restaurants but not of the other Itamae restaurants.  She ordered damages to be assessed for Ricky’s breach up to 2010 when Smart Wave stopped its operation.

1.5Jason now appeals against the Judge’s finding that Ricky is liable only in respect of the Itacho restaurants.  He argued that Ricky’s liability extends to the other Itamae restaurants as well.  He also claims that instead of ordering damages, the Judge should allow Jason the option to seek an account of profits and that the account should not be limited up to 2010.

1.6Ricky also cross-appeals against the Judge’s finding that he is liable in respect of the Itacho restaurants.

Brief background

2.1Jason, Daisy, Ricky and Shigemitsu are shareholders of a group of companies known as Ajisen Group which operates a successful chain of Japanese noodle restaurants under the trade name ‘Ajisen Ramen’ and「味千拉麵」(‘the Ajisen business’).  The Ajisen business was first set up in 1996 and by 2007 it was listed in Hong Kong.

2.2In 2004, the shareholders of the Ajisen Group decided to go into the sushi restaurant business as well and Smart Wave was set up to operate the first Itamae restaurant.  While Ricky is one of the shareholders of Smart Wave, he is the sole beneficial owner of the 3^rd to 10^th defendants who operated the other Itamae restaurants and also of the 11^th to 31^st defendants who operated the Itacho restaurants.

2.3Dispute occurred between Ricky, Jason and Daisy about their respective interests in the other Itamae restaurants.

2.4At around the same time as the successful opening of the second and third Itamae restaurants, plans were underway for the listing of the Ajisen Group.  In addition to the disputes as to Daisy and Jason’s entitlement to shares in the other Itamae restaurants, there were also disputes about the ownership of the chain of Ajisen restaurants which had been opened in Mainland China.  Ricky had also complained about not receiving his entitlement to dividends from the Ajisen Group.

2.5As a result of the compromise of the disputes, Ricky, Jason and Daisy entered into a shareholder’s agreement known as the Hero Elegant Agreement dated 16 September 2006 which governs their rights as shareholders in a company called Hero Elegant Ltd (‘Hero Elegant’).

2.6Hero Elegant and its subsidiaries were intended under the Hero Elegant Agreement to manage and operate the sushi restaurants using the ‘Itamae’「板前」trade marks.  Under the Hero Elegant Agreement, Ricky was to have 69% of the shares of Hero Elegant and Fine Elite Group Ltd (‘Fine Elite’) (on behalf of Daisy and Jason) was to hold 31% of its shares.  Whatever rights Jason and Daisy might have had in the companies operating the Itamae restaurants by virtue of their contribution to the setting up costs of these Itamae restaurants, Jason and Daisy agreed to accept 31% of the shareholding (through Fine Elite) in Hero Elegant instead of their 34% in Smart Wave (which held the first Itamae restaurant), or any other percentage Daisy had argued for in early 2006.

2.7Daisy and Jason claimed that in breach of the Hero Elegant Agreement, Ricky continued to manage and operate the Itamae restaurants using companies which were solely owned by him, and had failed to transfer the shares in these companies to Hero Elegant.  By HCA 1269/2008, Fine Elite seeks specific performance of the Hero Elegant Agreement and damages, alternatively, an account of the profits made by Ricky acting in breach of the Hero Elegant Agreement.

2.8Three years later Jason commenced the derivative action against Ricky in HCA 304/2011. 

2.9The Judge heard both actions together.  The Judge dismissed Fine Elite’s claim.  Fine Elite has not pursued any appeal against that decision.

Principles

A)  Fiduciary duty

3.1The principles on the fiduciary duty of a director of a company are well established :

3.1.1)  A director stood in a fiduciary duty to the company.  It is the duty of directors of companies to use their best exertions for the benefit of those whose interests are committed to their charge, and that they are bound to disregard their own private interests whenever a regard to them conflicts with the proper discharge of such duty : Regal (Hastings) Ltd. v. Gulliver and Others [1967] 2 A.C. 134 at pages 148 and 149 where the House of Lords reviewed the authorities of this area.  Lord Russell held at page 144 that :

‘ …..The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.’

See also Swain v. Law Society [1981] 3 All ER 797 at 807-808.

3.1.2)  At the same time there is a distinction in respect of the fiduciary duty between contracts in which the director’s company is concerned and contracts in which the company has no interest.  Lord Blanesburgh in Bell & Anor. v. Lever Brothers Ltd. & Ors. [1932] AC 161 at page 195 approved of the earlier decision of London and Mashonaland Exploraton Co. v. New Mashonaland Exploration Co. [1891] W. N. 165 and held at 194 that :

‘ And this distinction is vital: because the liability of a director in respect of profits made by him from a contract in which his company also is concerned is one thing: his liability, if any there be, in respect of his profits from a contract in which the company has no interest at all is quite another. In the first case, unless by the company’s regulations the director is permitted, subject to or without conditions, to retain his profit, he must account for it to the company. In the second case, the company has no concern in his profit and cannot make him accountable for it unless it appears – this is the essential qualification – that in earning that profit he has made use either of the property of the company or of some confidential information which has come to him as a director of the company.’

See also In Plus Group Ltd. & Ors. v. Pyke [2002] 2 BCLC 201.

3.1.3)  More recently the High Court of Australia in Hospital Products Ltd. v. United States Surgical Corporation [1984] 156 CLR 41 per Mason J (as he then was) at 97 emphasised the distinction and connection of contractual and fiduciary relationships :

‘ That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.’

3.1.4)  This theme is further taken up in Henderson v. Merrett Syndicates Ltd. [1995] 2 AC 145 per Lord Browne-Wilkinson at page 206 :

‘ Secondly, in my judgment, the derivation of the general principle from fiduciary duties may be instructive as to the impact of any contractual relationship between the parties on the general duty of care which would otherwise apply. The phrase “fiduciary duties” is a dangerous one, giving rise to a mistaken assumption that all fiduciaries owe the same duties in all circumstances. That is not the case. Although, so far as I am aware, every fiduciary is under a duty not to make a profit from his position (unless such profit is authorised), the fiduciary duties owed, for example, by an express trustee are not the same as those owed by an agent. Moreover, and more relevantly, the extent and nature of the fiduciary duties owed in any particular case fall to be determined by reference to any underlying contractual relationship between the parties. Thus, in the case of an agent employed under a contract, the scope of his fiduciary duties is determined by the terms of the underlying contract. Although an agent is, in the absence of contractual provision, in breach of his fiduciary duties if he acts for another who is in competition with his principal, if the contract under which he is acting authorises him so to do, the normal fiduciary duties are modified accordingly: see Kelly v. Cooper [1993] A.C. 205, and the cases there cited. The existence of a contract does not exclude the co-existence of concurrent fiduciary duties (indeed, the contract may well be their source); but the contract can and does modify the extent and nature of the general duty that would otherwise arise.’ (emphasis added)

B) Consent of shareholders

3.2Another principle relevant to the appeal is the effect of the unanimous consent of the shareholders to a certain decision. 

3.2.1)  Where it could be shown that all the shareholders with the right to attend and vote at a general meeting had assented to some matter which a general meeting of the company could carry into effect, the assent was as binding as a resolution in general meeting per Buckley J in In re Duomatic Ltd [1969] 2 Ch. 365 at 373.

3.2.2)  In EIC Services Ltd. & Anor. v. Phipps & Ors. [2003] BCC 931 Neuberger J (as he then was) elaborated on this principle :

‘ ….. The essence of the Duomatic principle, as I see it, is that, where the articles of a company require a course to be approved by a group of shareholders at a general meeting, that requirement can be avoided if all members of the group, being aware of the relevant facts, either give their approval to that course, or so conduct themselves as to make it inequitable for them to deny that they have given their approval. Whether the approval is given in advance or after the event, whether it is characterised as agreement, ratification, waiver, or estoppel, and whether members of the group give their consent in different ways at different times, does not matter.’ (emphasis added)

Itamae restaurants

4.1I will first deal with Jason’s claim against Ricky on the other Itamae restaurants.

1)  Ricky’s defence to the derivation action

4.2Ricky claimed that he alone has the right and entitlement to establish the other Itamae restaurants and the Itacho restaurants.  He claimed that he is the owner of the Itamae service marks and also of the Itacho service marks.

4.3This is the relevant part of Ricky’s pleaded defence to Jason’s claim based on his breach of fiduciary duty :

‘ 14. In or around April 2004, Smart Wave was incorporated by Ricky Cheng to engage in sushi business by way of a sushi restaurant with Ricky Cheng being sole director and sole shareholder.

15. Ricky Cheng approached Kong Yiu Wai; Mak Kin Shing; Sato Akira; Teraguchi Tadayoshi; Wong Yui To; Jason Poon and Daisy Poon and reached the following Agreement/Understanding :

a) the sushi business would consist of a sushi restaurant to be operated in the name of Smart Wave to be called or known as ‘ITAMAE SUSHI’;

b) the sushi restaurant would be managed by Ricky Cheng at the premises at Ground Floor, No. 14 Granville Road, Tsim Sha Tsui, Kowloon, Hong Kong;

c) the shareholdings of Smart Wave would be allocated and held in the manner and proportions as pleaded in paragraph 8.3 of the Statement of Claim;

d) the Service Marks bearing the name of ‘ITAMAE SUSHI’ was originated from, designed by and solely owned by and belonged to Ricky Cheng.  In particular Ricky Cheng did not transfer, assign nor gift the Service Marks to Smart Wave nor any other person(s);

e) Ricky Cheng would allow Smart Wave to use the Service Marks to operate one ‘ITAMAE SUSHI’ restaurant;

f) the parties had only discussed that Smart Wave would be permitted and authorized to operate one sushi restaurant using the Service Marks, namely that at Ground Floor, No. 14 Granville Road, Tsim Sha Tsui, Kowloon, Hong Kong, and Ricky Cheng did not permit, authorize nor licence Smart Wave to establish, engage in or operate any other restaurants or sushi restaurants using the Service Marks;

g) Ricky Cheng is and remains at liberty to establish, engage in and operate further or other sushi businesses or sushi restaurants, solely or in association with other parties or person and using the Service Marks including the names, arts and logos bearing the Chinese and English names ‘ITAMAE SUSHI’;

h) the other parties (including Smart Wave, save as above agreed) would not and would not attempt to set up, deal with, use or purport to lay claim to the Service Marks which originated from, were designed by and solely owned by and belonged to Ricky Cheng, alternatively, this was an implied term by reason of inter alia obviousness, necessity and/or business efficacy.’  (emphasis added)

2)  The Judge’s decision

4.4The basis of the Judge’s decision that Ricky has not been in breach of his fiduciary duty to Smart Wave in opening the other Itamae restaurants is as follows :

‘ 62. On the case advanced by Jason and Daisy, the shareholders of the Ajisen Group had agreed “to develop chain sushi restaurants in furtherance of the then existing business” (of the Ajisen Group), and had further agreed that “separate corporate vehicles would be formed to hold the interest of the said chain sushi restaurant business to be established” (emphasis added), following the same shareholding of the Ajisen Group (paragraph 12 of Jason’s witness statement made on 24 October 2011). There is no doubt that, even on the Poons’ case, the intention was for a chain of Itamae restaurants to be established, using different corporate vehicles to hold and to operate different restaurants in the chain, all using the Service Marks. The Hero Elegant Agreement also envisaged this. Clause 14.5 provides for all chain restaurants conducting the business defined in the agreement to be owned and operated by “a Group Company”, with Hero being the holding company of all such group companies owning and operating the business of the sushi restaurants.

63. Hence, as one of the restaurants in the chain, Smart Wave was never intended by its shareholders to have the exclusive right to carry on the sushi restaurant business using the Itamae name or Service Marks.  Even on Jason’s and Daisy’s case, the shareholders of Smart Wave knew, intended and agreed that other companies would be set up to operate other sushi restaurants, using the Itamae name and Service Marks.  I agree with Leading Counsel for Ricky that Smart Wave is not in a position to complain about the use of the Service Marks by other companies, or of the existence and operation of other sushi restaurants in the chain.  Ricky, as a director of Smart Wave, cannot be said to have acted in breach of his duties to Smart Wave by operating other sushi restaurants using the Service Marks.’  (emphasis added)

4.5In brief, the Judge held that the shareholders of Smart Wave knew, intended and agreed that Smart Wave would not have the exclusive right to operate another Itamae restaurant.  On the contrary, other companies would be set up by Ricky to operate other Itamae restaurants of which the shareholders would not and could not complain.

3)  The short point

4.6Mr Paul Shieh SC and Ms Linda Chan SC on behalf of Jason took the short point that the shareholders of the Ajisen Group and Smart Wave are different and there was no evidential basis for the Judge to come to the view that the shareholders of Smart Wave had come to such an understanding or agreement.  Further Ricky’s evidence is contrary to any such agreement or understanding by the shareholders of Smart Wave because he had accepted in cross-examination that in 2004, at the time of the alleged agreement, he had not told Jason and Daisy that he could open further Itamae restaurants on his own.

4.7Ms Audrey Eu SC and Mr Jeremy Chan, on behalf of Ricky, submitted that the Judge had not confused the two entities because in these two paragraphs of the judgment the Judge had referred to the shareholders of two entities. 

4.8Ms Eu argued that as it was agreed that there will be a chain restaurant and a separate corporate vehicle is to be used for each of the Itamae restaurants and Smart Wave does not have the exclusive right to operate these restaurants, Smart Wave cannot complain of a breach of fiduciary duty by Ricky when he opened other Itamae restaurants.  This is along the lines of the Bell v Lever Brothers approach that the fiduciary duty will not be imposed in respect of the director doing something that the company is not interested in. This is also along the line of the In re Duomatic Ltd approach regarding the consent of the shareholders to Ricky’s activities. 

4.9Ms Eu further argued that Daisy and Jason’s real interest is in the Hero Elegant Agreement in which all the other Itamae restaurants were intended to be vested and they would get 31% interest.  The rights of the parties are governed by contract, namely, the Hero Elegant Agreement and not by reference to the fiduciary duty of Ricky.  Daisy and Jason had said that if they were successful in their claim under this agreement, they would not pursue the derivative action.  It is ironical that when they would only get 31% in respect of the Itamae restaurants under the Hero Elegant Agreement they could now receive 34% under the derivative action.  This defence is along the lines of the Hospital Products Ltd approach that where the relationship is governed by contract, the fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation of the contract.

4)  State of evidence

4.10The success of Ricky’s case really hinges on the evidence in support of the Judge’s finding on the agreement by the shareholders of Smart Wave.  This is important because while there might be discussion, understanding or agreement amongst the shareholders of the Ajisen Group, the Ajisen Group and Smart Wave have different shareholders.  Jason in his witness statement had this to say :

‘ 20. The first Itamae Sushi Restaurant in Tsimshatsui proved to be a huge success. We therefore proceeded to open more Itamae Sushi Restaurants and Ricky Cheng was again tasked to coordinate their establishment. The second Itamae Sushi Restaurant in Causeway Bay was opened in March 2005 and the third one in Mongkok in February 2006. Similar to the first Itamae Sushi Restaurant, I was responsible for coordinating and supervising the decorations works of these two restaurants. Following the practice adopted for the Ajisen Ramen outlets in Hong Kong, I only charged a nominal fee of HK$50,000 to HK$60,000 for coordinating and supervising the decoration works. Needless to say, I would not have charged my fee at such a nominal rate if I were to have no beneficial interest or commercial stake in the business of the second and third Itamae Sushi Restaurants.

21. During the decoration of the 2^nd and 3^rd Itamae Sushi Restaurants, I asked Ricky Cheng from time to time when I would be allotted shares in these two restaurants but Ricky Cheng kept saying he was working on it.  Later on in May/June 2006, I received a fax from Ricky Cheng setting out the proposed shareholdings in the other Itamae Sushi Restaurants.  In the said fax, Daisy was allotted 23% shares and I was allotted only 7%.  I was understandably upset with the further reduction in my shareholdings from 10% to 7%.  When I complained to Ricky Cheng about the substantial reduction in my shareholding from 10% to 7%, Ricky Cheng again said that he would need to allot some shares to other parties to facilitate the operation of the Itamae Sushi business.  I told Ricky Cheng it was unacceptable for me as a shareholder of the Hong Kong Ajisen Ramen Group to be allotted fewer shares than an employee (namely, Mr. Mak Kin Shing, who was allotted 8% shares).  Noting my displeasure, Ricky Cheng told me he would allot 1% additional share to me from his own shareholding. The total shareholdings owned by Daisy and me would therefore be reduced to 31% (23% + 8%).  I have so far not been able to retrieve this fax, but this 31% shareholding was eventually reflected in the Hero Elegant Agreement (as will be defined and elaborated below).’

4.11Reading Jason’s witness statement in its context, he was referring to the shareholders of the Ajisen Group, namely, himself, Daisy, Ricky and Shigemitsu.  He did not say there was an identical understanding of the shareholders of Smart Wave.  For example, there was no evidence that Mr Sato Akira had anything to do with the Ajisen Group.  Paragraph 10 of his witness statement made this clear :

‘ 10. Eventually, the shareholders of the Hong Kong Ajisen Ramen Group, including Mr Shigemitsu, Daisy, Ricky Cheng and I, all agreed to develop chain sushi restaurants in furtherance of the then existing business. We further agreed that separate corporate vehicles would be formed to hold the interest of the said chain sushi restaurant business to be established by us. We as shareholders of the Hong Kong Ajisen Ramen Group would then be allotted shares of and in the said corporate vehicles (“the 2004 Agreement”).’

4.12Likewise, Daisy’s witness statement said that Ricky informed her and the other shareholders of the Ajisen Group, as distinct from the shareholders of Smart Wave, when he opened the second Itamae restaurant. 

5) Counsel’s question

4.13Ms Eu’s response was to rely on the question put by Mr Shieh to Ricky in his cross-examination that all the shareholders of the first Itamae restaurant was of the view that because the first restaurant was so successful, there should be expansion of the business and a second restaurant should be opened.  Ms Eu drew to the Court’s attention the fact that Mr Shieh was not only the counsel for Fine Elite (which holds the interest of Jason and Daisy) but also counsel for the shareholders of Smart Wave in the derivative action which was tried together.

4.14Mr Shieh’s answer to this is that there was a ‘slip of the tongue’ on his part when the question was put to Ricky which was in fact put in the context of Ricky being allowed (although not expressly authorized) to use shareholders’ funds in order to open the second Itamae restaurant.

6)  State of pleadings

4.15I do not regard what was put by Mr Shieh to Ricky constituted evidence in support of the Judge’s finding.  The issues in this case are defined by the pleadings of the parties : Poon Hau Kei v Hsin Chong Construction Co Ltd (2004) 7 HKCFAR 148.  Ricky’s pleaded defence (paragraph 15(g)) is in essence simply that after discussion with the shareholders of Smart Wave, he was entitled to open the other Itamae restaurants without the permission of Smart Wave.  The matter is put in a negative way.  It is not his defence that the opening of the other Itamae restaurants was done with the understanding and agreement of the Smart Wave shareholders which implies a positive act on their part.  In any event, in cross-examination Ricky admitted that at the material time, he had not told Smart Wave shareholders of his ‘right’ to open Itamae restaurants on his own (Transcript p. 536-7).  It is also not his pleaded case that the rights of the Smart Wave shareholders were to acquire shares in the other Itamae restaurants and his breach in not allotting shares to them would only entitle them to claim damages for breach of the shareholders’ agreement but not a claim for breach of fiduciary duty on his part.

4.16In the absence of a plea along those lines, I really do not see why the way Mr Shieh put his questions would provide a defence to Ricky.  More importantly, Jason’s and Daisy’s evidence does not extend to any understanding or agreement by all the shareholders of Smart Wave.

4.17Ricky stated in his cross-examination that after the opening of the second Itamae restaurant he was waiting for Daisy and Jason to ask him for their shares in this restaurant but they never did.  I do not see how this would assist Ricky because again it is not suggested by him in pleadings that this inactivity on the part of Daisy and Jason constituted acquiescence by them (let alone the other shareholders) that he may operate other Itamae restaurants without the permission of the shareholders of Smart Wave.

7)  Liability established of the Itamae restaurants

4.18In my view, in the absence of evidence in support of the Judge’s finding on the understanding or agreement by the shareholders of Smart Wave in respect of the operation of the other Itamae restaurants, Ricky was clearly in breach of his fiduciary duty towards Smart Wave under the well-established principle reaffirmed in Regal (Hastings).  He, as the sole director of Smart Wave, was under a fiduciary duty to act in its best interests, and it was against the interests of Smart Wave for him to operate a competing sushi restaurant business where the business opportunity is diverted from Smart Wave to himself.  The burden is on Ricky to demonstrate the propriety of the impugned transaction : Bishopsgate Investment Management Ltd [1993] BCC 120 at 139-140 and 143.

4.19Much was said about Ricky’s exclusive rights to the Itamae service marks.  But this must be a separate issue from the one concerning Ricky putting himself in a position of conflict with that of Smart Wave.

4.20As to the argument on operation of a chain restaurant by separate companies, in my view, the fact that each restaurant is to be run by a separate corporate vehicle does not mean there is no room for the existence of the fiduciary duty. It really depends on the terms of the agreement between the shareholders.  The terms here alleged by Ricky are extremely vague.

4.21The principles in Bell v Lever Brothers and in In re Duomatic Ltd do not assist Ricky.  In the absence of assent by all shareholders of Smart Wave, any agreement reached by the shareholders of the Ajisen Group is not binding on Smart Wave.

4.22I recognize the force of the argument of Ms Eu about the difference between contractual duty and fiduciary duty, but it is important to recognize that there are two distinct claims by two distinct parties.  The Hero Elegant Agreement is the means by which Ricky, Jason and Daisy as shareholders of the Ajisen Group resolved their disputes.  The claim on the Hero Elegant Agreement is by Daisy and Jason without the involvement of the other shareholders of Smart Wave, whereas the derivative action is a claim by all the shareholders of Smart Wave (except Ricky).  I do not see the injustice in the pursuit of the derivative action.  The Hospital Products Ltd line of authorities does not assist Ricky because it is simply inapplicable to the facts of the case.

4.23Further in respect of the Hero Elegant Agreement, Ricky has not pleaded that it was a global compromise concerning Ricky’s operation of other sushi restaurants.  This is a matter expressly recognized by the Judge when she addressed the issue of the Itacho restaurants.  In any event Smart Wave is not a party to the Hero Elegant Agreement.

4.24In the light of the above, I do not need to address Mr Shieh’s submission on the difference in Daisy and Jason’s entitlement to the 31% or 34% interest.

Itacho restaurants : cross-appeal

5.1In respect of the Itacho restaurants, the same fiduciary principle will apply when Ricky put himself in a position of conflict by operating these restaurants. 

5.2As to Ricky’s cross-appeal on the Itacho restaurants, Ms Eu rightly did not, and in my view could not in the absence of evidence, rely on the defence of the understanding or agreement of the shareholders towards the opening of the Itacho restaurants.  Ms Eu, however, referred to the difference of the Itamae and Itacho service marks.  While the two designs and their differences were raised in the Court below, they are clearly irrelevant to the issue of Ricky’s breach of fiduciary duty towards Smart Wave in opening the Itacho restaurants because Smart Wave’s claim is not based on the cause of action of passing off where it is relevant to consider the similarity of designs and names.  The issue here is really whether Ricky had put himself in a position of conflict by the operation of other sushi restaurants.  The other Itamae restaurants and the Itacho restaurants could well be operated by any other names without the slightest difference to Ricky’s liability. In my view the Judge had correctly found Ricky liable for his operation of the Itacho restaurants.

Account of profits or inquiry as to damages

1)  Nature of an account for profit

6.1Once the trust or fiduciary relationship is established or conceded the beneficiary or principal is entitled to an account as of right.  Although like all equitable remedies an order for an account is discretionary, in making the order the Court is not granting a remedy for wrong but enforcing performance of an obligation, per Lord Millett NPJ in Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681 at paragraphs 167 and 168. 

6.2A claim for an account will be defeated by equitable defences such as estoppel, laches, aquiescence and delay per the High Court of Australia in Warman International Ltd. and Another v. Dwyer and Others [1994-1995] 182 CLR 544 at 559. 

6.3As Lord Millett in Libertarian Investments Ltd at paragraph 168 further explained, an order for an account does not in itself provide the plaintiff with a remedy; it is merely the first step in a process which enables him to identify and quantify any deficit in the trust fund and seek the appropriate means by which it may be made good.

6.4The High Court of Australia in Warman International Ltd at page 559 elaborated on this :

‘ Ordinarily a fiduciary will be ordered to render an account of the profits made within the scope and ambit of his duty. Of course, if the loss suffered by the plaintiff exceeds the profits made by the fiduciary, the plaintiff may elect to have a compensatory remedy against the fiduciary. That election will bind the plaintiff.’

2)  Clean hands

6.5The Judge held that Smart Wave is entitled to seek damages from Ricky in respect of his breach of fiduciary duty towards Smart Wave.  She rejected an application made by Smart Wave, after the handing down of the judgment, to be given an option to seek an account of profits or an inquiry as to damages.  A claim for an account of profits is pleaded by Smart Wave as an alternative to its claim for damages or equitable compensation.

6.6The Judge held that an account of profits is a discretionary and equitable remedy and she refused to grant Smart Wave this relief because Jason who is the main protagonist in both actions had not come with clean hands.  Jason’s blemish is that he had acted in bad faith in applying for and seeking registration of the Itamae service marks which belong to Ricky as the Judge had found in the action on the Hero Elegant Agreement. This is the reason which the Judge held would have precluded Fine Elite from seeking specific performance of the Hero Elegant Agreement (having first held that Fine Elite was in repudiatory breach of the agreement).

6.7A number of points are advanced by Mr Shieh against this decision.  I do not need to canvass all of them.  In my view the Judge is wrong in refusing to grant Smart Wave the alternative relief for the following reasons :

6.7.1)  The principle is that in order for the inequitable conduct to bar any claim for equitable relief, the conduct must be legally attributable to the claimant (Royal Bank of Scotland v Highland Financial Partners [2013] 1 CLC 596 at 642 C-D, per Aikens LJ.  In the present case, Smart Wave’s claim is a separate and distinct claim from the one brought by Jason under the corporate vehicle of Fine Elite.  Jason in the derivative action acts only in a representative capacity for Smart Wave who is in fact the true plaintiff and any damages recoverable are payable to Smart Wave and not to Jason : see Lord Millett NPJ’s summary of the nature of the derivative action in Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 at paragraphs 47 to 48.  The act of Jason cannot be attributed to that of Smart Wave which consists of shareholders in addition to Jason.

6.7.2)  Related to the first point is that in order for the misconduct to give rise to a bar to equitable relief, the misconduct must have an immediate and necessary relation to the relief sought so that it would be unjust to grant that particular relief.  Scrutton LJ in Moody v. Cox [1917] 2 Ch 71 reviewed the authorities at pages 87 to 88 and stated :

‘ … equity will not apply the principle about clean hands unless the depravity, the dirt in question on the hand, has an immediate and necessary relation to the equity sued for.’

See also Snell’s Equity, 32^nd ed, at paragraph 5–015; Spry on the Principles of Equitable Remedies, 9^th ed, 2014, at p.175; Royal Bank of Scotland, at 645F-H.

6.8In the present case Jason’s misconduct in surreptitiously registering the Itamae service marks has no immediate and necessary relation to the relief sought by Smart Wave for breach of fiduciary duty on the part of Ricky.  None has been advanced.

6.9In my view Smart Wave should be given an option whether to claim an account of profits or inquiry as to damages. In order to enable it to make an election it ought to be given an opportunity to seek discovery from Ricky as sought in the Supplementary Notice of Appeal.

Temporal limit of Smart Wave’s claim

1)  Jason’s argument

7.1The Judge held that Smart Wave’s claim for damages against Ricky in respect of the Itacho restaurants should be limited to until 2010 which was the year when Smart Wave ceased its operation due to high rent demanded by the landlord.

7.2Mr Shieh submittd that it was wrong to limit the claim to 2010 because it was open to Smart Wave to move the operation to another location and it would be manifestly absurd for Ricky to be able to use his control over Smart Wave to put a temporal limit on his liability simply by causing Smart Wave to terminate the operation of the first Itamae restaurant.

7.3Mr Shieh submitted that it is irrelevant that the profit made by the fiduciary was one that the beneficiary could not have made anyway or that the profit was not made at the expense of the fiduciary.  Gains made by a defaulting fiduciary are to be disgorged irrespective of whether the beneficiary had suffered any financially measurable loss : Kao Lee & Yip v Koo Hoi Yan & Others [2003] 3 HKLRD 296 at paragraphs 134 and 135.  Prima facie, all property or profit obtained by Ricky by reason of his fiduciary position must be held by him as trustee and he is liable to account for it.  Regal (Hastings) Ltd v Gulliver, at 137G-138G, 144G-145A, 154B-C, Swain v Law Society, at 807e-808j; Kao Lee & Yip, at paragraph 132.

2)  Proper to impose a limit

7.4While the Judge’s holding was in the context of Smart Wave’s claim for damages in respect of the Itacho restaurants, the discussion will apply also to the remedy of an account of profits in respect of the other Itamae restaurants and the Itacho restaurants.

7.5By 2010 Smart Wave had been in operation for six years.  There is no suggestion that Ricky put a stop to the operation by Smart Wave of the first Itamae restaurant for some ulterior motive other than a business decision because of high rent.

7.6In my view the Judge is correct on this point. If Smart Wave ceased business, Ricky would no longer be in a position of conflict.  Further analogy may be drawn from Kao Lee & Yip where a time limit of one year was imposed for the account of profits that the plaintiff may seek from the 1^st defendant who set up a new firm to serve a client previously belonging to the plaintiff.  The limit was imposed so as not to penalize the 1^st defendant and so as to reflect the reality of the situation because as time passed, the profits that the new firm may make from providing service to the client would have become increasingly remote from the business opportunity that was first presented to the 1^st defendant.  I think the Judge had recognised the reality of the situation here as well and she could not be faulted for imposing the time limit.

Conclusion

8.1Smart Wave’s appeal is allowed to the extent as indicated.

8.2Ricky’s cross-appeal is dismissed.

Costs

9.There will be an order nisi that Smart Wave is to have 90% (because of its failure on the issue of the temporal limit) of the costs of the appeal and below.  There will be certificate for two counsel.

Hon Yuen JA :

10.I agree with the judgment of Cheung JA.

Hon Chu JA :

11.I agree.

Mr Paul Shieh SC and Ms Linda Chan SC, instructed by T. H. Koo & Associates, for the plaintiff

Ms Audrey Eu SC and Mr Jeremy Chan, instructed by Tang, Lai & Leung, for the 1^st defendant and 3^rd to 31^st defendants