SUPER ELECTRIC MOTOR LTD. v. PAI CHUNG YING and Another

1993, No. A1916

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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Coram: Deputy Judge Wesley Wong in Court

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J U D G M E N T

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1. The 1st Defendant was a director and general manager of the Plaintiff. In late 1988 and early 1989, the 1st Defendant alone could withdraw money from the bank accounts of the Plaintiff. On or about 11th February 1989, the 1st Defendant withdrew a sum of $2,282,901.07 from the Plaintiff's bank account opened with the National Commercial Bank Ltd's Kwun Tong branch. It is the Plaintiff's allegation that the 1st Defendant had withdrawn that sum for his own use and had failed to account it to the Plaintiff and was therefore in breach of his fiduciary duty as director.

2. The 1st Defendant admits having withdrawn that sum. His defence is that in or about February 1989 at a directors' meeting Lau Yen Tak (manager of the Kwun Tong branch of the National Commercial Bank) advised that the political situation in PRC was volatile and there could be a confidence crisis resulting in bank run of the Chinese banks. To protect the Plaintiff he advised that monies the Plaintiff kept with NCB should be withdrawn in cash and kept in a safe deposit box.

3. Pursuant to that advice the 1st Defendant on or about 11th February 1989 withdrew the deposit of US$292,867.36 together with interests totalling HK$2,282,901.07 and placed the same in a safe deposit box at NCB's Kwun Tong branch under the name of the 2nd Defendant (his wife).

4. Those cash placed in the safe deposit box in the name of the 2nd Defendant were later removed and deposited either in the 2nd Defendant's account or the account of Trinitrade Company ('Trinitrade') which was a trading firm in which the 1st and 2nd Defendants were partners.

5. The 1st Defendant said the said sum of $2,282,901.07 was later repaid by "inextricably bound up" running accounts between the Plaintiff and Trinitrade and between the Plaintiff and the 2nd Defendant.

6. The 2nd Defendant applied to be joined so that the 2nd Defendant and 1st Defendant can set off the accounts as partners of Trinitrade with the Plaintiff.

7. In the pleadings there was a counter claim by Trinitrade against the Plaintiff and the Plaintiff by way of counter claim to counter claim, counter claimed against Trinitrade.

8. At the trial, as the counter claim and counter claim to the counter claim involved inextricable accounts between the Plaintiff and Trinitrade, the parties at my suggestion agreed that those accounts would best be dealt with by taking of accounts by an auditor. At the end of the day any amount found due by one party should then pay that amount to the other party.

9. The parties having agreed to my proposal, the Defendants' counter claim and the Plaintiff's counter claim to counter claim are therefore adjourned sine die with liberty to restore. The only remaining issue is whether the 1st Defendant was in breach of his fiduciary duty when he took that $2,282,901.07 and if so whether that sum had been repaid and whether execution should be stayed pending the outcome of taking accounts.

10. Since the 1st Defendant admitted that he had withdrawn the said sum, the onus is on him to prove the allegations stated in his defence.

11. The 1st Defendant gave evidence which is at variance with his own defence. He said it was not at a directors' meeting that Lau Yen Tak advised of the volatile political situation and the possibility of a bank run by Chinese banks. It was at a dinner in a restaurant in Tsimshatsui East when his Indonesian brother-in-laws (shareholders of the Plaintiff) were present that Lau told him of this in either late 1988 or earlier 1989. In January 1989 Lau went to his office and reminded him again and advised him to withdraw money from Chinese Banks. So he withdrew the money and put them into the safe deposit box. The money was gradually transferred to Trinitrade's account or 2nd Defendant's account.

12. When cross examined by Mr Ho of counsel for the Plaintiff about the meeting pleaded at para 5A of the defence, 1st Defendant said the meeting was not in 1989 but earlier i.e. latter part of 1988, as by November 1988 the political situation in China was not stable. He further said that during the meeting there was no particular mention of that sum of money, nor was political instability mentioned.

13. When counsel put to him that he was not authorised to put the money into his partnership account, he said approval from other directors was not necessary.

14. 1st Defendant also did not agree that he had never repaid that sum and said that his wife and Trinitrade were treated as one entity and had repaid the sum to the Plaintiff. He even said a $2.20 million stated in the pleading was in fact the $2,282,901.07.

15. The 2nd Defendant gave evidence and said the directors of the Plaintiff agreed to place the money to Trinitrade. She had pledged her residence and office premises and US$30,000 from Hartanto Tjondro to Dah Sing Bank as security for Trinitrade to have more flexibility in respect of opening of Letter of Credit and overdraft as Plaintiff had to open Letters of Credit issued by Dah Sing Bank.

16. She produced a letter from Dah Sing Bank to prove her point. This may well be the case but that letter was issued by Dah Sing Bank on 24th November 1989 whereas the money was taken by the 1st Defendant on or about 11th February 1989 which was almost 10 months earlier. So the increased flexibility by Trinitrade to open Letter of Credit and overdraft had nothing to do with the taking of the $2,282,901.07 by the 1st Defendant.

17. The accountant of the Plaintiff was called to give evidence. He agreed that he accompanied the transfer of the money and acted as the body guard.

18. The last witness called by the Defendants is Lau Yen Tak. He said by March 1988 he was transferred from the National Commercial Bank in Kwun Tong to the head branch in Hong Kong Island. As branch manager of the bank, he only dealt with the business of the bank. He did not have any inside information concerning political situations. He only learnt about political matters from newspaper. He said he had not attended any directors' meeting of the Plaintiff. He only knew the 1st Defendant had taken the money out afterwards because he was no longer in that branch. He had not attended dinner with the 1st Defendant and the Plaintiff's directors in Tsimshatsui East. He said Hartanto came to Hong Kong between 1988 and 1989 once or twice and he invited him for dinner in Telford Garden. Hartanto went along with some Indonesian friends. It was just a social gathering.

19. With the evidence of the Defendants, it is not surprising that the Plaintiff elected not to call evidence.

20. The main reason according to the 1st Defendant as to why he withdrew the money from National Commercial Bank was because of the advice given by their branch manager Lau Yen Tak who told him the political situation in China was volatile and there was possibility of a bank run in Chinese banks. He believed Lau because of his insider information.

21. His evidence is completely shattered by his own witness Lau Yen Tak who said that he did not have any political information from the bank. He was already transferred away from Kwun Tong branch some 9 months before the 1st Defendant withdrew the money.

22. On balance I am satisfied that the 1st Defendant had taken the sum of $2,282,901.07 from the Plaintiff without justification. It could not have been in the interest of the Plaintiff to have such a large sum of money taken away from its account thus depriving the Plaintiff of the entitlement to interests derived from that money nor for that matter use the said sum for the advancement of the Plaintiff's business. Hence I am satisfied that the 1st Defendant was in breach of his fiduciary duty as director when he withdrew that amount.

23. Then I come to consider whether Trinitrade had repaid that amount back to the Plaintiff on 1st Defendant's behalf. Apart from para 11(2) of the re-amended defence and counter claim to which it was pleaded that a round sum of HK$2,200,000.00 intended to represent the sum of HK$2,282,901.07 there was never any mention of the repayment of $2,282,901.07 to the Plaintiff.

24. The items set out in the counter claim and the Plaintiff's counter claim to counter claim as had been pleaded by the Defendants are inextricable accounts between the Plaintiff and Trinitrade. In the premises on balance I find that neither the 1st Defendant nor the Defendants in the name of Trinitrade had repaid the amount the 1st Defendant took from the Plaintiff.

25. In the premises the 1st Defendant is indebted to the Plaintiff in the sum of $2,282,901.07.

26.In re Pennington and Owen Ltd [1925] 1 Ch 825, the liquidator in the winding up of a company sought to set off against debt due by the company to a creditor a debt alleged to be due to the company by a partnership firm of which the creditor was a member. It was held that the alleged debt of the partnership firm being a joint and not a joint and several debt could not be set off against the separate debt due by the company to the partner.

27. In Jones v. Fleming [1827] B & C 217 a partnership owed salary to an employee. The employee owed a debt to one of the partners individually. The employee sued the partners for salary. It was held that the partner could not set off the debt owed to him individually.

28. Based on the authorities above Trinitrade being a partnership, debts, if any, by Plaintiff to the Trinitrade cannot be set off against a separate debt due to the Plaintiff by the 1st Defendant, (a partner) as Trinitrade's account is a joint and not a joint and several account.

29. The debt owed by the 1st Defendant to the Plaintiff being a separate debt, I see no reason why there should be a stay of execution pending the outcome of taking accounts between the Plaintiff and Trinitrade.

30. In the premises there be the following orders:-

1) Judgement for the Plaintiff against the 1st Defendant in the sum of $2,282,091.07 together with interests at 8% p.a. from 11/2/89 until judgment and costs.

2) Taking of account by a mutually agreed public certified accountant. In default the parties be at liberty to apply for directions.

3) Payment of the amount found due.

4) Cost of the taking of accounts to the party to which the final balance is found due.

(Wesley Wong)

Deputy Judge of High Court

Representation:

Mr. Peter Ho of Messrs. Y.C. Lee, Pang & Kwok for the Plaintiff.

1st Defendant Mr Pai Chung Ying - In person

2nd Defendant Madam Wong Shui May - In person

1993, No: A1916.

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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The Action

1. The plaintiff applied for judgment under Order 14 on its claim against the first defendant for payment of the sum of $2,282,901.07. This was refused by the Master. The plaintiff now appeals against that decision.

The Claim and the Defence

2. The plaintiff issued a writ against the first defendant on 8 March 1993 claiming that, at all material times, the first defendant was a director of the plaintiff and owed to it fiduciary duties. The particulars recite that the plaintiff had an account with the National Commercial Bank and that the first defendant was a director authorised to withdraw money from the account. It is said that in breach of his fiduciary duties, on or about 11 February 1989, the first defendant wrongfully appropriated $2,282,901.07 from that account for his own use and has failed to account for it.

3. In his defence, the first defendant says that he and his wife (who has become the second defendant) carried on business in partnership under the name of Trinitrade Company. Around 1987, it is said, Trinitrade agreed at the request of the plaintiff to obtain banking facilities, including credit facilities, upon security provided by the defendants. These banking facilities were intended primarily for the purpose of the plaintiff's business, and Trinitrade agreed to act as nominee or agent for the plaintiff in operating them. Since 1987, these banking facilities have been operated by Trinitrade on behalf of the plaintiff, and sums due from one to the other were set off.

4. About February 1989, the first defendant says, acting on advice and in the interests of the plaintiff, he withdrew the sum of $2,282,901.07 from the plaintiff's bank account and deposited it into a safe deposit box. This was done, he says, with the knowledge and consent of his fellow directors. Later, he says, without giving any details, this money was withdrawn and placed in accounts to the credit of Trinitrade or himself. Subsequently, the money was repaid to the plaintiff "by Trinitrade Company and the 2nd Defendant, alternatively, through Trinitrade Company and the 2nd Defendant acting as agent of the 1st Defendant; in the alternative, the same was set off against and in any event was far exceeded by payments subsequently made by Trinitrade and the 2nd Defendant to and/or for the benefit of the Plaintiff".

5. During the period 3 June 1989 to 2 November 1989, payments made by Trinitrade Company and/or the second defendant to and/or for the plaintiff's benefit totalled some $4,192,900. Details are given.

6. In the counterclaim, the defendants say that, about May 1991, the plaintiff and Trinitrade attempted to state an account of the sums due from Trinitrade to the plaintiff, "including the subject matter of the Plaintiff's claim against the 1st. Defendant", and the sums due from the plaintiff to Trinitrade. This account, it is alleged, showed that Trinitrade owed the plaintiff $8,325,870 and the plaintiff owed Trinitrade $5,663,414.62.(which should read $5,363,414.62). The balance in favour of the plaintiff of $2,662,456 was to be settled by Trinitrade assuming liabilities of the plaintiff in the sum of $1,303,959 and paying $1,358,497 by cheque post-dated to 15 May 1991. The account was, however, subject to "final verification and adjustment", and it contained substantial errors and omissions. The defendants then give some details of the "errors and omissions". So, the defendants say, the account should be re-opened. They claim an order for re-opening the account and payment of the sum found to be due.

7. In its reply to the defence, the plaintiff pleads that its claim has nothing to do with transactions between the plaintiff and Trinitrade. The plaintiff denies that Trinitrade used the banking facilities as its agent or nominee, and used them for purposes other than the business of the plaintiff. The plaintiff says that it only used the facilities since August 1989, and that was the first defendant's own doing without the approval of the plaintiff's board of directors

8. The plaintiff denies that any of the payments by Trinitrade were repayment to the plaintiff of the sum of $2,282,901.07 wrongfully misappropriated by the first defendant.

9. In its defence to the counterclaim, the plaintiff repeats that what is said in the last paragraph, and adds that it has asked the first defendant "many times" to verify the account by he has refused to do so. The plaintiff says it is willing to verify the account with the first defendant "as the plaintiff's own verification has shown that the defendant and Trinitrade are both indebted to the plaintiff". The plaintiff denies that the May 1991 account included the plaintiff's claim of $2,282,901.07, and it dealt only with transactions between the plaintiff and Trinitrade.

The Situation

10. We have the situation that the first defendant admits taking the sum of $2,282,901.07, the property of the plaintiff. Whether or not the first defendant was authorised to remove the money from the bank account to the safe deposit box in the first place, he was not authorised to use it thereafter, and he does not attempt to say that he was.

11. He says that the money he took was repaid "mostly through the account of Trinitrade on my behalf in accordance with my directions". Specifically, he refers to a document headed "agreement" and signed on behalf of the plaintiff and Trinitrade and draws attention to an item that says "Up to 9th May 1991 . . . Super Electric Motor Limited has temporarily deposited with Trinitrade Co the following sums :- . . . $2,200,000" He says this ". . . shows a sum of HK$2,200,000.00 allegedly to have been temporarily deposited by the Plaintiff with Trinitrade Company. The said sum actually represents the deposit withdrawn by me from the Plaintiff's account with The National Commercial Bank Limited and now claimed by the Plaintiff in this action. As such, the said sum has been accounted for to the Plaintiff by way of set-off against the other sums due from the Plaintiff to Trinitrade Company (i.e. myself) as aforementioned."

12. In another affirmation, he again refers to this sum of $2,200,000 and says "this was intended to cover the HK$2,282,901.00 withdrawn by me from NCB on or about 11th February 1989, because the exact figure was not to hand - that was one of the reasons why the May 91 Account was expressly stated to be subject to further checking."

13. In relation to this sum of $2,200,000, the plaintiff pleads that it was "a separate and distinct amount from the sum of $2,282,901.07 wrongfully withdrawn by the 1st Defendant from the account of the Plaintiff. The said sum of $2,200,000 was paid to Trinitrade in the following manner" and then recites four cheques drawn between 23 March 1989 and 4 April 1989 amounting to $2,200,000. These cheques were endorsed by the first defendant and cashed by the second defendant. The accountant for the plaintiff, Mr Yeung Kwan Lun, says that in March and April he was asked by the second defendant, on four occasions, "to accompany her to withdraw money from the accounts of Plaintiff with the NCB or the HKSB and then redeposited the said money into the bank accounts of Trinitrade or herself with the HKSB or the Dah Sing Bank on the date of withdrawal." He then gives particulars of the same four cheques by which this was done.

14. The evidence regarding this is contained in affirmations dated February 1994. The first defendant signed an affirmation on 18 July 1994. In this affirmation, he specifically refers to the earlier affirmations containing the allegations about how this sum of $2,200,000 arose. He deals in some detail with some of the allegations contained in those earlier affirmations, but says not one word to refute the allegations made that the sum of $2,200,00 was unconnected with $2,282,901.07 taken by him and that it referred to other money taken from the plaintiff.

15. The defence advanced by the first defendant, that he has repaid the money he took, is clearly not made out. When presented with the rebuttal to his allegations about the $2,200,000 being the repayment, he does not attempt to respond.

16. The first defendant does not suggest that, at the time he took the money belonging to the plaintiff, he was repaying himself in respect of a debt that the plaintiff owed him. Indeed, he gives no explanation at all for taking this money.

17. The first defendant says that Trinitrade was "merely handling the accounting transactions as agent/nominee on my behalf. . . . . the true and correct accounting parties in this action are between the Plaintiff and myself even though the accounting transactions were intrinsically intertwined with the account of Trinitrade Company acting on my behalf. [The second defendant] agrees that, insofar as may be necessary, such sum as may be found due from the Plaintiff to Trinitrade should be set off against the Plaintiff's claim herein against me. . . . Trinitrade being a partnership between myself and my wife, I have never drawn any distinction between sums due to the Plaintiff from me personally, and that at all material times, inasmuch as any sums were due from me to the Plaintiff, I believed and intended that the same should be set-off against payments made by Trinitrade and/or my wife to the Plaintiff."

18. Nowhere does the first defendant plead or allege that he had some agreement or arrangement with the plaintiff under which amounts that were due by him personally, especially amounts that he had unlawfully taken from the plaintiff, should be taken into account and set-off against moneys that may be due by the plaintiff to Trinitrade. Nor is it suggested by the first defendant that the plaintiff thought that its dealings with Trinitrade were with the first defendant, or that Trinitrade was dealing with the plaintiff as agent or nominee for the first defendant. In the absence of these factors, it is not, of course, possible in law for a debt due by the first defendant alone to the plaintiff to be set-off against a debt due by the plaintiff to the first defendant and the second defendant together.

19. In any event, it is my belief that the law will not tolerate allowing the first defendant to resist repayment of a sum of money he took from the plaintiff, which was taken in circumstances that involved, to put it at its least blameworthy, a clear breach of fiduciary duty, by pleading that other money may, at the end of the day after resolution of serious disputes, be owing by the plaintiff to a partnership in which the first defendant is one of the partners.

The Result

20. I conclude that the first defendant has not satisfied me that he has a reasonable probability of showing a real or bona fide defence. It cannot be said that there is a fair and reasonable probability that the first defendant has a real or bona fide defence to the plaintiff's claim. It follows that the plaintiff is entitled to judgment in the sum of $2,282,901.07 and that is granted.

Interest

21. The plaintiff is entitled to interest at the judgment rate from today until date of payment. It is also entitled to interest before judgment. In the absence of agreement in this respect, I will hear argument.

Costs

22. It seems to me that the plaintiff is entitled to its costs of action in respect of its claim, and I make an order nisi to this effect.

Representation:

Mr Johnson Lam, instructed by Messrs Y.C. Lee & Pang, for the plaintiff.

Ms Dinna Cheung, instructed by Messrs Jesse H.Y. Kwok & Co, for the first defendant.