LEE SAI NAM v. LI SHU CHUNG AND ANOTHER

HCA 1711/2009

[2018] HKCFI 1365

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1711 OF 2009

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D E C I S I O N

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Appeals before the court

1.  Before the court are the appeals by Mr Li Shu Chung[1] and Li Joseph See Sun[2] (“Ken” and “Joseph” respectively and “Paying Parties” collectively) against 2 orders made by Master K Lo on 17 January 2017 for the issue of interim certificates in respect of parts of the costs claimed against the Paying Parties under various bills of costs (“Bills” collectively) issued by Mr Lee Sai Nam,[3] Allied Ever Holdings Limited,[4] Ms Lee Sin Man Seline[5] and Yuen Hing Enterprise Macao Commercial Offshore Limited[6] (“Mr Lee”, “Allied Ever”, “Seline” and “Yuen Hing” respectively and “Receiving Parties” collectively).

Background

2.  The Bills were issued pursuant to the following costs orders made in this action (“Costs Orders” collectively):

Costs Order	Paying Party or Parties	Receiving Party or Parties
Order dated 19.7.2010 by Master de Souza (“1st Costs Order”)	Ken	Allied Ever
Order dated 15.5.2013 by DHCJ Marlene Ng (“2nd Costs Order”)	Ken	Mr Lee, Seline & Yuen Hing
Order dated 31.5.2013 by DHCJ Marlene Ng (“3rd Costs Order”)	Ken & Joseph	Mr Lee & Seline
Order dated 10.1.2014 by DHCJ Marlene Ng (“4th Costs Order”)	Ken	Mr Lee & Seline
Order dated 9.12.2015 by DHCJ Simon Leung (“5th Costs Order”)	Ken & Joseph	Mr Lee, Seline & Yuen Hing
Order dated 14.3.2016 by DHCJ Simon Leung varying the 5th Costs Order (“6th Costs Order”)	Ken & Joseph	Mr Lee & Seline

3.  Dealing first with Yuen Hing, represented by Christine M Koo & Ip (“CMKI”):

(1)   Pursuant to the 2^nd and 5^th Costs Orders, Yuen Hing filed notice of commencement of taxation on 30 June 2016. 

(2)   By a bill of costs dated 30 June 2016 and amended on 9 August 2016 (“1^st Bill”), Yuen Hing claimed against Ken $3,037,764.50 for the costs awarded to it under the 2^nd and 5^th Costs Orders.

(3)   On 27 September 2016, Ken filed and served his list of objections to the 1^st Bill (“1^st Objections”) by which he set out objections to the extent of $1,705,616,90 which, if all upheld, would reduce the amount of costs payable under the 1^st Bill to $1,332,147.60.

(4)   On 18 October 2016, Yuen Hing applied to set the 1^st Bill down for taxation.

(5)   Both Yuen Hing and Ken requested for taxation with an oral hearing, estimated to require 3 days.

(6)   By letters dated 18 November and 15 December 2016 from CMKI to Ken and Joseph’s solicitors, K & L Gates (“KLG”), Yuen Hing demanded Ken to pay it $1,322,147.60 being the part of the costs claimed by it under the 1^st Bill not objected to by Ken in the 1^st Objections.

(7)   Such demand by letter was not met.  By a summons filed on 6 January 2017 (“1^st Summons”), Yuen Hing applied for an interim certificate for $1,322,147.60 pursuant to Order 62, rule 17(1) of the Rules of the High Court (Cap 4A).

4.  As for the other Receiving Parties, represented by D S Cheung & Co (“DSC”), they filed notices of commencement of taxation and issued 4 bills of costs on 31 August 2016 to claim against the Paying Parties the costs awarded to them under the Costs Orders as follows:

	Costs Order(s) to which Bill was related	Receiving Party or Parties	Paying Party or Parties	Amount of Costs Claimed
“2nd Bill”	5th & 6th Costs Orders	Mr Lee	Ken & Joseph	$6,889,550.30
“3rd Bill”	2nd, 4th, 5th & 6th Costs Orders	Mr Lee & Seline	Ken	$6,945,881.90
“4th Bill”	1st Costs Order	Allied Ever	Ken	$47,878.50
“5th Bill”	3rd Costs Order	Mr Lee & Seline	Ken & Joseph	$121,378.40

5.  On 6 December 2016, the Paying Parties filed and served lists of objections to the 2^nd to 5^th Bills (“2^nd Objections” to “5^th Objections” respectively) setting out objections which, if all upheld, would reduce the amounts of costs payable under the 2^nd to 5^th Bills as follows:

	Amount of Costs Claimed	Amount Of Claimed Costs Objected to	Amount of Costs Payable if All Objections were Upheld
2nd Bill	$6,889,550.30	$4,423,798.40	$2,465,751.90
3rd Bill	$6,945,881.90	$4,404,333.20	$2,541,548.70
4th Bill	$47,878.50	$25,391.20	$22,487.30
5th Bill	$121,378.40	$68,173.30	$53,205.10

For the sake of completeness, regarding the 4^th Bill, Ken also took 2 preliminary objections in the 4^th Objections: (1) firstly that Allied Ever was precluded by Order 62, rule 22(7)(a) from commencing taxation proceedings because the 4^th Bill was out of time having been filed and served more than 2 years after the 1^st Costs Order; and (2) secondly that Ken should alternatively be given a global deduction of 45% off the taxed costs due to Allied Ever’s delay in proceeding with taxation under the 1^st Costs Order.  It will be seen that the second-mentioned objection would affect the quantum of the interim certificate issued in respect of the 2^nd to 5^th Bills.

6.  On 3 January 2017, Mr Lee, Allied Ever and Seline applied to set the 2^nd to 5^th Bills down for taxation.  Both they and the Paying Parties requested for taxation with an oral hearing, estimated to require 4 days.

7.  By a letter dated 22 December 2016 from DSC to KLG, Mr Lee, Allied Ever and Seline demanded the Paying Parties to pay them $5,082,993 being the sum of the parts of the costs claimed by them under the 2^nd to 5^th Bills not objected to by the Paying Parties (i.e. $2,465,751.90 + $2,541,548.70 + $22,487.30 + $53,205.10).  Such demand by letter was not met.  By a summons filed on 11 January 2017 (“2^nd Summons”), Mr Lee, Allied Ever and Seline applied for the issue of an interim certificate under Order 62 rule 17(1), or alternatively interim payment pursuant to the court’s inherent jurisdiction, of $5,082,993.

8.  The applications by the 1^st and 2^nd Summonses (“Summonses”) rest upon the premise that even if the 1^st to 5^th Objections (“Objections” collectively) were all ultimately accepted by the court to the full extent, the Paying Parties would still have to pay the respective amounts sought in the Summonses so the court should now issue interim certificates for those amounts.

9.  Both the Summonses were made returnable before Master K Lo on 17 January 2017 for a 3-minute hearing.  It is fair to say that all the parties treated or were prepared to treat this first hearing as a call-over hearing.  I say so because, before the hearing, the parties’ solicitors exchanged correspondence, which culminated in an agreement for the adjournment of the Summonses for substantive argument to be heard together and for the Paying Parties to file and serve affidavits in opposition to be followed by affidavits in reply by the Receiving Parties, if any, after which there should be no further affidavit without leave of the court.  The only matter on which the parties could not reach consensus was the length of the adjourned hearing, with the Receiving Parties asking for 3 hours and the Paying Parties asking for 1 day.

10.  However, when the Summonses came before Master K Lo on 17 January 2017, she refused to adjourn them for argument and allowed the Summonses there and then by ordering the issuance of the following interim certificates (“Interim Certificates”):

(1)   one for $1,322,147.60 (being the part of the costs claimed under the 1^st Bill) payable forthwith (“1^st Interim Certificate”);

(2)   the other for $2,795,646 (being part of the costs claimed under the 2^nd to 5^th Bills) payable forthwith (“2^nd Interim Certificate”), a breakdown of which is as follows:

(a)   $1,356,163,55 under the 2^nd Bill;

(b)   $1,397,851.78 under the 3^rd Bill;

(c)   $12,368.01 under the 4^th Bill; and

(d)   $29,262.80 under the 5^th Bill.

11.  It can be seen that while the Master allowed the 1^st Summons to the full extent, the amounts she granted under the 2^nd Summons were arrived at after applying a 45% discount to the amounts of costs not objected to in the 2^nd to 5^th Objections.  The Paying Parties have obtained the transcript of the hearing on 17 January 2017 (“Transcript”).  Insofar as I can work out from the Transcript, such discount was applied because of Ken’s claim in the 4^th Objections for a 45% global deduction off the costs taxed under the 4^th Bill.  It is, however, unclear why the amounts claimed in respect of the 2^nd, 3^rd and 5^th Bills to which the Paying Parties have not made the same preliminary objection were subject to the same discount save that the representative of DSC agreed to such deductions for the purposes of the 2^nd Summons.  See page 28F-G.

12.  Mr Wilson Leung, counsel for the Paying Parties, has summarised the Master’s reasons in paragraph 13 of his skeleton submissions dated 20 March 2017 as follows:

(1)   If the receiving party claimed (say) $10 in costs, and the paying party raised an objection in relation to $3, there was no reason why the court should not give “interim judgment” or “partial judgment” on the remaining $7.

(2)   This was because, even if the paying party’s objections were all upheld, the maximum deduction would be $3.  In the Master’s own experience, the court would not reduce the costs further than the extent of the paying party’s objections.

(3)   While the court might reject some of the paying party’s objections and eventually allow more than $7 for the receiving party, this did not prevent the $7 from now being “taxed” costs within the meaning of Order 62, rule 17(1).  This was because the rule referred to any “part”of the receiving party’s costs which had been taxed, and not any “items” of costs which had been taxed.  Thus, the $7 could be regarded as “taxed” at the present stage.

(4)   The interim certificate is a “good way of pressurising even the receiving party to acknowledge or at least consider their position after the interim certificate is given”.

Having reviewed the Transcript, I consider this to be a fair summary of the views expressed by the Master in the course of the hearing on 17 January 2017.  To ensure that the costs for which interim certificates were issued would not be re-opened by another master (i.e. sub-paragraph (3) hereof), Master K Lo directed that the taxation of the Bills should be conducted before herself.

Interim certificates

13.  The power to issue an interim certificate for taxed costs before the conclusion of taxation is derived from Order 62, rule 17(1). I set out the whole rule for the full context:

“17. Interim certificates

(1) A taxing master may from time to time in the course of the taxation of any costs by him issue an interim certificate for any part of those costs which has been taxed.

(2) If, in the course of the taxation of a solicitor’s bill to his own client, it appears to the taxing master that in any event the solicitor will be liable in connection with that bill to pay money to the client, he may from time to time issue an interim certificate specifying an amount which in his opinion is payable by the solicitor to his client.

(3) On the filing of a certificate issued under paragraph (2), the Court may order the amount specified therein to be paid forthwith to the client or into court.” (emphasis added)

14.  There is no dispute that the Interim Certificates were issued in the course of the taxation of the Bills, the same having been commenced by the Receiving Parties’ notices of commencement of taxation in June and August 2016.

15.  Nor is there any dispute that an interim certificate can be issued only for costs which has been taxed. 

16.  In this regard, my attention has been drawn to SY Engineering Co Ltd v Hong Kong Housing Authority [2001] 2 HKC 226.  In that case, the taxing master had begun taxing the receiving party’s bill of costs which ran to 298 pages and claimed for over $25 million, to which the paying party had lodged a 66 page list of objections challenging 550 items.  The taxation could not be finished within the 1½ days allocated and had to be adjourned part-heard.  Before adjourning, the master granted an interim certificate in respect of those costs which had been taxed which amounted to $166,031.  The paying party appealed on the ground that it had already given a $10.5 million bond as security for costs so that there was no basis for ordering the interim certificate. 

17.  In dismissing the appeal, Yeung J (as the Vice President then was) explained at 229D-H:

“Order 62 r 17 empowers a taxing master from time to time in the course of the taxation of any costs by him to issue an interim certificate for any part of those costs which have been taxed.

There was no dispute that when Master Yuen granted the interim certificate, the costs that had been taxed was $166,031. Order 62 r 17 clearly caters for situation whereby the taxing master before the completion of the taxation considers appropriate to order part payment of the costs claimed.

…

Irrespective of the amount of costs sought by the party entitled to be paid, a taxing master should only order interim certificate for the part of the costs which had been taxed.  The reason is obvious.  Once part of the costs had been taxed, the party entitled to be paid should be paid.” (emphasis added)

18.  SY Engineering Co Ltd v Hong Kong Housing Authority is representative of the typical situation in which the court would exercise the power to issue an interim certificate under Order 62, rule 17(1), i.e. where the taxing master has taxed some but not all items of the costs claimed in the receiving party’s bill of costs and has to adjourn the taxation part-heard.

19.  The instant case clearly does not fall within such situation.  The debate before me is whether the Master had taxed any part of the costs claimed under the Bills by the process she went through at the hearing on 17 January 2017.

20.  The challenge by the Paying Parties is one as to jurisdiction, not exercise of discretion.  It is their case that the Master had no power to issue the Interim Certificates as she had not yet taxed any part of the costs under any of the Bills.  She erred in regarding the amounts to be stated in the Interim Certificates as “taxed”.  Although such amounts were equivalent to the amount of claimed costs to which the Paying Parties had not objected, this did not mean that those costs had been “taxed”.  To “tax” essentially means: (1) considering the items of costs claimed by the receiving party; (2) considering the objections raised by the paying party in respect of each item of costs; and then (3) deciding, for each item of costs, the amount which should be allowed.  At the hearing on 17 January 2017, the Master had not started the process of considering the items of costs claimed by the Receiving Parties, and the objections raised thereto by the Paying Parties.  She had not decided, for any item of costs, the amount of costs which should be allowed.  Indeed, the Master accepted that, at the end of the day, she might allow more costs than the amount granted in the interim certificates.

21.  In support, Mr Leung refers to and relies on the following statement by Farwell J (as he then was) in Re Grant, Bulcraig & Co [1906] 1 Ch 124 at 128:

“To tax is to deal seriatim with each item by way of allowance or disallowance. To settle is finally to ascertain the amount (if any) recoverable.” (emphasis added)

22.  Mr Leung also seeks to derive support from the judgment of Registrar Au-Yeung (as her Ladyship then was) in Tsang Sau Hing Beatrice v Yeung Man Loong Maxly [2009] 5 HKC 154 at [1], [2], [7] and [19], which concerned an application made by the receiving parties at the call-over stage of taxation for interim certificates in respect of items of costs in their bills of costs filed for taxation and not objected to in the paying parties’ lists of objections:

“1. In respect of items of bills of costs where the paying party has not raised objections in the list of objections, is the receiving party entitled to interim certificates?

“2. I have no hesitation in answering the question in the affirmative.  Under O 62, rule 17(1) of the Rules of the High Court (Rule 17),

“A taxing master may from time to time in the course of the taxation of any costs by him issue an interim certificate for any part of those costs which has been taxed.”

…

7. Although in SY Engineering Co Ltd v. Hong Kong Housing Authority, the interim certificate was granted pursuant to formal taxation which had gone part-heard, there is no reason why the words of Yeung J are not applicable to the situation where taxation is still at the stage of call-over hearing.  This is because para 1 of PD 14.3 provides that a call-over hearing is to dispose finally of matters where it is apparent that the paying party is no longer interested in or opposing the taxation.  The taxing master can therefore immediately tax and grant an interim certificate for the unopposed items of costs.

…

19. In summary, a taxing master has power under O 62, r 17 of the Rules of the High Court to grant interim certificates for unopposed items in a bill of costs even on the day of the call-over hearing.” (emphasis added)

23.  Mr Alan Kwong (with him Miss Stephanie Wong) for Mr Lee, Allied Ever and Seline and Miss Frances Lok for Yuen Hing, on the other hand, see no reason why an item of partially disputed costs cannot be taxed more than once in stages, firstly at an early stage of taxation for the purpose of Order 62, rule 17(1) based on the extent to which the item is unopposed and then finally at the formal taxation hearing.

(1)   The Paying Parties’ construction that costs is not taxed until the Master has made a final decision on the total quantum allowed in respect of a particular item is against the wording of the rule. 

(a)   First, Order 62, rule 17(1) refers to “any part of those costs which has been taxed”, and not “any items of those costs which has been taxed”. 

(b)   Second, the word “finally” does not appear before the word “taxed” in rule 17(1).  The costs can therefore be taxed by reference to the whole item or a part of it.

(2)   Such construction is also contrary to authority.

(a)   Re Grant, Bulcraig & Co is distinguishable as what Farwell J said was in the context of a taxation between solicitors and client under s 37 of the Solicitors Act 1843, directed by an order for taxation dated 9 December 1904.

(b)   It appears from paragraph 17 of Registrar Au-Yeung’s judgment in Tsang Sau Hing, supra, that she taxed the receiving parties’ bills of costs by deducting from the costs claimed thereby the deductions proposed by the paying parties and issued interim certificates for the differences so arrived at.

(3)   Such construction is not conducive to the attainment of the court’s underlying objectives to increase costs-effectiveness, to ensure that a case is dealt with as expeditiously as reasonably practicable and to ensure fairness between the parties under Order 1A, rule 1(a), (b) and (d).

24.  The issue raised is essentially one of the proper construction of Order 62, rule 17(1).

25.  I have not been shown any definitions of “taxation” or “taxed” in the RHC.

26.  In the absence of any such statutory definitions, given that taxation of costs has been taking place daily in our courts since their establishment, it is in my view reasonable to presume that rule 17(1) was drafted in light of the actual manner in which costs is taxed by the courts.

27.  In this regard, taxation is to be contrasted with summary assessment, where the court takes a “broad-brush approach” and should “not embark on a mini-taxation”: see paragraph 13 of Practice Direction 14.3 on Costs.

28.  As I understand it, at a taxation hearing, the taxing master would have before him the receiving party’s bill of costs and the paying party’s list of objections as well as their respective materials in support or opposition.  As submitted by Mr Leung, the taxing master would (1) review the items of costs claimed by the receiving party; (2) consider the objections raised by the paying party in respect of each item of costs; and then (3) deciding, for each item of costs, the amount which should be allowed.  In short, he would go through the bill of costs and the list of objections and resolve each claim and the objections thereto (if any), item by item. Taxation can therefore be summarised as an item-by-item process whereby the court reaches a decision on what amount of costs to allow on each item of the costs claimed by the receiving party.  An item of costs is taxed when the taxing master decides the amount that should be allowed on it.  The notion subscribed to by Mr Kwong and Miss Lok that an item of costs could be taxed more than once in stages appears to me to be necessitated by their attempts to bring their case within rule 17(1) and therefore begging the question.

29.  I am therefore not with Mr Kwong and Miss Lok in how they seek to distinguish Farwell J’s statement on the nature of taxation in Re Grant, Bulcraig & Co.  While the case was dated and arose from taxation in a different context, it is not suggested that the taxation under s 37 of the Solicitors Act 1843 and directed under the order dated 9 December 1904 was a different process from a taxation under Order 62 as we know it.

30.  That the requirement in rule 17(1) for taxation of the costs for which an interim certificate is issued should be understood as an item-by-item process whereby the court reaches a decision on the amount of costs to be allowed on each item of costs claimed by the receiving party is reinforced by the contrast with rule 17(2).  Under rule 17(2), an interim certificate may be granted in the course of the taxation of a solicitor’s bill to his own client in favour of the client if it appears to the taxing master that in any event the solicitor will be liable in connection with the bill to pay money to the client and if he is able to form an opinion as to amount which he thinks is payable by the solicitor to the client. 

31.  As I see it, the process undertaken by the Master at the hearing on 17 January 2017 was more akin to that provided for in rule 17(2) or the consideration whether to order interim payment on account of costs pending taxation in exercise of the court’s inherent jurisdiction.  It was certainly not taxation in the sense of an item-by-item adjudication on the amount of costs to be allowed on each item of the costs claimed.  She did not refer specifically to any single item of costs, not to mention making any decision on any such item.  Her approach would necessarily entail the taxing master revisiting all the items of the Bills to which the Paying Parties have raised objections at the taxation hearing.   She expressly stated that she might revise any or all of the items upward at the substantive taxation hearing.  All she did at that stage was to indicate a minimum amount which she would probably allow when she eventually taxed the Bills. 

32.  Indeed, as submitted by Mr Leung, there is no reason in principle why a taxing master could not, at the end of the day, reduce the costs further than the extent of the paying party’s objections (e.g. where the paying party is acting in person and has difficulty in formulating proper objections, but it is obvious to the taxing master that a particular item of costs is grossly excessive).  Costs are always in the court’s discretion, not bound by the parties’ positions.  What is being decided here is a point of principle potentially affecting other cases.  It is thus not an answer to say that, in this case, Master K Lo ensured that this would not happen by reserving the taxation of the Bills to herself. 

33.  I have not overlooked the parties’ conflicting readings of Tsang Sau Hing, supra. 

34.  It is accepted by counsel for all parties that, based on Tsang Sau Hing, where there are items of costs that are wholly unopposed, the taxing master is clearly entitled to immediately tax such items as drawn and issue an interim certificate for the amounts of the same under rule 17(1) at the taxation call-over hearing. 

35.  However, what we have here are mostly items of costs that are partially opposed (such as a claim for costs for 10 hours of work by a partner of the receiving party’s solicitors is met with an objection that the work should be done by an assistant solicitor who should take just 5 hours). 

36.  On one hand, the paragraphs cited in paragraph 22 above, especially the words underlined, tend to support Mr Leung’s submission that the taxing master cannot partially “tax” all disputed items up to the extent that they are not opposed and issue an interim certificate under rule 17(1)  for the total amount of the unopposed costs or otherwise based on such amount.

37.  However, as noted by Mr Kwong and Miss Lok,  it appears from paragraph 17 of Registrar Au-Yeung’s judgment that she might have taxed the receiving parties’ bills of costs by deducting from the costs claimed thereby the deductions proposed by the paying parties and issued interim certificates for the differences so arrived at.

38.  I have read Tsang Sau Hing a number of times.  The ambiguity does exist and cannot be resolved on the basis of what is disclosed in the judgment.  If the interim certificates issued in that case did cover the difference between the costs claimed by the receiving parties and the costs objected to by the paying parties across the board, for the reasons stated above, I respectfully depart from Tsang Sau Hing.  I note that the Registrar did not appear to have been addressed on the proper construction of Order 62, rule 17(1), at least not to the same extent as I have been in this case.  Indeed, I note from paragraph 4 of the judgment that the paying parties in Tsang Sau Hing raised no such question of construction.

39.  As for the argument based on the underlying objectives in Order 1A, rule 1, it would have more force if a receiving party could not otherwise obtain early payment of unopposed costs in advance of the conclusion of taxation.  This is, however, not the case, as shown under the next heading. 

40.  Likewise, the risk of temptation to abuse the process of taxation by raising some objections to each and every item of costs that is said to arise from the above interpretation of Order 62, rule 17(1) would be neutralised by the existence of means outside such rule for a receiving party to obtain early payment of unopposed costs in advance of the conclusion of taxation. 

41.  On these notes, I turn to Mr Lee, Allied Ever and Seline’s alternative application for interim payment.

Interim payment

42.  Mr Leung accepts that the court, under its inherent jurisdiction, can order an interim payment of costs: see Re Hawkins Development Ltd [2010] 1 HKLRD 535 at [17]-[19], [24]-[26] per Kwan JA (sitting as an additional judge of the Court of First Instance; and Lau Yue Kui v Philip Chan & Co (a firm), CACV 75/2014, unreported, 29 December 2014, [28(1)-(4)] per Cheung JA.

43.  In support of his submission that this court should itself exercise such jurisdiction by ordering interim payment in the same amount as the 2^nd Interim Certificate, Mr Kwong has drawn my attention to and/or highlighted the following:

(1)   This action has lasted 7 years from 2009 to late 2016.

(2)   Almost each and every interlocutory application was fought.

(3)   The trial of liability, excluding questions on quantum, lasted for 20 days and at which his clients were represented by a team of 2 senior counsel and 1 junior counsel.  A certificate for 2 counsel was granted by the trial judge.

(4)   The latest costs order in question was made in March 2016.

(5)   The costs to which his clients are entitled would include their costs of pursuing the original action and defending the action by counterclaim including costs reserved.  The quantum recoverable would most likely far exceed the amount sought by way of interim payment which is just 55% of the unopposed costs claimed under the 2^nd to 5^th Bills.

(6)   The appeal from the judgment on liability by the Paying Parties was dismissed by the Court of Appeal on 19 January 2017.

44.  These are compelling factors favouring interim payment. 

45.  However, I have been referred to a number of authorities decided by the courts of England and Wales (where the power to order interim payment of costs has been made statutory) before the introduction of a statutory rebuttable presumption in favour of interim payment in 2013: Mars UK Ltd v Teknowledge Ltd [2000] FSR 138; Dyson Ltd v Hoover Ltd (No 4) [2004] 1 WLR 1264; and Blakemore v Cummings Practice Note [2010] 1 WLR 983 (CA).

46.  It is unnecessary for me to go into these cases in any detail save to observe that the discretion to grant or refuse an application for an order for interim payment should be exercised on merits having regard to all the circumstances of the particular case.  Even where the court considers that it could with some certainty fix an appropriate sum, there may still be good reason why it is inappropriate to order interim payment: per Elias LJ in Blakemore at [24].

47.  I have not been shown any cases in which the court dealt with an application for an order for interim payment of costs without reference to evidence from both sides.

48.  In this regard, insofar as the Paying Parties are concerned, the parties did, before the hearing on 17 January 2017, agree on directions for the filing and service of affidavits in opposition by the Paying Parties.  Due to the proximity of the dates of the Summonses and the date of the hearing before Master K Lo and the unexpected turn in which the hearing took, the Paying Parties did not have any or any proper opportunity to place before the court in evidence what they consider to be circumstances material to whether interim payment of parts of the costs claimed in the 2^nd to 5^th Bills should be ordered or not. 

49.  In these circumstances, while I have considerable sympathy with Mr Kwong’s clients, in the interest of procedural fairness, I am not comfortable with shutting out the Paying Parties.  I have not overlooked the fact that Mr Kwong appears to have some answers to the few considerations that Mr Leung has managed to raise in his supplemental skeleton submissions in the short time available to him.  However, I do not feel able to assume that the Paying Parties, if given a proper chance to prepare evidence in opposition, would have nothing else to say.  I agree with Mr Leung that the proper course is to remit Mr Lee, Allied Ever and Seline’s alternative application for an order for interim payment back to the Master.

Dispositions

50.  For the reasons stated above, I allow the Paying Parties’ appeals and set aside the Interim Certificates.  I further remit paragraph 2 of the 2^nd Summons back to the Master.

51.  I also make an order nisi that

(1)   the Receiving Parties should pay the Paying Parties’ costs of their appeals, to be taxed if not agreed on a party and party basis with certificate for counsel;

(2)   Yuen Hing should pay Ken the costs occasioned to him below by the 1^st Summons, to be taxed if not agreed on a party and party basis; and

(3)   the costs of the 2^nd Summons should be reserved pending the determination of paragraph 2 thereof.

  

  

HCA 1711/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 1711 OF 2009

________________________

________________________

________________________

D E C I S I O N

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1.  On 9 December 2015, I handed down judgment after a 20-day trial in the present case (“the Judgment”). The same definitions and abbreviations in the Judgment are adopted here. I found in favour of the Father, Seline and Yuen Hing on liability. Failing on that front, Ken’s counterclaim lost its footing and was dismissed. I made a nisi order that the Father shall have its costs of the action, including those of defending the counterclaim against him; and Seline and Yuen Hing shall have their respective costs of defending the counterclaim. Costs include those that have been reserved, and shall be taxed, if not agreed. The parties had 14 days to apply to vary the nisi order, and in that event, the matter might be disposed of by way of paper ruling.

2.  On 22 December 2015, the successful parties filed their respective summonses for variation of the nisi costs order.  Upon consultation with the parties, I gave directions for the lodging of written submissions and paper disposal of the applications.  The last submission was lodged in February 2016.

3.  By their respective summonses, the Father, Seline and Yuen Hing ask that the costs awarded nisi to them respectively to be taxed on indemnity basis.  The Father and Seline also ask for certificate for 3, or alternatively, 2 counsel representing them.

INDEMNITY COSTS

4.  O.62, r.28(3) of the Rules of the High Court provides that the court may direct costs awarded to be taxed on the common fund or indemnity basis.  In order to obtain such order, the receiving party should show that the case has some special or unusual features.  The classic case is the presence of ulterior motive or underhand conduct on the part of the paying party.  It may be that the proceedings were scandalous or vexatious, or initiated or prosecuted maliciously or for an ulterior motive or in an oppressive manner or in such circumstances as to constitute an affront to the court: see Overseas Trust Bank Ltd v Coopers & Lybrand (a firm) & Peat Marwick, Mitchell & Co (a firm) & Anor (third parties) [1991] 1 HKLR 177 at 133E-F.

5.  Litigants who conducted their cases in bad faith, or as a personal vendetta, or in an improper or oppressive manner, or who cause costs to be incurred irrationally or out of all proportion as to what is at stake, may also expect to be ordered to pay costs on an indemnity basis, if they lose: see Choy Yee Chun v Bond Star Development Ltd [1997] HKLRD 1327 at 1335 (citing Sung Poo Kee Ltd v Pak Lik Co [1996] 3 HKC 570 at 575).

6.  However, the circumstances in which such an order may be made are not defined or confined. The discretion is not to be fettered or circumscribed beyond the requirement that such an order must be appropriate: see Town Planning Board v Society for Protection of the Harbour Ltd (No 2) (2004) 7 HKCFAR 114 at §§12-17[1].  What constitute appropriate circumstances in this context is fact-sensitive.  The conduct of the paying party is cogently relevant.  This could be where the proceedings in question should never have been brought or defended but the party nevertheless unreasonably and unjustifiably persisted: see Huge Dragon Corp Ltd v Lung Mun Oasis (IO) [2014] 3 HKLRD 286 at §13, or where the losing party continued to pursue a misconceived claim without objectivity, and it was called into question whether this was motivated by personal grudge against the successful party and thus an abuse of process: see Wu Mei Sam v Pui Ying Middle School of Hong Kong [2015] 4 HKLRD 864[2] at §§21-23.

7.  It was submitted on behalf of the Father, Seline and Yuen Hing that Ken’s conduct of his case was disproportionate and oppressive so as to warrant sanction by indemnity costs.  On behalf of Yuen Hing, it was submitted that it could fairly be concluded that Ken’s counterclaim and his conduct of it involved his possible pursuit of economic gain at the expense of the other family members and personal grudge against them, which was much more than merely consequential upon the Father’s claim against him.  Such was misuse of legal proceedings, which should attract the court’s signal of it displeasure by indemnity costs order against him.

8.  The Father’s side highlighted features which, they said, reflected poorly on Ken’s case and his conduct of it, if not themselves signs of abuse.  I summarise a few below:

(1)  Ken came up with the alleged oral profits sharing agreements only by way of belated amendment to the pleading.  Further allegations in that respect beyond the pleading were still made at the trial.  The assertions were eventually rejected as being incredible.

(2)  Both the Father’s side and Ken’s side had amended their respective pleadings several times.  But those by Ken were inexplicable and failed to stand the test of trial.  The rounds of substantial changes in his case, including withdrawal of admission, and the attribution of those changes to the alleged multiple failure of his former legal representatives were rejected as wholly incredible.

(3)  Ken called some witnesses, whose pretence of neutrality and independence from Ken was far from truthful.  That was exposed only during the trial, and their evidence duly not preferred.

(4)  The introduction of the evidence of Mazars was futile.  The evidence per se could not prove the existence of the alleged oral profits sharing and distribution agreements.  The witnesses from Mazars also reinforced the discretionary nature of the Father’s distributions of the profits.  As far as what the entries in the ledgers meant, the evidence of Mazars’ interpretation, as a third party, could not override what the Father, as the maker, meant (though objectively assessed).

(5)  The past calculations and distributions of profits recorded by the Father in the ledgers as studied by Mazars was deployed to work out the various alleged profits sharing and distribution formulae by way of reverse engineering.  The evidence was clear that Ken never informed Mazars of the alleged agreements.  The exercise turned out to be futile even for his purpose.  The exposure of the mistakes in his formalae was testament.  The introduction of evidence on the basis of such forensic exercise only served to prolong the trial and to escalate costs.

(6)  The reliability of the alleged minutes of the family held on 31 October 2008 and the secret tape-recording of the meeting between Ken and the Father in December 2008 as the self-serving evidence of the alleged admission by the family members and the Father was rejected.  Those were consecutively engineered by Ken, including taking advantage of the aged father who was known to him to be suffering bilateral impaired hearing ability.

(7)  Misconceived contentions and arguments were raised.  Arguments such as the admissibility of evidence (as per the witness statements on the Father’s side) with reference to the presumption of advancement were dismissed as being misconceived.   The contention of the illegality of the Luen Tat trust arrangement in the 1980s was never pleaded and was dismissed.

(8)  Since the previous adverse findings in respect of Ken’s alleged entitlement to PTTC as well as Pak Tat by the Companies Court[3], the renewed attempt with adjusted factual contentions in the same respect in the present case was again ruled against Ken.

(9)  Despite the court’s previous rulings against him in his application for discovery prior to the trial, Ken repeatedly criticised the Father’s side for failure to make discovery; and even attempted to make voluminous discovery on the 11^th day of the trial.  The attempt was rejected.

(10)  The contention that the Father, Seline, Richard and Yuen Hing were liable to account for substantial overpayment of profits by Luen Tat was not a pleaded claim.  Nor was Richard was even a party to the pleaded counterclaim.  Any cause of action as alleged would have belonged to Luen Tat.  Such assertions should not have been raised during the trial.

(11)  By her 6^th affirmation dated 23 December 2015, Seline gave an account and produced documentary evidence of telephone messages and letters to the Father, which were said to be harassing, berating and threatening him in relation to the continuation of the present case.

9.  On behalf of Ken, it was submitted that there was no finding of actual dishonesty on his part.  As mentioned, the circumstances warranting the consideration of indemnity costs are not defined or confined.  The discretion of the court is not be fettered by whether such factual finding must exist.  Having said that, I still need to find the affront or abuse of process, over and above the preference of a party’s case to the other or the dismissal of a case for being (wholly) incredible on the evidence, before the circumstances could be said to afford as appropriate and warrant an indemnity costs order.

10.  The starting point is that substantial part of the dispute in the present case rested upon the evaluation of the oral evidence from the two sides of the dispute in respect of events over years.  As apparent from the Judgment, the case and how it was put forward, including the pleadings, formed part of the consideration of the relative credibility of the parties’ respective case.  The analysis as set out in the Judgment did not suggest observations over and beyond similar exercise in any given case.

11.  I say the same in respect of the assessment of the credibility of the witnesses for Ken.  The alleged minutes of the family meeting dated 31 October 2008 was rejected, because it was considered unreliable for the reasons set out in the Judgment. The secret tape-recording of the conversation between Ken and the Father may be questionable morally.  But the reality was that it was not a concocted piece of evidence.  The dispute lied in what were said, which, as explained in the Judgment, could not be better judged except by the court listening to it.  This I did, and made the relevant finding adverse to Ken as a result.

12.  The evidence from Mazars was substantial, and they proved to be futile for Ken’s purpose for reasons as explained in the Judgment.  However, it came to exist as contemporaneous evidence of verification of the calculations in the Father’s ledgers prior to litigation.  Ken was criticised for “reverse engineering” in that he put those formulae forward as the alleged agreements.  But the fact was that he asserted the alleged oral profits sharing agreement in any event, and, as held, the evidence from Mazars did not serve to prove that assertion.  That Ken lost on his reliance on such evidence, including the mistakes he made in the formulae, were part and parcel of the consideration of the evidence in assessing the relative credibility of the parties in this respect.

13.  As to certain conduct of the trial on the part of Ken, his attempt to adduce further documentary evidence on the 11^th day of the trial was disposed of on the spot with costs reserved.  The costs order made at the end included that against him.  The advance of arguments in respect of legal presumptions, illegality (without proper pleading) and the purported claim against the Father’s side including Richard, who was not a party to the counterclaim, were no doubt dismissed.  But I would be slow to conclude that they, and the consequential escalation of costs, were so out of proportion as to constitute affront to the court or abuse of process.

14.  As to the dispute in respect of Pak Tat, it should be noted that I proceeded to consider the factual allegations of Ken, and ruled against him without adjudicating on the contention whether it was an abuse of process (res judicata).  The finding on the basis of the allegations and evidence in this respect was again the result of assessment of the relative credibility of the parties, like any given case.

15.  The affirmation of Seline referred to was dated after the Judgment has been handed down.  That further evidence would be adduced for the present purpose was not actually indicated even during the court’s consultation with the parties on the directions necessary for the paper disposal.  It is in my view not legitimate or fair to take that into account like this for the present purpose.

16.  All considered, including those features highlighted by the Father’s side, I would still refrain from finding the necessary affront and abuse to take this case out of the cases of ordinary hostility or conflicting assertions and contentions that would have warranted an indemnity costs order.

CERTIFICATE FOR COUNSEL

17.  This is between the Father and Seline on one side and Ken and Joseph on the other. Both sides were represented by leading counsel.  Ken and Joseph did not oppose certificate for 2 counsel for the Father and Seline.  The only real question is whether their engagement of 3 counsel should be certified.  Mr William Wong and Mr Kwong have been instructed and handling the present action (and some, if not all, related actions).  Mr Wong Yan Lung, leading counsel for the Father and Seline, was engaged for the trial.

18.  Reference was made to the significance of the present trial (to the litigants and the other related litigations), the value at stake and the extensiveness of the factual dispute.  They are relevant.  The parties also engaged themselves in the exercise of comparing the aggregate years of experience of the counsel team acting for the respective sides.  This is not helpful, as the concern in that case should have been the choice of counsel (at early stage) instead of an exercise of topping up in terms of aggregate years of experience.

19.  All considered, with no disrespect, I am not persuaded to certify the engagement of 3 counsel for the Father and Seline.  This in no way reflects any reservation at all about the most able assistance received by this court throughout the trial or compromises the court’s gratitude for that.

VARIATIONS SOUGHT BY KEN AND JOSEPH

20.  The request by Ken and Joseph for variation of the nisi costs order was made in the absence of a cross application but was included in their submissions in opposition of the applications by the Father, Seline and Yuen Hing.  How this was considered possible or appropriate defies understanding.  With respect, I agree with what Stone J said in UDL Holdings Limited & Anor v Leung Yuet Keung & Anor, HCA 4409/2002 (19 January 2009):

“45. As I understand the situation, notwithstanding the date of the judgment containing the order nisi......, no move whatever was made by the successful defendants to vary this order nisi until the plaintiffs themselves sought a variation.

46. Whilst the matter has not been expressed thus, the defendants’ underlying assumption is that by means of the plaintiffs’ application so to vary, the plaintiffs thereby have rendered the costs issue at large, with the result that there is no necessity to ask for an extension of the 21 day period as prescribed for a variation application, nor indeed to proffer any explanation for the delay, and that the defendants thereby are entitled to put forward their own plea for a variation.

47. With respect, I consider that this approach is neither permissible nor appropriate.

48. It seems to me that in principle an application to vary a costs’ order nisi is ‘party-specific’, by which I mean that, absent any cross-application within the prescribed period by the opposing party in whatever terms may be considered appropriate, the approach of the respondent to any variation application as properly constituted is confined to resisting the application and to upholding the order nisi as originally made, and I fail to see why the fact of a variation application by one party in effect gives the opposing party carte blanche to make its own distinct and substantively different variation application out of time.

49. Of course, it remains open to the party which is out of time to seek leave to extend time to make such variation application, but no effort has been made to do this in this case, and for my part I wish to give the lie to the apparent idea that a cross-application simply can be ‘tacked on’, as of right, to a properly-constituted application. In my judgment it cannot. And in the current instance the court has been given no material upon which to exercise any discretion to extend time, even had it been asked to do so, which it has not.

50. Thus I am unable to agree with the contended effect of the defendants’ reliance, as outlined in its ‘Addendum to Defendants’ Submissions’, upon the terms of Order 42, rule 5B(6), which provides that “Where a written decision is given pursuant to this rule the Court may make therein an order nisi as to costs and, unless an application has been made to vary that order, that order shall become absolute 14 days after the decision is pronounced”, and the corresponding assertion, following upon citation of that Order, that “the order nisi has not become absolute due to the plaintiffs’ application to vary and therefore can be considered by the court afresh”.

51. The short point, it seems to me, is that the order nisi indeed can be reconsidered by the court, upon appropriate application within time, in terms of the variation proposed, but only in terms of that proposed variation, and that if and in so far as the opposing party wishes to canvass its own variation, for the reasons adumbrated in any specific application, the court can and will consider that variation also; however, as earlier indicated, what in my view it does not do is effectively to throw the entire issue costs’ issue open to general and unrestricted debate, and thereby relieve the opposing party from responsibility for the proper formulation, within time, of its own proposed variation.

52. Accordingly, if this view be correct, this ruling leaves the defendants’ application out of time and out of court for a variation in terms of the appropriate scale of the original costs’ order, and the application thus is rejected on this basis alone.

……”

21.  In the present case, I consciously made a nisi order as to costs instead of leaving the issue of costs at large and inviting the parties to make submissions[4].  It would therefore be for the parties to apply for variation of the nisi order, if they desire.  There was no indication whatsoever by Ken or Joseph of any intention to seek to vary the nisi costs order.  That was so even in the correspondence upon this court’s consultation with them on the directions for paper disposal as envisaged by the Judgment[5]. When they finally came to decide to seek to vary the nisi costs order, they still cared not to take out any application, let alone one for extension of time.  In the circumstances, what they may legitimately do is to respond to the applications by the Father, Seline and Yuen Hing and no more.

22.  In any event, the request for variation by Ken and Joseph, even if considered, would not have been acceded to.

23.  As far as Ken is concerned, it was argued that Yuen Hing ought not to have been represented separately because it was controlled by the Father and Seline, and they ran the same line of defence to the counterclaim.  Unlike issue as to authority, justification for separate legal representation may be raised as relevant to the issue of costs when the issue is under consideration.  It matters not whether it has been raised before.  However it is not immediately apparent that separate legal representation of a corporate body and its controlling shareholders or directors, being separate entities, in the present case was unreasonable.  That counsel for Yuen Hing essentially adopted the cross examination by counsel for the Father and Seline at the trial, as a considered approach in conduct of the trial, is not to be faulted.

24.  As far as Joseph is concerned, it was argued that he was but a nominal defendant.  As pleaded by him and observed by this court[6], there was no suggestion that Joseph was involved in the family business and dispute other than being the holder of shares in Luen Tat transferred by Ken in 2009.  The Father joined Joseph as a defendant because he was a necessary party for the purpose of the relief sought in respect of the shares in Luen Tat.

25.  However Joseph did not therefore become a nominal defendant as now described.  The fact was that Joseph never indicated a neutral stance whereby he would abide by any order of the court upon adjudication of the contest between the Father’s side and Ken.  Represented by the same legal team acting for Ken, Joseph put forward his defence putting the Father to proof of the claim in the original action.  He put in his witness statement testifying to his knowledge and belief that the shares in questions were owned by Ken.  The Father was required to prove their case against Ken as much as against Joseph.  The suggestion of no order as to costs between the Father and Joseph effectively means the former would be deprived of his costs of successfully proving the case against Joseph.  This cannot be right in principle, however much the costs incurred against Joseph were subsumed in the costs against Ken.

26.  The background and extent of Joseph’s involvement in this litigation may well justify the consideration of ordering the costs of the Father’s side against him to be borne by Ken.  However, this differs from what Ken and Joseph are seeking.  Nor is this sought by the Father’s side.

ORDER

27.  The nisi costs order dated 9 December 2015 is varied so that there is certificate for 2 counsel for the Father and Seline; and subject to that, the nisi order is hereby made absolute.

28.  The above event reflects no real success in the controversial aspects of the applications by the Father and Seline or Yuen Hing.  I therefore order that Ken and Joseph do have the costs of and occasioned by these applications, to be taxed, if not agreed.  This costs order is nisi and shall become absolute in the absence of application in 14 days.

HCA 1711/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 1711 OF 2009

________________________

________________________

________________________

J U D G M E N T
________________________

1.  This is one of the many legal battles in which the members of the Lee family are entangled.  Previous directions have been made so that the determination of the present action shall come first; and the trial of the issues of liability and quantum in the present action shall be split.  This is the trial on liability.

BACKGROUND

2.  Lee Sai Nam (the plaintiff by original action and the 1^st defendant by counterclaim) (“the Father”) and his wife Madam Lee Kui Mui (“the Mother”) gave birth to 4 children, 3 of which were involved in the family business set up by the Father and the present dispute.  Li Shu Chung, also known as Ken Li (the 1^st defendant by original action and the plaintiff by counterclaim) (“Ken”) is the eldest son.  Lee Sin Man Seline (the 3^rd defendant by counterclaim) (“Seline”) is the younger sister of Ken.  Li Shu Hang Richard (“Richard”) is the younger brother of Ken and Seline.  Also named as a party to the present action is Li Joseph See Sun (“Joseph”) (the 2^nd defendant by original action), who is the son of Ken.

The family business

3.  The Father founded the family business of manufacturing watchband products and accessories in mid-1950.  In 1972, the Father incorporated in Hong Kong Luen Tat Watch Band Manufacturer Ltd (“Luen Tat”), which became the marketing arm of the business.  In 1981, the Father set up Pak Tat Trading Company (“PTTC”), which became the manufacturing arm of the business.  The Father and the Mother were then the sole shareholders and directors of Luen Tat, while the Father was the sole proprietor of PTTC.

4.  The Father had received meagre formal education.  He oversaw the operation and management of his business the old fashioned way.  Central to that was his keeping of own informal ledgers on the financial situation of the business without professional accountant’s assistance throughout the years.

5.  Ken was educated and married in England.  In his 20s, Ken returned to Hong Kong in 1985-1986 to work for the Father at Luen Tat.  His position was sales director.  Ken and his wife, who is British, kept their home in England, where all their children studied.

6.  In 1986-1987, the Lee residence was erected in Kowloon Tong (“the Family Residence”).  It was held by Roteland Development Ltd (“Roteland”), of which the Father and Ken (through their corporate nominees) were on record shareholders. Ken moved into the 3/F of the Family Residence.  The Family Residence forms the subject matter of other litigation.

7.  In about April 1986, the Father and the Mother assigned all the shareholdings in Luen Tat to Ken and his wife at no consideration.  The nature of and intention behind the arrangement is a matter of dispute.

8.  In the early 1990s, at the Father’s request, Seline started to work for family business, and had since then handled the financial and accounting affairs of the group.  The Father also obtained from her the business figures for compiling his own ledgers.

9.  Two things happened in about 1992.  First, Richard returned from Canada after his graduation, and started to work for the group.  His position was sales director of Luen Tat.  Second, the Mainland manufacturing base, namely, Lianda Metal Watchband (Shenzhen) Co Ltd (“Shenzhen Lianda”), was set up in Shenzhen.

10.  In 1993, Ken and his wife transferred 49% shareholdings in Luen Tat, then in their hands, to Richard.  Ken continued to hold 51% shares in Luen Tat.  The nature of and intention behind the arrangement is also a matter of dispute.

11.  Shenzhen Lianda owned its land and the manufacturing base erected there.  All the shares in Shenzhen Lianda were registered under the name of PTTC, which, as mentioned, was the sole proprietorship of the Father.  Ken now asserts half beneficial ownership of PTTC and Shenzhen Lianda.

12.  In 1995, for tax planning purposes incidental to the emigration plan of the Father and Richard, professional advice was sought.  This led to the restructuring of the shareholdings in Luen Tat to be held by the respective family trusts of Ken and Richard.  The authorised capital of Luen Tat was increased.  The existing 15,000 ordinary shares were converted to become 5% non-voting deferred shares. 100 new shares were created with voting rights (“New Shares”). 51 New Shares were allotted to the corporate vehicle of Ken, namely, Joesh Overseas Ltd (“Joesh”) while 49 New Shares were allotted to Richard’s corporate vehicle, namely, Full Moon Investments Holdings Inc (“Full Moon”).

13.  The understanding of the parties upon the restructuring of shareholdings in Luen Tat, as in the case before that, is in dispute.

14.  For tax saving purpose, Luen Tat put in place a re-invoicing operation.  In 2002, the re-invoicing operation was moved[1] to a new company incorporated in Macao, namely, Yuen Hing.  Seline was put in charge as the administrator of Yuen Hing.  Luen Tat would place orders with Yuen Hing for the goods required in its business, and Yuen Hing would place corresponding orders for the goods with Shenzhen Lianda.  As such, Yuen Hing would invoice and receive payment from Luen Tat for the goods.  Yuen Hing is therefore said to be the keeper of income of the group, and for his counterclaim Ken joined it as a defendant.

15.  Following professional advice, Pak Tat Trading Co (“Pak Tat”), a Mauritius company, was registered in Hong Kong in 2002 as the vehicle to take the palce of PTTC to hold the shares in Shenzhen Lianda.  All the shares in PTTC were transferred to Pak Tat, and the transfer of shareholdings in Shenzhen Lianda from PTTC to Pak Tat eventually also received the approval of the Mainland authority.  The consideration on record was HK$53 million.  No actual payment was made by Pak Tat to the Father for the transfer, and the sum was entered as the Father’s shareholder’s loan to Pak Tat.  The Father was the authorised representative of Pak Tat, while he, Ken and Richard were its directors.  Following his assertion of beneficial interest in PTTC and Shenzhen Lianda, Ken also asserts half beneficial ownership of Pak Tat.

16.  Since the establishment of Shenzhen Lianda, the Father had stationed there for 1 to 2 days every week.  In about 2005, the Father, who was in his mid-70s, had an accident when he slipped and fell in the dormitory of Shenzhen Lianda.  The injury caused the Father to decide to visit the manufacturing site less.  Yet even after that, the Father would still go to the office of Luen Tat in Hong Kong, and continue to sign cheques as the sole authorised bank signatory of Luen Tat.  The Father also continued to keep his ledgers on the financial situation of the group with the assistance of Seline.  The parties are in dispute as to the circumstances in which the Father had been doing so and what that manifested.

17.  In about mid-2006, Richard resigned and ceased to be involved in the business of the group.  The circumstances in which Richard did so are matters of dispute. In any event, he formally resigned as a director of Luen Tat in December 2007, and caused the transfer of the 49 New Shares in Luen Tat to the Father’s nominee in April 2009.

18.  Back to September 2006.  Then the Father caused shares in Pak Tat to be allotted to Ken, and thus making him on record 50% shareholder of the company.  Why the Father did so is a matter of dispute.  The Father holds the other 50% shares in Pak Tat.

19.  On 31 October 2008, a meeting was held.  It was attended by the Father, Ken, Seline and Richard.  Lai Yuk Wah (“Lai”) was present at the invitation of Ken.  Certain draft minutes of that meeting had been prepared but was never signed by the Father, Seline or Richard.  The nature of and discussion in the meeting are matters in dispute.  So is the conclusion.

20.  In any event, it was decided that Seline would leave the group.  However, she was re-engaged shortly afterwards as a consultant to handle the accounting matters of the group.  The circumstances surrounding her departure and re-engagement are matters of dispute.

21.  In December 2008, Ken, in his capacity as the sole director of Luen Tat, cancelled the authorisation to the Father, and made himself the sole authorised bank signatory of Luen Tat.

22.  In the same month, Ken spoke to the Father in private, during which Ken raised with the Father the issues of sharing and distribution of profits as well as Ken’s alleged entitlement to all the money in the group.  Unbeknownst to the Father, Ken tape-recorded their conversation during the meeting.  The content (somehow) and reliability of the recording as evidence of alleged admissions made by the Father is in dispute.

23.  By early 2009, at the instruction of Ken, Mazars CPA Limited (“Mazars”)[2] had also met with the Father more than once to verify his calculations in the Father’s ledgers.

24.  During the few months by May 2009, Ken caused a total sum of HK$28 million to be paid by Yuen Hing in settlement of Luen Tat’s invoices (upon the re-invoicing) into his personal account.

25.  Meanwhile, in late March to early April 2009, there was negotiation between the Father and Ken through the Mother, the details of which are in dispute.

26.  In April 2009, as mentioned, Richard caused Full Moon to transfer the 49 New Shares in Luen Tat to the Father through his wholly owned BVI corporate nominee, Allied Ever Holdings Limited (“Allied Ever”).  The claim in the present action against Ever Allied had been withdrawn.

27.  In May 2009, Ken caused Joesh to transfer the 51 new shares in Luen Tat to his son, Joseph.  Hence the naming of Joseph as a defendant in the claim.  There is no suggestion that Joseph was otherwise involved in the family business and dispute.

28.  By then, the ownership of the group, on record, was that 51% of Luen Tat was held by Ken and Joseph, while 49% was held by the Father through Allied Ever.  The Father and Ken held 50% each of Pak Tat, which in turn wholly owned Shenzhen Lianda. Yuen Hing was wholly owned by a BVI corporate vehicle, and Seline remained its registered administrator.

29.  In May 2009, Ken repeated his attempt, through a family friend, Ms Kitty So (“Kitty So”), to secure the Father’s signature on a draft resolution, which was said to reflect what was agreed during the meeting of the family members on 31 October 2008.  The Father again refused to accept and made his counter-proposal.

30.  In June 2009, Seline again left the group.

31.  On 11 June 2009, the Father, accompanied by Seline, attended the office of Luen Tat, seeking to inspect and to copy accounting documents.  This eventually met with the resistance of Ken and his associates.  On the occasion, Seline was allegedly assaulted by Ken, and was hospitalised.  The Father had had no access to the company documents since then.  What exactly happened is a matter in dispute.

32.  In July 2009, Ken and his family moved out of the 3/F of the Family Residence.

Profits from the business

33.  When Ken started to work for the Father, he received 10% of the business profits distributed.  This remained the case, notwithstanding the assignment of all the shareholdings in Luen Tat to Ken and his wife in 1986.  This lasted until 1988.

34.  For the period between 1988 and 1992, the Father and Ken received 50% each of the profits distributed.

35.  Richard joined and worked for the family business in 1992.  Of the profits distributed, Richard was given 25% while the Father and Ken received 37.5% each.  This was the ratio, notwithstanding the fact that all the shares in Luen Tat were held by Ken and Richard in the 51:49 ratio.

36.  The distribution of profits changed in 1994, when Seline started to receive 10% of profits distributed before the Father, Ken and Richard shared the remaining 90% in their respective percentage ratios mentioned above.  In other words, the Father and Ken received 33.75% each while Richard received 22.5%.

37.  In 2002, the Father decided not to take his percentage share of the profits.

38.  Profits were last distributed in 2006.

39.  The dispute essentially is whether the distribution of the profits was a matter of the Father’s sole discretion or a matter of legal entitlement pursuant to specific agreements.  The answer to the question determines the counterclaim of Ken and is relevant to the consideration of Father’s claim.

The litigations

40.  In the dispute giving rise to the present action, Ken is on one side whereas the other members of the family stood by the Father on the other side.

41.  In August 2009, the Father commenced the present action.  In the same month, the Father caused Ever Allied to commence proceedings to wind up Luen Tat on just and equitable ground (“HCCW 497/2009”).  In July 2009, Luen Tat was wound up[3] with costs of the proceedings ordered against Ken.

42.  In 2010, action was commenced in respect of alleged nuisance caused to the family members by the occupier of the 3/F of the Family Residence allegedly arranged or permitted by Ken (“HCA 853/2010”).  The family members also commenced action for intimidation and harassment by rascals or debt collectors allegedly instigated by Ken since late November 2010 (“HCA 1831/2010”). Interlocutory injunction has been granted and continued (with variations) until the trial of the action or further order of the court[4].

43.  In July 2011, the Father commenced proceedings to wind up Pak Tat (“HCCW 236/2011”) on the ground that the company failed to pay him the sum of HK$53 million in connection with his transfer of shares in PTTC as mentioned above.

44.  In September 2011, Ken commenced proceedings to wind up Roteland, which, as mentioned, holds the Family Residence that still houses the other members of the family (“HCCW 302/2011”).

45.  On 1 December 2011, judgment in HCCW 236/2011 was handed down.  Harris J rejected Ken’s dispute of the debt owed by the company to the Father, and ordered the winding up of Pak Tat (“the HCCW 236/2011 Judgment”).  Ken filed his appeal (CACV 284/2011), which he eventually did not proceed with.  Instead, in October 2012, Ken commenced a fresh action against the Father, Seline and Richard for alleged conspiracy with their lawyers to deceive Harris J into granting the order winding up Pak Tat (“HCA 1890/2012”).  That action has since December 2013 been stayed pending the outcome of the present action.

46.  During the global case management conference on 25 July 2012, Harris J directed for the split trial of the issues of liability and quantum in the present action. The determination of quantum and issues relating to it should take place after the trial on liability of Ken’s counterclaim.  His Lordship also directed that HCA 853/2010 and HCA 1831/2010 should be tried together; and the trial of HCCW 302/2011 shall take place after the judgment in the present action and HCA 853/2010 and HCA 1831/2010.

47.  Upon the winding up of Luen Tat and Pak Tat, the liquidators of the companies have since the end of 2012 commenced actions against the Father, Ken, Seline, Richard and Yuen Hing for account of money allegedly paid by Luen Tat under their control to Yuen Hing through the re-invoicing operation as well as tax penalty paid by Luen Tat arising out of that (HCA 1482/2012 and HCA 2137/2012).  These actions have been also stayed pending the determination of the present action[5].  Action was also commenced against the members of Lee family and Richard’s own company (Radar International (HK) Limited) for misappropriation of the assets of Luen Tat (HCA 1952/2012)[6].

48.  In the present trial, Mr Wong Yan Lung SC, together with Mr William Wong SC and Mr Kwong, appeared for the Father and Seline.  Yuen Hing was separately represented by Miss Lok.  Mr Joffe and Mr Wu appeared for Ken and Joseph.

THE FATHER’S CASE

49.  Against the above background, the case and evidence on the Father’s side is this:

(1) The Father had provided the fund in the sum of HK$500,000 for Ken’s own decoration business venture in England in the 1980s.  Upon the failure of such business, Ken returned to work for the Father in 1985/1986.

(2) In 1986, the manufacturer of ‘Charles Jourdan’ threatened with legal proceedings against Luen Tat for alleged copyright infringement.  The dispute was eventually settled on terms including the undertakings by the Father and the Mother, as the shareholders and directors of Luen Tat.  Concerned about the personal undertakings, the Father decided to remove themselves from the record of shareholders and directors of Luen Tat.  Hence the assignment of the shares of the company to Ken and his wife.  It was made clear that the shares were so held by them for the Father, and that they agreed.  The Father remained in control of the business.

(3) It was the Father who decided to establish and invested into the manufacturing base in the Mainland in 1992.  He handled all the matters relating to the acquisition of land in Shenzhen and the dealings with the Mainland authorities.  The entire shareholding of Shenzhen Lianda was registered under PTTC, which was the Father’s sole proprietorship.

(4) The Father was in control of the management and operation of Shenzhen Lianda.  Until his injury at the Shenzhen manufacturing site in about 2005, the Father had spent 1 to 2 days per week there.  Unlike Seline and Richard, Ken was never stationed there, as he was mainly involved in sales and marketing of the group through Luen Tat.  Ken spent less than half of his time in Hong Kong, having to travel between here and England for his family visits.

(5) Upon Richard’s graduation and return to work for the Father in 1992, it was at the Father’s instruction that Ken and his wife transferred 49% of the shareholdings in Luen Tat to Richard.  The understanding remained that the shares in Luen Tat were held by Ken and Richard for the Father.

(6) The restructuring of the shareholdings of Luen Tat in 1995 served tax planning purposes, and proceeded with the approval of the Father.  The understanding remained unchanged that the shares in Luen Tat were held by the sons, through their trust vehicles, for the Father instead of themselves beneficially.

(7) The formation of Yuen Hing for the re-invoicing operation proceeded with the approval of the Father, who was the de facto owner of this addition to the group in 2002.

(8) In 2002, the Father decided to incorporate Pak Tat, after considering the advice of accountant[7] to vest the interest in Shenzhen Lianda in a corporate vehicle so that it would be easier to pass the interest to his children upon his death.  At the time, the Father was 72 years old.

(9) After the injury from the fall at the manufacturing site in about 2005, the Father wished no more regular travel to the manufacturing site.  Requesting Ken to take up more actual responsibilities there, the Father also made the transfer of shares, for no consideration, with a view to clothing Ken with more apparent authority as the one in charge of the manufacturing site.  Nevertheless the Father made clear to Ken that Ken held the shares as his nominee.

(10) Since 2006, Ken had gradually ousted his siblings from the business and usurped the Father’s control of the group.

(11) Regarding Richard, Ken, siding with the Shenzhen factory manager, Tang Chan Man (“Tang”), proposed through Tang that Richard’s department in Shenzhen Lianda should be made independent and removed from the manufacturing site.  Richard’s department was marginalised and its operation paralysed.  It was under those circumstances that Richard decided to leave the group altogether.

(12) Regarding Seline, in October 2008, Ken and she were in dispute, again concerning Tang arising out of their dispute at the Shenzhen dormitory during the national holiday.  Whilst the incident should be trivial, Ken was adamant that Seline had to leave.

(13) The meeting of the family members on 31 October 2008 was held.  Lai Yuk Wah (“Lai”) was arranged to attend the meeting and to prepare the minutes.  Following the departure of Richard, Seline also made clear during the meeting that she would leave the group.

(14) Ken also cancelled the Father’s authorisation as the bank signatory of Luen Tat.  Ken and Lai became the authorised signatories.

(15) Seline was re-engaged as consultant shortly afterwards, mainly because Ken had no way of understanding and mastering the internal accounting system and practice of the group, of which the Father’s ledgers were the key.  Nor could he secure an immediate replacement[8].

(16) Since the end of October 2008, Ken had made repeated attempts to get the family members attending the meeting on 31 October 2008 to sign a draft of what was said to be the resolution of that meeting, namely Ken became entitled to all the income of Luen Tat and Pak Tat.  The Father, Seline and Richard refused to sign and had never signed it.

(17) Ken further attempted to obtain the Father’s admission to his assertion of control of and entitlement to all of the group by speaking to the Father in private on those matters while secretly tape-recording the conversation.  That was taking advantage of the Father’s known bilateral hearing problems and advanced age.

(18) The Father was still minded to resolve the situation by negotiation with Ken.  He therefore engaged the Mother to talk to Ken.  Hence his proposal to let Ken manage the group on condition that Ken had to distribute 30% profits to him. Ken disagreed.  Instead Ken repeated his request, through Kitty So, to the Father to sign a draft resolution confirming his entitlement to all of the group.  In refusing to do so, the Father adjusted his earlier proposal for distribution of profits to 10%, which he was minded to give to Seline.

(19) In April 2009, Richard returned the 49 New Shares in Luen Tat to the corporate nominee of the Father, Allied Ever, as they had all along been held for the Father.

(20) Then there was the incident at the office of Luen Tat on 11 June 2009, when Seline was assaulted by Ken.  In the heat of the moment, Ken also said to the Father that he would dissipate all the assets of Luen Tat.

(21) The Father had since no longer had access to the company documents.  Nor had he had the means since the end of 2008 to keep track of the financial affairs of the group and to prepare his ledgers.

50.  In the above circumstances so developed, the Father had no alternative but to resort to litigation.

51.  Following the commencement of the present action and the winding-up proceedings, Ken had allegedly deployed all sorts of tactics to harass and to pressurise the other family members, which formed the various complaints and causes of action in the other actions as mentioned above.

52.  As to the profits of the group, the Father’s case is that he was the one who decided in his discretion whether and, if yes, when and how the group’s profits were to be distributed.  The profits distributed to the children were gratuitous performance bonus, and there is no question of enforceable right or entitlement to the sharing of the profits of the group by any of the children.  The alleged agreements whereby the profits had been distributed were specifically denied.

THE CLAIM

53.  The Father claims against Ken and Joseph for declaration that the 5% non-voting deferred shares and the New Shares in Luen Tat in their hands or their nominees were held on trust for him, and for an order that such shares are to be reverted to him or his nominee pursuant to his directions.  The Father puts forward a similar claim against Ken in respect of the 50 shares in Pak Tat.

KEN’S CASE

54.  The present case of Ken is this:

(1) It was at the request of his parents that he returned to work for the Father in 1985. He had since been entitled to 10% share of the annual business profits.

(2) The shares in Luen Tat were transferred to Ken and his wife in 1986 without intention or valid establishment of trust.

(3) The establishment of Shenzhen Lianda in 1992 was a joint decision of the Father and Ken.  It was a co-investment of their respective shares in Luen Tat’s retained earnings, and each of them owned 50% interest in the project.  The Father held 50% interest in PTTC, and subsequently Pak Tat, on trust for Ken.

(4) In 1992/1993, the Father had health problems and intended to retire, and decided to distribute the family assets to his children.  Hence the gift of 51% and 49% of the shares in Luen Tat to Ken and Richard respectively, and the incidental transfer of the shares to Richard.

(5) Since then, Ken became the majority shareholder and person in control of Luen Tat whereas the Father became a mere figure head of the group.  Out of respect, Ken allowed the Father to use the office and to help determining the group’s profits sharing.

(6) The restructure of the shareholdings in Luen Tat in 1995 was carried out without consultation or approval of the Father.  Ken obtained the 51 New Shares in Luen Tat for consideration.

(7) It was the joint decision of Ken and the Father to hold their interest in Shenzhen Lianda through a company other than PTTC.  Hence the setting up of Pak Tat and transfer of shares in PTTC to Pak Tak in 2002.

(8) In 2002, the re-invoicing operation was moved to Macau and conducted through Yuen Hing.

(9) Since 2004, the relationship between Ken and the Father turned sour.

(10) It was upon Ken’s request that the Father, as his trustee of 50% interest in Pak Tat, caused Pak Tat to issue 50 shares to Ken in 2006 to reflect their 50/50 interest.

(11) In 2006, Richard decided to leave the group to pursue his own business interest. Richard (or his wife) was also concerned about potential personal liability for severance payment for the workers in case of closure of the Shenzhen manufacturing.

(12) Richard formally resigned from the board of Luen Tat in December 2007, when a resolution was also passed to alter the articles of association so as to allow Ken to be the sole director.

(13) In June 2008, Ken decided to dismiss Seline to maintain staff morale, after she had interfered with management and sought to undermine Ken’s leadership.

(14) During the meeting on 31 October 2008 convened by Ken, it was resolved that (i) Ken was the beneficial owner of 51% in Luen Tat and 50% in Pak Tat; (ii) Ken would be solely responsible for running Luen Tat and Shenzhen Lianda; (iii) all the income from the group belonged to Ken; (iv) Seline would leave the group in January 2009; and (v) the Father would enjoy the existing privileges.

(15) In response to the draft minutes of the meeting on 31 October 2008 sent by Lai, the Father sent his proposal to Lai regarding Seline’s profits share.  Upon Lai relaying to Ken what he learned from Richard about the Father’s concern about Seline being a divorcee, Ken agreed to retain Seline as a contractor.

(16) In December 2008, Ken cancelled the Father’s status as authorised bank signatory of Luen Tat.

(17) During their conversation in the same month, the Father admitted that he and Richard had received their final profits sharing, and that Ken would since be entitled to all the money of the group.  The conversation was tape-recorded by Ken.  During the subsequent meetings between Mazars and the Father, the Father again confirmed Ken’s entitlement.

(18) The total sum of HK$28 million paid by Luen Tat in settlement of Yuen Hing’s invoices, pursuant to the re-invoicing, that was transferred into Ken’s personal account from Luen Tat in 2009 represented partial distribution of his profits share entitlement.

(19) The Father had been requesting for profits share, and this was repeated in early 2009 through the Mother to Ken.  The Father requested 30% whereas Ken counter-proposed 10% plus pocket money of HK$100,000 per month and living expenses.

(20) When Ken, through Kitty So, sought the Father to sign a draft resolution in line with what was agreed during the meeting on 31 October 2008, the Father indeed left a note requesting Ken to maintain the status quo and to give the Father 10% profits share.

(21) In June 2009, Ken dismissed Seline.

(22) In the same month, the confrontation at the office of Luen Tat took place.  The Father and Seline were stopped from sending by fax the company’s records to an unknown destination.  In the heat of the moment, Ken as a reflex pushed Seline aside. The Father slapped Ken and threatened to stab him to death.

(23) After the confrontation, Ken moved out of the Family Residence.

55.  As to the profits of the group, Ken’s present case is this:

(1) The Father decided that the profits sharing between himself and Ken in a 50:50 ratio for the period from 1988 to 1992.

(2) In 1992, it was agreed that the group’s profits were to be shared among the Father (37.5%), Ken (37.5%) and Richard (25%).

(3) In 1994, it was agreed that the profits would be shared among the Father (33.75%), Ken (33.75%), Richard (22.5%) and Seline (10%).

(4) In 2002, the Father decided to forego his profits share with effect from 1 March 2002.  The profits would be shared among Ken (50.4%), Richard (33.6%) and Seline (16%).

(5) Following the departure of Richard from the group in June 2006, the profits would be shared by Ken (90%) and Seline (10%).

(6) In the meeting on 31 October 2008, it was agreed that Ken should be entitled to 100% of the profits.

(7) Giving credit to a total sum of HK$28 million received through Yuen Hing by mid-2009 in partial settlement of Ken’s entitlement to the group’s profits, as mentioned, there is still a balance in the sum of HK$25,602,977.76 due and owing to Ken, which the Father, Seline and Yuen Hing have failed, neglected or refused to account to him.

THE COUNTERCLAIM

56.  By way of counterclaim, Ken claims against the Father for declaration that the shares in Luen Tat are wholly and beneficially owned by Ken, and that the Father held half of the shares in Pak Tat on trust for Ken until September 2006, and that each of the 50 shares in Pak Tat currently held by Ken are wholly and beneficially owned by Ken.

57.  Ken also claims against the Father, Seline and/or Yuen Hing for an account of the profits and money of the group said to belong to him, including the payment of the abovementioned sum of HK$25,602,977.76.  Ken also claims for an account for all money so belonging to Ken that were said to be wrongfully retained or converted by Seline or Yuen Hing or the Father to their own use.

THE MAIN ISSUES

58.  As far as liabilities under the claim and the counterclaim are concerned, the following main questions call for determination:

(1) Whether Ken (or his nominee) holds the 51% shareholdings in Luen Tat on trust for the Father, as the Father contends, or whether the Father had transferred the same to Ken as gift back in 1993, as Ken contends;

(2) Whether Ken holds the 50% shareholdings in Pak Tat on trust for the Father, as the Father contends, or whether he became the beneficial owner of the same pursuant to oral agreement back in 1992, as Ken contends;

(3) Whether it was at all material times the Father who decided in his sole discretion on whether and, if yes, when and how the profits from the group would be distributed as gratuitous performance bonus to his children, as the Father contends, or whether it was a matter of legal entitlements to the profits of the group at specific sharing ratios pursuant to the series of oral agreements reached over the years, as Ken contends; and

(4) If the court finds in favour of Ken on (3) above, whether the Father, Seline or Yuen Hing is liable to Ken’s claim for the alleged unpaid accumulated profits in the sum of HK$25,602,977.

WITNESSES

59.  On the side of the Father (Seline and Yuen Hing), the following witnesses[9] testified:

(1) Richard;

(2) Seline;

(3) the Father;

(4) Chan Kwok Choy Gary, manager of a customer of Luen Tat;

(5) Liang Guo Xin, plant supervisor and manager of Shenzhen Lianda from February 1990 to June 2012;

(6) Li Sai Kit, cousin of the Father who worked as a support staff in the group from 1979 to 1982 and as the Father’s driver from 2002 to July 2006); and

(7) the Mother.

60.  On the side of Ken and Joseph, the following witnesses testified:

(1) Ken;

(2) Joseph;

(3) Chan Tsz Lok, former employee of Luen Tat;

(4) Giovanni Sordi, former managing director and shareholder of a customer of Ken and Luen Tat;

(5) Akio Sakuma, general manager of a customer of Ken and Luen Tat;

(6) Lee Kui, the Father’s elder brother who worked as a salesperson in the group from 1974 to 2010;

(7) Cho Yee Chun David, manager of Moores Rowland, which is now Mazars;

(8) Tsang Kam Ping, former employee of Luen Tat;

(9) Chan Ming Wai, accountant in Meder Services Limited, associate of Mazars; and

(10) Lai Yuk Wah, friend of the Lee family, who attended the parties’ meeting on 31 October 2008.

PRELIMINARY POINTS

61.  A couple of preliminary points.

Presumptions

62.  Much was said about the operation of the presumption of advancement/gift between the Father and his sons in respect of the shares of Luen Tat[10].  Reference was also made to the countervailing presumption of resulting trust.

63.  In a case where both sides of the dispute have put forward and adduced evidence in support of their respective positive case, the Court would be expected to find what in fact happened and the real intention of the parties on the basis of the evidence.  It is only where evidence is absent or insufficient to lead the court to a conclusion that the presumption, and thus the burden of proof, would be resorted to: see Snell on Equity (32^nd Ed) at §25-007; Au Yuk Yin v Wong Wang Hin Eddy [2013] 4 HKLRD 373 at §§18-19, per Lam VP (citing Lavell v Lavell [2004] 2 FCR 418).

64.  In the present case, the Father was adamant that throughout the years, the shareholdings in Luen Tat and Pak Tat (formerly PTTC) had been restructured for various reasons but always upon the understanding that he remained the ultimate beneficial owner and person heading the group.  On the contrary, Ken’s case was that the Father decided to retire because of his deteriorating health and to distribute his assets to his children by 1992/1993.  The Father allegedly did so, and had since become mere figure head, whereas Ken had become the person in control of the group.  As to the distribution of profits, the Father said it was entirely his decision and discretion whereas Ken asserted profits sharing agreements and admission by the Father.

65.  The court is expected to determine which of their respective version was true on the evidence, and what the legal effect of them was.  Practically there is no place for the presumption in the determination, save as the last resort.

66.  Sorting out this preliminary point also helps dealing with the next one.

The witness statements

67.  Ken sought that parts of the witness statements on the Father’s side should be expunged.

68.  First, he argued that the evidence should be inadmissible as they infringe the principle in Shepherd v Cartwright [1955] AC 431 at 445, per Viscount Simonds.  It was submitted that in rebutting the presumption of advancement, any acts or declarations by the parties subsequent to the transfer of shares in the present case are only admissible in evidence against the Father, not in his favour.

69.  The following parts of the statements are said to be contravening this principle:

(1) the Father’s amended statement, §§22-28;

(2) Richard’s supplemental statement, §§8, 18-26; and

(3) Seline’s supplemental statement, §§5-7.

70.  Mr Wong argued that the argument is wholly misconceived, as the purpose of the subject evidence goes to the issue on whether the oral agreements existed and whether the trust arrangement continued.  It is not primarily for the purpose of rebutting the presumption of advancement.  In line with the discussion in respect of the applicability of presumptions, I agree with him.

71.  As Ken asserted and adduced evidence of alleged oral agreement with the Father in 1992 whereby Father allegedly promised to give him the shares in Luen Tat as gift, the Father must be allowed to adduce evidence, including his conversation with Ken and Richard at the time of Ken’s transfer of shares to Richard.  In support his case that the trust arrangement over the shares in Luen Tat continued after 1993, the Father must likewise be allowed to adduce evidence in respect of the understanding at the time of the restructuring of shares in 1995 and at the time of Richard’s return of the shares.  All those would be to rebut the positive case of alleged oral agreement, not presumption of advancement: see Ip Man Shan Henry v Ching Hing Construction Co Ltd & Ors [2003] 1 HKC 256, §§179, 187-188;Nanyang Commercial Bank Ltd v. The Personal Representative of Vannee Nativivat & Anor [2013] 3 HKLRD 749 §§49-51 (following Ip Man Shan Henry).

72.  Arguably, even assuming the presumption of advancement arises, the evidence under challenge should still be admissible.  What the rule says is that the acts and declarations of the parties before or at the time of the purchase, or so immediately after it as to constitute a part of the transaction, are admissible in evidence either for or against the party who did the act or made the declaration.  It was only subsequent declarations that are admissible as evidence only against the party who made them, and not in his favour: see Ip Man Shan Henry v Ching Hing Construction Co Ltd & Ors [2003] 1 HKC 256 at §178.

73.  Second, it was argued that parts of the statements on the Father’s side are irrelevant, prejudicial and abusive.  They included the following:

(1) The Father’s amended statement, §§134-145; and

(2) Richard’s supplemental statement, §§52, 94 (1^st sentence).

74.  Essentially those paragraphs of the statements touched upon the makers’ respective accounts of the alleged misconduct of Ken, which constituted the complaint and founded the causes of action in the other actions between the 2 camps of the present litigation.  To the extent that the witnesses would have to refer to those alleged episodes so as to complete the flow of their respective account, the evidence is arguably not irrelevant.  Reference to those alleged episodes, which in fact led to the other actions, is unimpeachable as far as all formed part of the background of the present case (as also set out above).  The complaint about prejudicial effect, in my view, is overstated in the case of trial by professional judge.

75.  Last, there is also complaint about other parts of the Father’s amended statement for being speculation, comment or matters of legal advice.  I do not agree.  The Father should be in a position to express his belief and views, if they formed an integral part of his explanation of his conduct.  Value and weight of that is a matter for submission.

Discovery

76.  Ken criticised the Father’s side for alleged failure to make discovery of, among other things, accounting documents. As to that, Ken’s repeated discovery applications for Yuen Hing’s accounting documents had been considered and ruled against Ken with costs by DHCJ Ng.  As far as the present trial on liability is concerned, the documents sought were not considered as relevant or necessary for the fair disposal of the trial.  Further, Ken could have sought some of the documents from Luen Tat’s liquidators.  I have no intention of repeating the comprehensive discussion in the learned Deputy Judge’s decisions[11].

77.  Indeed Ken apparently went ahead to obtain from Luen Tat’s liquidators what were said to be summary of invoices, and sought to adduce and rely on them at the trial. However, what Ken could have sought to do in all these years did not happen until the 11^th day of the trial, and just before Ken took the witness stand.  They were said to be necessary and relevant, in view of Seline’s evidence in court.  They were voluminous.  They were not primary documents.  The Father’s side would have been entitled to verify their contents.  Allowing such documents would trigger a whole series of consequences that would impact on the proper proceeding of the trial.  That the trial by then would not be finished in any event and would have had to be adjourned part-heard could not capitalized in justification of such manner of introduction of new documentary evidence at such stage of the trial.  Discretion had to be exercised in refusal of such attempt.  So I did with costs reserved.

LUEN TAT

78.  By 1986, the shares in Luen Tat had been held by the Father and the Mother.  The latter never asserted beneficial interest or control over the share in her hands.  She held it for the Father, and she confirmed that in her evidence.

79.  There was not much argument about the ‘Charles Jourdan’ episode before the transfer of shares in Luen Tat in 1986 from the Father and the Mother to Ken and his wife.  By his witness statements and in Court, the Father gave an account of the background and the conversation back in 1986 preceding the transfer. His account was also largely corroborated by the evidence of Richard and the Mother.

80.  Ken used to admit by pleading that the shares of Luen Tat transferred to him and his wife in 1986 were held on behalf of the Father (until 1992/1993).  The admission was however removed by subsequent amendment to his pleading.  Ken attributed that as a mistake on the part of his former legal representatives.  His current pleaded case is that first, there was no properly created trust of the shares as alleged by the Father, and second, the purpose of the trust alleged by the Father was illegitimate[12].

81.  In the submissions on his behalf, Ken also sought to discredit the Father’s evidence in respect of what were said in respect of the transfer of the shares in Luen Tat to Ken and his wife.  It was also pointed that even according to the Father, he only told Ken but not Karen to hold the shares in Luen Tat for him, and only Ken but not Karen agreed to do so.  He also questioned the Mother’s evidence as to the alleged agreement on his part to hold the shares for the Father.

82.  The evidence of each witness in this respect, I think, should be considered as whole.  Whilst the Father might not have engaged in direct conversation with Ken’s wife, when there was no suggestion that they would have understood each other’s language, it was never suggested that Ken’s wife was intended to personally benefit from the transfer.  Nor was it suggested that she declined to hold such share for the Father.

83.  Irrespective of the precise wordings used by the Father when initiating the transfer of the shares in Luen Tat, he was adamant that he made clear that Ken and his wife would hold the shares for him.  Likewise, whilst the Mother could not recall herself being a party to an agreement with the Father or the sons in this respect, she was adamant that Ken agreed to hold the shares in Luen Tat for the Father.

84.  Whilst his admission by pleading was removed by subsequent amendment, that Ken and his wife held the shares in Luen Tat in 1986 for the Father remained his evidence as per his statement[13].

85.  Mr Wong submitted that technical or formal words are not required for the creation of an express private trust.  What was required was a sufficiently clear manifestation of an intention to create such a trust, whilst words such as “trust” or “confidence” or the like are not a must: see Hudson, The Law of Trusts (2^nd Ed) at §2.03; and at§2.04:

“Thus, in appropriate circumstances, an express trust may be created by means of an informal declaration, or may be inferred from the acts of the settlor or the circumstances of the case. So, in Paul v. Constance, the words ‘the money is as much yours as mine’, referring to moneys in a bank account, were held, in the circumstances of the case, to have created a trust. A similar result was reached in Rowe v Prance, where the legal owner of a yacht referred to it, in many conversations with his mistress, as ‘ours’ or as ‘our boat’.”

86.  Mr Wong also highlighted the domestic context, as opposed to commercial dealings between contracting parties, in which the understanding and intention of the parties involved should be ascertained.  I agree.

87.  On behalf of Ken, it was argued that the Father did not appreciate the concept of trust or the duties of a trustee, and therefore could not have had the requisite intention to create a trust.  However, as to this, Hudson (above) has this to say (at §2.05):

“It is not even necessary that the creator of the trust should be aware that it is a trust that he was creating: all that is required is that he has a sufficiently clear intention to create a state of affairs (such as the creation of successive equitable interests in property) which requires a trust for its implementation or to impose an obligation of the kind which in law is regarded as a trust obligation. He is presumed to intend the legal consequences of his acts.”

See also In re Kayford Ltd [1975] 1 WLR 279 at 282A.

88.  Reference was also made to the Father’s evidence in respect of his lack of understanding of the mechanism of trusts. That was however about the new trusts subsequently established by the professional advisors of Ken and Richard in 1995. It was in such context when the Father admitted in his evidence that he knew some, but did not know well how the intended tax avoidance came to be achieved practically by way of the restructuring by way of the trusts.  More importantly, the Father remained adamant in his evidence that irrespective of how the shareholdings were restructured in 1995 by way of the sons’ trusts, the shares remained his[14].

89.  Mr Wong submitted that the Father, at the very least, understood that it was possible for him to entrust other to hold assets on his behalf under their name, and the people whom he was entrusted would have to listen to him in dealing with the assets. This is more than sufficient to create a trust.  In line with the legal principles, I agree.

90.  One should also not lose sight of Ken’s own case that the Father decided to make the gift of the shares in Luen Tat to him and Richard only in 1992/1993.  The Father would no longer have been in a position to do so, had Ken already become entitled to the shares beneficially by the actual gift of shares in 1986 or the operation of the presumption of advancement in respect of the transfer of the shares.

91.  Once it is established that the Father had the intention and expressed that the shares in Luen Tat were to be held for him, the contention that a trust of the shares was not properly created or constituted would not advance the case of Ken in any realistic way.  If the presumption applies, then once the evidence of the Father is preferred, the countervailing presumption of resulting trust operated in favour of the Father in respect of the shares in Luen Tat: See Lewin on Trust(18^th Ed) at §9-08:

“What is presumed where the presumption of resulting trust applies is, it is thought, that the transferor did not intend a gift, and, where a resulting trust is sought to be established by reference to the transferor’s intention, the relevant intention is that he did not intend to make a gift.”

92.  On the evidence, I have no doubt that Ken and his wife held the shares in Luen Tat in 1986 for the Father instead of any of them beneficially.

93.  As to the contention that any trust so created was tainted by its illegitimate purpose, it cannot be properly understood unless Ken is alleging illegality. Yet illegality was not, as it should have been, properly pleaded: see Hong Kong Civil Procedure 2014 at §18/8/14 (as cited[15] ).

94.  It was, as I find, the ‘Charles Jourdan’ episode that brought about the idea of removing the Father and Mother from the record of shareholders and directors of Luen Tat in 1986.  What the Father attempted was to avoid the attraction of potential personal liability in the event of possible intellectual property infringement by the products manufactured by Luen Tat.  It did not follow that it was a scheme to facilitate infringement whilst evading personal liability.  There is no evidence to suggest such a scheme.  The alleged illegitimate purpose is not apparent[16].

95.  Generally, even assuming a transfer was for an illegal purpose, the transferor may in principle recover the property transferred if he had repented before the illegal purpose was carried through: see Tinsley v Milligan [1994] 1 AC 340 at 374B, per Lord Browne-Wilkinson.  In that event, even assuming that the presumption of advancement applies, evidence may still be led to rebut it for the purpose of recovery: see Tribe v. Tribe [1996] Ch 107 at headnote; 116F-H, per Nourse LJ; 132H-133B, per Millet LJ.

96.  In the present case, the Father gave evidence that the company had already taken steps to prevent infringement against ‘Charles Jourdan’.  There was no suggestion or evidence that there had been infringement ever since.  No illegality had been carried into effect that would have prevented the Father from recovering the shares.

97.  On the evidence, I have no doubt that the shares in Luen Tat were transferred to Ken and his wife in 1986 to effectively hold on trust for the Father instead of themselves beneficially.  There is no factual basis for estopping the Father from recovering the shares transferred in 1986.

98.  Ken’s assertion is that by 1992/1993, the Father had decided to retire due to deteriorating health and to distribute his assets to his children.  On this basis, the shares in Luen Tat, then in the hands of Ken and his wife, were subsequently divided between him and Richard in a 51:49 ratio.  Since then, the Father had become mere figure-head of Luen Tat whereas Ken was the one in control of the company.

99.  The above assertion is central to Ken’s entire case.  However it should be noted that his pleaded case in this respect used to be different.  Originally Ken asserted that he obtained complete control of Luen Tat in about 2006 to 2008[17].  His present case of assumption of control over Luen Tat in 1993 came about only by way of amendment[18].

100.  As to the evidence, the Father was about 60 years old in 1992.  Whilst the Father admitted that he had been to the hospital, he and the other family members denied such deterioration of his health as that alleged by Ken.  According to the Father, he was still running Marathon regularly.  In support, there was produced the photograph depicting the Father’s participation in one of those marathons then, wherein the Father as depicted, in my view, would probably impresses no one that he was or would be experiencing deterioration in health that would prevent him from gainfully involved in the family business.

101.  What the Father did with the business speak even more loudly.  Timing-wise, that was when the plan to set up the Shenzhen manufacturing base came about.  According to the Father, he set the plan going upon ascertaining that Richard would return to join the family business after graduation from overseas in about the same year.

102.  In court, Ken denied that the setting up of the Shenzhen manufacturing base was the Father’s plan.  He testified to the effect that it was his initiative, though he had discussed that with the Father.  It is also his case that this was a co-investment of their respective shares of the retained earnings of Luen Tat, and that they would each own 50% interests in the project and the Shenzhen manufacturing site.

103.  As discussed above, the shares in Luen Tat had since 1986 been held by Ken and his wife on trust for the Father.  The basis for Ken’s assertion of pre-existing beneficial interest in the company, and thus share of retained earnings as a matter of entitlement, did not exist by then as a matter of fact.  The undisputed fact was that when he joined the family business in mid-1980, the Father distributed to him 10% profits of Luen Tat.  The factual basis for asserting pre-existing half interest in Luen Tat and its retained earnings, and thus the same in the Shenzhen project, by Ken is lacking.

104.  As far as the shareholdings were concerned, the situation did not change upon the setting up of Shenzhen manufacturing site.  The Father became and had remained the sole shareholder of Shenzhen Lianda, originally through PTTC as his sole proprietorship and subsequently Pak Tat under his sole ownership, for the following 14 years.  Ken was specifically cross examined about that in connection with his assertion that the Father had already decided to retire and to relinquish his assets.  His evidence, I say, was not impressive.

105.  The evidence shows that the Father very much had his hands on the overseeing of the operation of Shenzhen Lianda.  He kept his room at the dormitory of Shenzhen Lianda, and travelled there 1 to 2 times a week.  This pattern lasted until his fall and injury in 2005.  On the contrary, Ken was seldom there and did not keep a room at the dormitory there.  Ken was mainly responsible for sales and marketing through Luen Tat, but actually did not spend much time in Hong Kong either.  The Father, Richard and Lee Sai Kit testified to that.  So did David Cho, who was called to testify for Ken.  According to Liang Guoxin, the Father had control even over matters such as the disposal of manufacturing debris in the Shenzhen factory.  Li Kui, the Father’s brother who was called to testify on behalf of Ken, acknowledged in court that he had worked for the Father as the owner of the group until his retirement.

106.  Then there was the fact that the Father continued to sign most of the cheques for Luen Tat and to keep his own monthly ledgers on the financial situation of the group with the assistance of Seline.  This practice did not stop until after Ken cancelled the authorization of the Father as the bank signatory of Luen Tat in late 2008 and seized de facto control.

107.  Throughout the years, and Ken did not argue otherwise, the Father and Seline were responsible for the financial affairs.  The undeniable fact was that the Father kept track of the financial situation of the business by keeping his ledgers. The ledgers contained detailed entries of the group’s acquisition of land, machinery and raw materials for the Shenzhen manufactory in its operation.  The details, recorded in the Father’s own way, are impressive.  According to Seline, the Father always had an eye on the cash flow of the group.  According to Richard, that Ken might have signed the official financial report and tax return of Luen Tat did not mean that he actually realized the actual financial position of the group.  He added that it was always the Father’s ledgers that told the actual position.  Hence the same had also formed the basis for the Father’s distribution of profits of the group, and even Ken has to rely on it for the purpose of his counterclaim.

108.  Ken had little knowledge about the accounting and tax matters of the group[19].  Soon after it was decided that Seline would leave the group towards the end of October 2008, she was soon afterwards re-engaged as a contractor by Ken to handle the financial affairs of the group.  According to the Father’s side, it was because of Ken’s failure to secure a replacement of Seline, who would be prepared and able to do the job.  Ken dismissed the suggestion, and suggested that he did so after Richard relayed to him the Father’s concern about the livelihood of Seline being a divorcee.  Out of brotherly love, Ken decided to re-engage her.  There is no evidence that the then situation of Seline was unknown to Ken, when it was decided that she should leave the group.  The explanation of Ken for his alleged change of mind sounds artificial.

109.  Before Yuen Hing was incorporated in 2002, the Father also kept most of the business profits in his own personal bank account.  Chan Ming Wai of Mazars, who had held discussion with the Father about his ledgers, observed that the Father indeed did not draw a clear line between his personal and company matters.  This helps reflect the maintenance of the Father’s old-fashioned way of managing business.  Even after Yuen Hing was incorporated, the Father, together with Seline, still controlled the so-called ‘safe of the group’, which became Yuen Hing.

110.  Then, there was the Father’s role in the profits distributions.  This will be discussed in detail in its own section below.

111.  Ms Lok for Yuen Hing submitted that he who had control of the money matters had to be one exerting ultimate control.  Considering the circumstances discussed above, I can understand why.

112.  In his evidence, Ken categorized the Father’s various involvements in the business since 1992/1993 as nothing but symbolic of the role of figure head and a matter of convenience as well as the Father’s own indulgence in looking at the money, which Ken said he could not stop.

113.  Ken called witnesses to testify in respect of their observation, understanding or belief that Ken was in control, or the boss, of the group (since 1992/1993). Li Kui, Tsang Kam Ping and Chan Tsz Lok were former employees of the group. Sakuma and Sordi were former customers of Luen Tat.

114.  Tsang Kam Ping gave rather one-sided evidence in respect of the significance of the role of Lee Kui in charge of the management, whom Ken allegedly took over after his joining the family business.  Tsang in her evidence seemed to suggest that she had even better idea about the role of Lee Kui than he himself.  Yet Lee Kui, as mentioned, accepted that he worked for the Father as the boss.  The disturbing feature, which was never revealed until transpired during cross examination, was that Tsang and Chan Tze Lok were two of those whom Ken had solicited to join his new company, Henfung Precision Technologies Limited (“Heng Fung”).

115.  The documentary evidence shows that in June 2009, Ken issued notices on behalf Shenzhen Lianda to its suppliers, representing that the business of Luen Tat had been “renamed” to Kenta Precision Ltd, which was his company.  It was further renamed to Heng Fung in 2010, while Heng Fung issued corresponding notices to the customers and suppliers of Luen Tat’s group.  Sakuma confirmed that after the liquidation of Luen Tat, Ken told him that Luen Tat had changed its name, and invited him to place order with Heng Fung.  These former employees now worked for Ken, and their independence was thus questioned.  All considered, I find the evidence of Tsang to be particularly unreliable.

116.  Sordi was fair enough to accept that it was not accurate to describe Ken as the boss, as he had no evidence to say so, and would not know if Ken was in fact authorized by someone else to deal with him.  What he and Ken talked about were confined to orders, price and terms of contract. That was indeed marketing, which, according to the evidence adduced on behalf of the Father, Ken specialized in at all times.  Sordi accepted that it was not fair to say that the Father did not do any real work.  Nor did he know Richard Lee’s role, and therefore it was also not fair to describe Richard as a spoiled child in his statement.

117.  In any event, these witnesses in common gave evidence of their perception, and none of them possessed personal knowledge of the actual arrangement between the members of the Lee family regarding control of the group.  Considered as a whole, the evidence from these witnesses does not serve to effectively contradict the other evidence as discussed above.

118.  Judging from the background and the evidence of the Father, I am impressed that the Father was indeed the kind of old-fashioned businessman who commanded.  The Father did not hide that.  In denying the alleged 50/50 share of Luen Tat’s profits and thus the alleged 50/50 share of investment in the Shenzhen project between him and Ken, the Father literally said that he was both the boss and the father; and as the head of the family, he had the right to do things and nobody ever went against his decision.  I am therefore not surprised that the Father took issue as to Ken’s present attempt to understate his actual role in the group since 1992/1993.  What the evidence objectively demonstrates was that contrary to what Ken suggested, the Father had not stopped his involvement in the business in and since 1992, and such involvement in his same old way had been more significant than mere pastime of a retiree.

119.  The factual basis for the alleged giving away of assets or interest in Luen Tat incidental to the Father’s decision to retire then did not exist.  This finding of fact in respect of the central assertion of Ken also set the background against which the parties’ respective cases since 1992/1993 would be assessed.

120.  The shareholdings in Luen Tat were restructured in 1995, whereby the shares held by Ken and Richard were put into their respective new trusts, Joesh and Full Moon, and held by the professional trustees.  It was pointed out on behalf of Ken that the shares in question were no longer the original shares but the New Shares in Luen Tat created upon the restructuring.  As a matter of fact, this is immaterial.

121.  First, Ken’s case is never that he became the beneficial owner of 51% of Luen Tat as a result of the creation and subscription of the New Shares in the 1995 restructuring.  His case is that the Father agreed that the shares in Luen Tat were transferred to and vested in him and Richard as gift back in 1993.  As such, what happened in 1995 could only be restructuring of what he and Richard already owned beneficially.

122.  Second, the evidence shows that the shareholdings in Luen Tat were restructured and the trusts were set up to facilitate tax planning incidental to emigration plan.  The New Shares were taken up upon the giving up of the interest in the old ones. No real consideration was paid for the allotment of the New Shares except for the nominal sum of $100, while the deferred non-voting shares in the context became valueless.

123.  However, since I reject Ken’s assertion about the Father’s gift of the original shares in Luen Tat to him and Richard in 1993, both Ken and Richard could only be holding the original shares in Luen Tat for the Father.  The restructuring of such shareholdings in 1995 per se would not change that.  As mentioned, there is no assertion that Ken and Richard became beneficial owners of Luen Tat by virtue of this restructuring as opposed to the restructuring in 1993.

124.  The Father in his evidence demonstrated that he might not understand the complex mechanism of the trusts so set up by the sons for tax planning.  But it should be borne in mind that the Father had only the explanation by the sons.  It was in this context that, according to the Father, he categorically told his sons that no matter how the shareholdings were restructured, they remained his (or “唔理你點重組法都好,啲股權都係我嘅” ).  According to the Father, it was upon such basis and understanding that the transfer proceeded with his approval.  Richard stated in corroboration of that.  Such was evidence of the Father’s express intention at the material time sufficient to reinforce the pre-existing trust, or at least to negative any intention of gift, be it in 1993 or 1995, in respect of the beneficial interest in Luen Tat.

125.  It followed that the actual allotment of the New Shares to the nominee companies was mere logistics.  None of the nominees or professional trustees acquired any beneficial interest in Luen Tat.  The evidence indeed shows that they acted according to the instructions of Ken and Richard as the apparent beneficial owners of the shares.  For instance, when Richard left the family business, he was in a position to cause the return of the 49 New Shares to the Father’s nominee, Allied Ever, in 2009.  Subsequently, Ken was also in a position to cause the 51 New Shares to be transferred to Joseph but not beneficially either[20].  All these tend to show that the involvement of professional trustees and nominees per se did not alter the control of the apparent beneficial owners, Ken and Richard, who in turn held the shares subject to the fiduciary relationship with the Father as the ultimate beneficial owner of Luen Tat.

126.  Ken put forward various explanations for the transfer of the 49 New Shares in Luen Tat by Richard to Allied Ever.  At one point, Ken suggested that Richard did so upon his buy-out.  At another point, it was suggested that Richard did so to avoid personal liability arising out of the employment claims and the financial difficulty of the group.  Eventually it was suggested (but still neither pleaded nor stated) that Richard did so, as he had already taken his fair share of entitlements under those shares in kind, including part of the family residence.  Then Ken also suggested that Richard transferred the 49 New Shares to Allied Ever in 2009, when it was after the dispute had surfaced, in order to clothe the Father with standing of a minority shareholder to commence winding up of Luen Tat.  It is difficult for all the suggestions in this respect to sit side by side at the same time.

127.  Ken suggested that the Father should be aware of his taking absolute control over Luen Tat because Richard would sign the resolutions altering the company’s constitution and enabling Ken to become the sole director only with the Father’s instruction or blessing.  As Mr Wong pointed out, no such case was actually put to the Father or Richard.  Further, whilst not denying having signed those documents, Richard, he said, did so without particularly appreciating their significance.  It should also be borne in mind that by then, which was December 2007, Richard had already relinquished his duties at Luen Tat for over a year.  The contemporaneous correspondence evidences the liaison between the staff member of Luen Tat and the professional trustee in relation to the preparation of the documents.  Seline was not involved.  The documents were apparently bundled together to be signed at the same time.

128.  At the time, the Father also set up his own Trust[21]. It was suggested that the Father could have required Ken and Richard to transfer the shares of Luen Tat directly into his new trust.  However, in my view, that the Father allowed the sons to proceed with their trust proposal per se did not negative the trust in respect of the shares during the lifetime of the Father.  It should be borne in mind that the Father trusted his sons in 1995.  In his evidence, the Father also never hid his then intention that the sons should inherit him upon his passing in the normal course of events.  The suggestion that the Father could have required the New Shares to be transferred to his own new trust was apparently premised on the benefit of hindsight that dispute would arise between the Father and Ken, which the Father obviously did not foresee at the material time.

129.  Ken questioned that if the Father had been in control, he would have demanded for the return of the shares earlier.  However, the situation had been a developing one.  Richard chose to leave the family business.  Ken removed the Father’s involvement in the business, including the cancellation of his authority to sign cheques of Luen Tat without his prior knowledge.  Seline had to leave the group, albeit re-engaged subsequently.  Those brought us to the end of 2008.  The Father tried to negotiate a way out in early 2009.  According to Seline, she saw the Father in tears as a result of the development by early 2009.  Seline eventually still left the group.  Then there was the episode when the Father and Seline attempted to inspect the books of the company at its office in June 2009.  In court, the Father described that asking for the shares back from Ken then would have been like “going into a tiger’s cave to ask for the tiger’s skin back”.  Litigation was the last resort of the Father.

PAK TAT

130.  Ken’s case is that he had agreed with the Father to utilize their respective shares of the retained earnings of Luen Tat to co-invest in the setting up of Shenzhen Lianda in 1992.  At all times, he held half of the beneficial interest in Shenzhen Lianda through PTTC, and subsequently Pak Tat.  The objective fact was that Ken was made 50% shareholder of Pak Tat in 2006.

131.  Further Ken criticized the Father and Richard for conspiracy to concoct the cause for recovery of the sum of HK$53 million for the proceedings to wind up Pak Tat, and hence the judgment there by fraud.  Harris J in his judgment in HCCW 236/2011 (1 December 2011) had, among other things, the following to say as to whether Ken managed to raise a bona fide defence on the basis of his alleged beneficial interest in Pak Tat:

“7. The documents that have been produced in evidence are consistent with the Father’s case. They show Pak Tat was owned by him as was Shenzhen Lianda. They show the sale of the shares in Shenzhen Lianda to the Company [Pak Tat] in whose books he was, until September 2006, shown as the only shareholder. There is nothing to suggest that anybody else financed Pak Tat and Shenzhen Lianda’s business and the acquisition of land. Shenzhen Lianda’s corporate documents, signed by Ken Li, record a registered capital of HK$53,000,000 and, as I understand the position, in the Mainland the authorities require to be satisfied that a company does have the capital recorded in its corporate documents. It may be that the Father’s claim has not been properly formulated, but on the face of the evidence to which I have referred it would appear that he is owed HK$53,000,000 and there is no dispute that the Company does not have the money to repay him. Prima facie he is entitled to a winding-up order.

……

10. Ken Li argues that his Father’s version of events is wrong. He says that he owned half of Pak Tat and half of the Company from the outset. I note in passing that he originally argued his Father held the whole of the Company’s shares on trust for him when they were acquired. He says that he also contributed to investment in Pak Tat and Shenzhen Lianda. He claims that HK$53,000,000 was never invested in Shenzhen Lianda, which never had any external funding. He also points out that his Father has not produced any documents evidencing payments to Pak Tat, Shenzhen Lianda or the Company.

11. Ken Li has provided no evidence at all explaining why prior to 2006 he did not insist in having his interest in the Company recognised by allotment to him of shares or why Pak Tat was on the face of its business registration certificate operated as a sole proprietorship. He has produced no evidence that he provided any finance to Pak Tat, Shenzhen Lianda or the Company. He has provided no explanation of how Shenzhen Lianda was able to finance the purchase of land. The substance of the defence he advances on behalf of the Company is that Shenzhen Lianda never needed the money Father seeks to recover and Father has failed to demonstrate that he made a loan to the Company. The latter point is correct. However, I am not satisfied that Ken Li has demonstrated that the underlying basis for the claim, namely, that Father did not own Pak Tat, did not finance Shenzhen Lianda’s acquisition of land and, therefore, did not sell Shenzhen Lianda to the Company for HK$5,300,000, is doubtful. It seems on the basis of the evidence before me coherent and credible.

12. So far as the lack of documents are concerned, as I have already noted the likely explanation is that Father’s claim is for non-payment by the Company of the purchase price for Pak Tat’s interest in Shenzhen Lianda.  It is not a claim for repayment of a loan to the Company.  Is this a reason to treat Father’s claim that he is owed HK$53,000,000 by the Company as open to substantial and bona fide dispute?  I think not.  Ken Li argues that the whole basis of his Father’s claim is fallacious and fabricated.  It does not seem that he has adduced evidence that suggests that this argument has substance or is bona fide.  If Father’s description of the financing of Pak Tat and Shenzhen Lianda and the Company’s acquisition of Shenzhen Lianda is correct it follows that Father would probably be owed a considerable amount by the Company by way of the purchase price for Shenzhen Lianda’s shares.  As Father owned both Pak Tat and the Company it is unsurprising that he did not cause the Company to pay for the shares it acquired, because he was the owner of both companies and he would simply have been moving money from one pocket to the other.  The result is that he is still owed money by the Company whether as the outstanding price of Shenzhen Lianda’s shares or as a loan to the Company to pay that price: as I have already indicated it seems likely that the former reflects the true position.  The absence of documents showing that he paid money to the Company is, viewed practically, nothing to the point.”

132.  It was argued on behalf of the Father that in respect of the factual disputes about which Harris J had said in his judgment above, they constituted res judicata binding on the parties, and Ken is estopped from seeking to re-open those disputes in the present action.  The Father referred to the test set out in Kan Wai Chung & Ors v Hau Wun Fai, CACV 43/2012 (7 February 2013) at §11.  Ken relied on the Privy Council decision in the Cambridge Gas case [2007] 1 AC 508, and argued that a judgment arising out of bankruptcy or insolvency proceedings was unique.  The argument was considered by DHCJ Ng in her decision[22] who took the view that what Harris J said above were not definitive and determinative of the rights between the parties.  The Father argued that reliance on the Cambridge Gas case was misplaced, and the same had been disapproved of by the UK Supreme Court in Rubin v Eurfinance SA [2012] 3 WLR 1019.

133.  As discussed below, I say that even putting aside the res judicata argument and considering the contentions and evidence as now made, all one has about Ken’s case in respect of his alleged beneficial interest in Pak Tat is skepticism.

134.  Like that in respect of Luen Tat, Ken’s case in respect of Pak Tat had also undergone substantial changes.  Back in 2009, Ken’s then pleaded case was that the Father gave him as gift 100% of Pak Tat and 50% of which had since 2006 been held by the Father on trust for him.  Had that been true, Ken would have effectively acknowledged the Father’s 100% ownership of Pak Tat until 2006, or else the Father would not have been in a position to make the alleged gift then. It was only after amendment of his pleading did Ken changed to assert that he and the Father co-invested in and at all times owned Shenzhen Lianda in a 50:50 ratio since its establishment.

135.  Ken referred to the capital verification reports and the Father’s ledgers said to be in support of their co-investment through Luen Tat the total sums of RMB 4,800,668 and HK$62,998,913 respectively in Shenzhen Lianda.  Yet neither document actually mentioned anything in that regard with reference to Ken’s involvement.The ledgers did not really tell how the money was injected from Luen Tat to the Mainland.

136.  In any event, it does not assist Ken by asserting that the investment was made by Luen Tat.  As discussed, the shares in Luen Tat had been held by Ken and his wife until 1992, and by Ken and Richard since 1992.  At no time was Ken the beneficial owner of the shares in Luen Tat, and there was no factual basis for Ken to assert any entitlement to share the profits of Luen Tat by reference to beneficial ownership of the company.  Unless Ken was somehow otherwise entitled to share the profits of Luen Tat, that Luen Tat made the investment into establishing the Shenzhen base did not in real sense differ from the Father’s investment, albeit sourced from Luen Tat.  It should be noted that, and it was un-contradicted evidence of the Father, that in 1990s and before any re-invoicing operation was put in place, all the moneys of Luen Tat were kept in the personal account of the Father, and he would take the money to the Mainland for the Shenzhen project.  This also aligns with the observation of Harris J in his judgment cited above.

137.  That Ken was allegedly the beneficial owner of 50% of PTTC since 1992 as a result of his alleged co-investment was in fact not manifested.  That was so, even when opportunity to manifest that arose when Pak Tat was incorporated to take over the sole proprietorship of PTTC in 2002.  The Father had remained the sole shareholder of Pak Tat until 2006.  Even after 2006, the Father remained on record 50% shareholder of Pak Tat.  As mentioned, all those also added to the implausibility of Ken’s central assertion that the Father had decided to retire and to relinquish his assets to his children because of his deteriorating health in 1992.

138.  In the course of his explanation, Ken referred to his relationship with his wife in 1993 and the alleged advice of the professional trustee of his family trust.  As noted by Mr Wong, none of those was ever mentioned in his affirmations filed to oppose the winding up of Pak Tat, notwithstanding that his alleged half interest in Pak Tat was undoubtedly a crucial issue in the winding up proceedings (HCCW 236/2011).

139.  As mentioned, Ken commenced HCA 1890/2012 seeking to overturn Harris J’s judgment in HCCW 236/2011.  According to the statement of claim filed in that action in October 2012[23], Ken contended that when the Father caused the interest in Shenzhen Lianda under PTTC to be transferred to Pak Tat in September 2002, the Father remained the sole shareholder but allegedly continued to hold half of the shareholding in Pak Tat on trust for him.  Such contention was dropped and replaced by amendment a year later.  It became that it was Ken who orally requested the Father to transfer the shareholding in Shenzhen Lianda from PTTC to a holding company so that their respective stakes in Shenzhen Lianda could be reflected if required. Only that unbeknownst to him, the Father caused PTTC and Pak Tat to enter into a share transfer agreement whereby PTTC sold and Pak Tat purchased 100% shareholding in Shenzhen Lianda for HK$53,000,000.  Ken did not admit the share transfer agreement or the sale, and averred that between 2002 and 2006, his 50% stake in Shenzhen Lianda remained held on trust for him.

140.  None of the above contentions appeared in Ken’s affirmation in opposition in the winding up proceedings.  Even when made in HCA 1890/2012, they were not made until by way of amendment one year after the original pleading was filed upon commencement of HCA 1890/2012.  They were also at variance with what Ken now explained in court in the present action mentioned above.

141.  Ken apparently had paid for the shares in Pak Tat in 2006, but it was a nominal sum US$50 (equivalent to US$1 per share) was paid.  Mr Wong submitted that practically it could not be said that real valuable consideration had been given for half of the ownership of the Shenzhen manufacturing basis comprising the land, factory, machinery and operation.  I tend to agree.  In any event, the primary case of Ken is based on his beneficial entitlement arising out of investment since 1992, not purchase in 2006.

142.  The Father explained the circumstances in which he decided to transfer 50% shareholdings in Pak Tat to Ken after his fall and injury[24].  It was pointed out on behalf of Ken that the Father had made a contrary admission in court that Ken owned 50% of Pak Tat, a “Freudian slip” as it was suggested.  Then the Father was cross examined with reference to what the documents said.  I agree with Mr Wong that the Father’s answer should be assessed in that light as well as against the totality of his evidence.  The Father remained adamant throughout the trial that he was the sole beneficial owner of Pak Tat.

DISTRIBUTION OF PROFITS

143.  Central to Ken’s counterclaim is the dispute as to whether the distribution out of the group’s profits was a matter of entitlement arising out of legally binding agreements, as Ken contends, or a matter of discretion of the Father, as the Father (and the other family members) says.

144.  To recapitulate, there is no dispute that there had been distribution of the group’s profits for the following periods in the following ratios:

(1) Between 1986 and 1998: Father (90%), Ken (10%);

(2) Between 1988 and 1992: Father (50%), Ken (50%);

(3) Between 1992 and 1994: Father (37.5%), Ken (37.5%), Richard (25%);

(4) Between 1994 and 2002: Seline (10%), and the remaining 90% were shared amongst the Father (37.5%), Ken (37.5%) and Richard (25%).  The resulting ratio was: Father (33.75%), Ken (33.75%), Richard (22.5%) and Seline (10%).  This was what the Father described as the “Original Formula”.

145.  Since 2002, the Father had not taken any share of the profits.

146.  According to the Father, there had been no distribution of profits in and after 2002.  In mid-2006, occasioned by Richard’s departure from the group, the Father calculated the distribution of profits, this time for the period between 2002 and 2006.  The Father arbitrarily divided the accumulated profits of HK$50,841,827 (as recorded in his ledgers) into 2 parts.  A sum of HK$28,000,000 was deemed to be the profits up to 2002, which would be distributed according to the Original Formula.  The balance of HK$22,841,827 was treated as the profits earned between 2002 and 2006, which would be distributed according to a new formula.  This was what the Father described as “the Supplemental Formula”.

147.  Ken asserted 6 methods of distribution:

(1) Paragraph 144 (2), (3) and (4) above were respectively defined by Ken as Methods 1, 2 and 3.

(2) According to him, for 2002 to 2006, the profits were shared in this ratio: Father (nil), Ken (50.4%), Richard (33.6%) and Seline (16%).  Ken defined this as Method 4. Much was said about this alleged method as opposed to the Supplemental Formula alleged by the Father.

(3) Between 2006 and 2008, the profits sharing ratio became: Ken (90%) and Seline (10%).  Ken defined this as Method 5.

(4) Since 2009, Ken claims to be entitled to 100% of the profits.  Ken called this Method 6.

148.  Methods 2, 3, 4 and 6, according to Ken, were the result of specific oral agreements.  As far as the pleadings are concerned, no agreement was asserted in respect of his Methods 1 and 5.

Preliminary observations

149.  The alleged specific agreements on profits sharing, which formed the factual backbone of Ken’s present case in this respect and his counterclaim had not been pleaded from the outset[25]. What Ken originally pleaded was that the Father simply ceased declaring or distributing dividends out of the group since about July 2006.  It was only in 2006 (or early 2007) that the Father gave all the moneys of Luen Tat, Yuen Hing and Shenzhen Lianda to him.  The account was retracted in the first amendment exercise some 9 months later, with the emergence of the new case based on the alleged profits agreements.

150.  In 1986, the Father (and the Mother) transferred the shares in Luen Tat to Ken and his wife to hold for them.  Since 1992, when Richard joined the family business, the shares in Luen Tat became held by Ken and Richard.  The Father had since 1992 been the sole shareholder of PTTC, and subsequently Pak Tat.  All of them never received share of the group’s profits in percentages corresponding to their shareholdings in the group on record.  Seline received distribution whilst she was never a shareholder in Luen Tat or Shenzhen Lianda.  Until 2002, the Father still received substantial share of the profits.

151.  It should be obvious that the distribution of the group’s profits had no correlation with the shareholdings on record as one may expect in the normal corporate practice of declaration and payment of dividends. The evidence from the Father’s side was that the nature of the payments was bonuses to the family members who served in the family business.  I find that to be the fact.  This is crucial.

152.  Since Ken joined the family business upon his return from England in 1986, the Father had given him 10% of the profits.  That lasted until 1988, notwithstanding the transfer of the shares in Luen Tat to Ken and his wife.  It was also the Father who decided to distribute the profits in the ratio and amounts between himself and Ken during this period.  No contrary case has been pleaded by Ken.  It was the Father’s decision even on Ken’s pleaded case[26].  Further, the Father’s continuous receipt of substantial portion of the profits since then until 2002, as mentioned, contradicted Ken’s case that the Father decided in 1992 to relinquish his assets to his children.  That the Father stopped taking share of the profits in 2002 was also undisputedly his own decision.

153.  No doubt the Father’s ledgers formed the centre of study in this respect, even for the purpose of Ken’s counterclaim.  The ledgers contained detailed record of the “ins” and “outs” of the business, condescending on the smallest items such as purchase of raw materials and machinery, the very precise calculations, the balancing and comparison between his own notions of current assets and liabilities “比”, the distribution of monies and the tracking of the drawings and completion of the distributions “分齊”, all the way to the end of 2008.  As mentioned, this was hardly the result of mere pastime of the Father after retirement or of rendering symbolic assistance out of respect.  These were real and intensive labour over the details of business.

Method 1

154.  The pleaded case of Ken was that it was the Father who decided to share future profits with him on 50:50 basis.  No profit sharing agreement was pleaded.  In court, Ken seemed to suggest (for the first time) that the Father was bound by a promise to let him have 50% of the profits and thus Method 1.  The Father denied that.  As discussed, the Father was still in control of the group at least during this period.  Even on Ken’s own case, the Father decided to retire only in 1992.  I find it hard to believe that just when the Father decided to give Ken 10% profit as bonus in 1986, he would change his mind to commit to give Ken half of the profits after Ken had served the family business for just 2 years.

Method 2

155.  This, according to Ken, was when the Father decided to retire and to relinquish his assets, including his interest in Luen Tat, to his children.  That was, according to Ken, how he and Richard became 51% and 49% owner of Luen Tat respectively.

156.  Notwithstanding the above contention, Ken’s share of profits during this period was 37.5%. Even on the basis of Ken’s own case, that there was room for the profits sharing to be determined by way of agreement, and whereby the Father was in a position to command equal share of the profits as his, contradicts the assertion of full control over the family business by Ken.  As discussed, all the circumstances since 1992 (until 2008) tend to show that the Father was far from retiring from the business of the group.

157.  Further, the Mother, the Father and Ken were said to be the parties to this alleged agreement[27].  The Father and the Mother denied that.  Whilst she could not be specific, she was adamant in court, which was in line with her statement, that how to distribute the profits had always been the sole decision of the Father[28].  In evidence was also her letter dated 29July 2013 to Ken, albeit not contemporaneous, whereby she reiterated such understanding.

158.  It should also be noted that Richard started working for the group in 1992 and, according to Ken, was the beneficial owner of 49% of the shares in Luen Tat.  Had the matter proceeded by way of agreement, one would have expected the agreement to be one between the beneficial shareholders, not the Father who, according to Ken, had relinquished control and interest.  If Richard shared the same understanding as alleged by Ken, one would have expected Richard to ensure that he was the contracting party.  Yet it was not even formally asserted that Richard was a party to the alleged agreement.  Ken tried to suggest so in court.  At one point, Ken suggested that Richard too agreed to the profit distribution pursuant to the alleged agreement.  At another point, Ken suggested that either he or the Father had informed Richard of the sharing ratio to which Richard did not object.  Still nowhere in his pleading or witness statements was either of those accounts found.

159.  According to the Father, he first decided to share the profits among himself and his two sons equally.  After hearing complaint by Ken to the Mother about that, the Father changed his mind and distributed only 25% to Richard.  Hence the final distribution ratio in 1992.  Between his account and the evidence of Ken, the former, I find, is more reliable.  I say this also after taking into account the evidence discussed above and below as a whole.

Method 3

160.  This was said to be the result of an oral agreement between Ken and the Father in 1994.  Again, it was not the pleaded case of Ken that Richard and Seline were parties to this alleged oral agreement.  I repeat the observation made above in this regard.

161.  According to the Father, it was due to Seline’s hard work in the group that he decided to give her a preferential share of the first 10% of the profits.  The rest of the 90% would be distributed among the male members of the family in accordance with the Original Formula (37.5 each for Father and Ken, 25% for Richard)[29].  The Father expressed in court that had it been up to Ken, Ken probably would not have given Seline and Richard anything.  Be that mere sentiment developed as a result of the present dispute, the important point was that bonus, according to the Father, was still a matter for him.  Not that the Father had no say since 1992 as Ken alleged.

Method 4

162.  There is no dispute that the Father took no further share of the profits from 2002.  According to Ken, this was agreed to by the Father, whereas according to the Father, it was his own decision, not a matter of agreement.  The two sides of the litigation also differed in two major aspects: first, when the decision or, as alleged by Ken, the agreement was made; and second, the calculation.

163.  According to the Father, he made up his mind about a one-off distribution of the profits accumulated since 2002 only in 2006, and what occasioned that was Richard’s departure from the group.  As far as the evidence tells, such decision could not have been made before June 2006 because the sum of accumulated profits of HK$50,841,827 mentioned above was not, as it could not be, available in 2002.  This was supported by the entry dated 30 June 2006 in the Father’s ledger which recorded this one off distribution.

164.  As mentioned, the Father explained that.  He took the sum of HK$50,841,827 (the net current assess of the group at the time recorded by the “比” figure) as the distributable profits on that occasion.  He applied the Original Formula to calculate the distribution of the first HK$20,000,000 taken to be the profits accumulated up to 2002, namely: Seline (10%), Ken and Father (37.5% each) and Richard (25%).  He then applied the Supplemental Formula to calculate the distribution of the balance of the profits accruing, taken to be HK$22,841,827.  In his pleading and statement, the Father repeated the formulae as stated in his 2nd affirmation filed for the HCCW 497/2009 back in July 2009.

165.  Correction was however made at a late stage, and for that purpose the Father took out an application by summons dated 19 February 2014 to further amend his reply and to adduce his second supplemental statement.  He also sought to explain certain terms and entries recorded in his ledgers, which he said had been incorrectly interpreted by the witnesses from Mazars on Ken’s side.

166.  Application of this sort would be allowed only in exceptional circumstances[30]. The circumstances necessitating that were explained in the new statement.  The lateness of the application was explained by reference to the late discovery of the mistake in the course of preparation of the trial by the Father, who suffered from old age and bilateral hearing difficulties.  Once discovered, which, according to Seline in court, was in about January 2014, the summons was taken out.  It was 3 weeks before the trial.

167.  I allowed the application on the first day of the trial.  I did so, as I accepted the submission on behalf of the Father.  The scope of the proposed amendments was narrow.  The correction and further explanation would not go beyond the existing documentary evidence.  The error and thus correction would have had to come about in the course of the Father’s evidence.  Ken would suffer no material prejudice.  The correction and the new evidence were not such that might have caused him to need to embark on further investigation.  He would still pursue his positive case on the profits sharing agreements as he asserted, and would have the opportunity to cross examine the Father in the same respect.  The exercise of cross examination of the Father to be conducted by Ken was not expected to be substantially prejudiced as a result of the correction and the new evidence. On balance, the need to secure just resolution of the dispute outweighed the countervailing factors in the circumstances of this case.

168.  The mistake that the Father corrected himself was that he did not (as he mistakenly stated in his 2^nd Affirmation in HCCW 497/2009) divide his forgone share (37.5%) further among his children.  Consistent with his informal manner in keeping the Ledgers over the years, the Father simply took out his own 37.5% (undistributed) and use the remaining 62.5 (%) as the base for the calculation of distributions to his children.  Of the balance of the profits in the sum of HK$22,841,827, Seline was to have 10/62.5 (or 16%), and the remaining 52.5/62.5 (or 85%) was to be shared among Ken (37.5/62.5 = 60%) and Richard (25/62.5 = 40%).  The results actually tallied with the figures in the Father’s ledgers.

169.  Method 4 alleged by Ken[31] was effectively a word-for-word copy from the formulae explained in the Father’s 2^nd Affirmation in HCCW 497/2009.  That Ken directly copied from what now transpired to be a mistake on the part of the Father in his previous affirmation revealed that Ken had far from clear idea about the calculation, unless he could explain it.  In any event, he still had his own pleaded method to prove.

170.  Ken argued that by applying the Supplemental Formula, as now corrected, the result of the shares would not be exactly like the figures recorded on the ledgers dated 20^th June 2006.  But that was not put to the Father, notwithstanding the fact that this part of the Father’s clarification came about by way of his further supplemental statement. Further, by applying Method 4 asserted by Ken, the result would be even more at odd with the records in the Ledgers dated 20 June 2006:

(1) Seline: HK$22,841,827 x 10% = 2,284,182.7

(2) The remaining 90% would be HK$20,557,644.3, shared as follows:

(a) Ken: 37.5% = HK$7,709,116.6

(b) Richard: 25% = HK$5,139,411

(c) The Father: 37.5% forgone = HK$7,709,116.6

(3) The Father’s 37.5% (HK$7,709,116.6) further shared by the children as follows :

(a) Seline: (10/62.5) = HK$1,233,458.67

(b) Of the remaining (52.5/62.5) = HK$6,475,657.94,

(i) Ken (37.5/62.5) = 3,885,394.76

(j) Richard (25/62.5) = 2,590,263.18

171.  The end result would be:

(1) Ken: HK$(7,709,116.6 + 3,885,394.76) = HK$ 11,594,511.36

(2) Seline: HK$(2,284,182.7 + 1,233,458.67) = HK3,517,641.37

(3) Richard: HK$(5,139,411.1 + 2,590,263.18) = HK$7,729,674.28

172.  As a result, the distribution ratio became all wrong: Seline (15.4%), Richard (33.8%), Ken (50.8%).  The alleged ratios were but so odd that they could hardly have been specifically chosen for agreement.  Whilst Ken criticized the Father for the last minute change of his formula, his case, on balance, did not sound more truthful.

173.  Again, neither Richard nor Seline were said to be parties to this alleged agreement.  I repeat the observation mentioned above.  At one point, Ken explained that Richard and Seline were parties to this alleged agreement because they took profits.  Yet that they took profits hardly explained.  In any event, the taking of profits did not happen until 2006, which would not sit well with Ken’s case that the alleged agreement was made, now allegedly among all the parties, in 2002.  Ken’s evidence in further explaining that was far from satisfactory.

Method 5

174.  Ken’s case is that since Richard left the group, he became entitled to 90% of the profits with the remaining 10% to Seline[32]. The basis for asserting that was not at all clear.  It was not pleaded to be the result of any specific agreement.  The Father denied the assertion.  His ledgers showed no record of that revised ratio since 2006 either.

175.  What Ken relied on was apparently the calculation by Mazars.  Mazars’ calculation in turn was based on their interpretation of the Father’s ledgers.   They took the figures recorded under the word “比” for the amount of profits to be distributed[33]. By his further statement, as well as in court, the Father was adamant that he never suggested or agreed that “比” in his ledgers represented “to give”.  The character, he explained, meant comparison (or “比較”), which was comparison of what he had taken away and what he owed the others (not “俾出去”).

176.  The contemporaneous notes taken by the colleague of Chan Ming Wai, Jenix, during the meetings[34] with the Father also did not align with Chan’s evidence that Ken was entitled to 90% of the group’s profits after Richard left.  Jenix was not called to testify[35].  I am not impressed that Chan Ming Wai managed to explain the discrepancy pointed out to her.  In court, she accepted that she could not really tell what the Father intended to do with the balance of the profits after the 10% to Seline.

Method 6

177.  This related to what happened since 2009 when Ken had de facto control of the group.  He claimed to be entitled to 100% of its profits.  Ken effectively assumed such entitlement upon Seline’s departure from the group[36]. In court, the Father dismissed that as nothing but Ken’s own words and idea.

178.  Ken relied on what were said to be admissions by the Father on different occasions in support of his alleged entitlement to all the money of the group:

(1) the alleged admission by the Father during the meetings with the representatives of Mazars in 2008;

(2) the alleged resolution made in the meeting of the family members on 31 October 2008; and

(3) the alleged admission made during the conversation with Ken in December 2008 tape recorded by Ken in secret; and

(4) the alleged admission to Kitty So in March or April 2009.

179.  Allegations such as the alleged admission in the October 2008 meeting and the tape-recorded conversation with the Father did not exist in the case of Ken originally pleaded.

The alleged admission to Mazars in 2008

180.  It was said that the Father admitted to Chan Ming Wai and David Cho, in the course of their verifying the Father’s ledgers in 2008, that Ken was entitled to all the profits of the group after Seline's departure[37].  On the contrary, it was argued on the Father’s side that that was not even the purpose of verifying exercise.

181.  The Father explained that the ledgers were made for the purpose of recording the monthly profits of the Group informally.  If the profits accumulated to a certain amount and the cash flow was sufficient to meet the ordinary operation, the Father would consider distributing the profits to his children according to his own calculations[38].  The ledgers therefore told the past profits distribution but not the nature or basis for entitlement as such. Seline, who had handled the financial and accounting affairs of the group, had the same understanding[39].

182.  When the Father made available his ledgers and agreed to meet with Mazars, the purpose was to let Ken verify whether Richard had been overpaid.  According to Ken, he instructed Mazars to verify the ledgers in 2006 and 2009 for the purpose of calculating the shares of Richard and Seline in the group's profits[40].  Apparently the Father was keen to let the verification reveal that he had been fair in treating his children.  All that could be detected from the secret tape recording of the conversation between Ken and the Father.

183.  As such, Chan Ming Wai and David Cho of Mazars were, and could only be, concerned with the quantum of the profits distributed.  Their brief was not to investigate what the nature of the distribution was or whether the distributions were the result of the agreement on entitlement alleged by Ken.  Indeed Ken admitted that he had not even informed David Cho or Chan Ming Wai of the existence of the profits sharing agreements that were alleged.

184.  Further, the accountant's forensic analysis of the ledgers, which was essentially their interpretation, would not reveal the true basis of the distributions.  Chan accepted in court that by entitlement to the profits, she was referring to what the Father described to her as “分紅”.  In the present context, as discussed earlier, this could only be taken to mean distribution of bonus instead of the corporate practice of declaration and distribution of dividends to shareholders.  Further Chan was referring to that as a matter of history discerned from the ledgers.  She was not in a position to tell one way or the other whether it was a matter of legal entitlement as Ken suggested[41].

185.  As to David Cho, whilst he observed some consistent application of the methods of calculating the distribution of profits[42], which the Father did not dispute, from the Father’s ledgers, that per se cast no light on whether those were the results of specific agreements asserted by Ken either.  Importantly, Cho told this court, which Chan Ming Wai accepted that she had no reason to doubt, that (i) when and how much of the profits were to distribute was entirely a matter for the Father; (ii) the so-called entitlement was for the Father to decide, and the Father could change his mind; (iii) after the Father had decided the sharing ratio, the children would not disagree; and (iv) at no time had Ken told Cho that there was any specifically agreed formula for profit sharing.

186.  The Father also clearly remembered that he had never told any of the accountants that he had given up his shareholding, interest or future profits in the group[43].  As to his ledgers, what matters is what he meant (albeit still objectively assessed), not what a third party, who was not involved in their compilation, interpreted the ledgers to mean.

The allegedresolutionin the meeting on 31Oct 2008

187.  This followed the disagreement between Seline and Tang Chan Man at the dormitory facility in Shenzhen during the national holiday in 2008.  As mentioned, Ken considered that Seline had to go.  He convened the meeting to be held on 31 October 2008.  That, according to the Father, Richard and Seline, was what that meeting was supposed to address.  As mentioned, Seline confirmed during the meeting that she would leave the group[44].

188.  According to Ken, the Father agreed during the meeting that all the profits of the group belonged to him.  The agreement was said to be recorded in the minutes of the meeting, which was prepared by Lai Yuk Wa.  It read:

“所有股東確認，現在及日後聯達金屬錶帶有限公司及工廠一切收益（扣除一切支出）均屬於李樹忠先生所有，李樹忠先生有所有權運用及使用”

Essentially, it suggested that all shareholders confirmed all the present and future income (net of expenses) of Luen Tat and the Shenzhen factory belonged to Ken, and Ken had all rights to apply and use them.

189.  The Father, Seline and Richard denied the alleged agreement or resolution, and maintained their stance in court.  The fact was that they never signed the draft resolution, despite repeated requests from Ken.

190.  The above draft resolution was said to have followed from a handwritten draft minutes taken by Lai, which simply read:

“所有股東確認，聯達及工廠一切收益（扣除一切支出）均屬於李樹忠先生”

Essentially, it read that all the shareholders confirmed that all the income (after deducting expenses) of Luen Tat and the factory belong to Ken.

191.  The notes allegedly taken by Lai contemporaneously during the meeting were referred to.  There was in fact no reference to discussion amongst the family members on Ken's entitlement to the group's present or future profits.  The last bullet point of the notes suggested that the Father was still entitled to all the existing benefit and entitlement without any change.

192.  The Father’s side questioned Lai’s independence in the matter.  I can see why.  Lai was present at Ken’s request.  The evidence shows that his company was engaged by Ken on behalf of Luen Tat for the provision of computer repairing services. Just after this family meeting, Lai or his company received almost HK$1 million from Luen Tat between April 2009 and Jan 2010, and according to the Father’s side, for no apparent reason.  Perhaps more intriguing was that Lai became one of the authorized signatories for Luen Tat, after the cancellation of that of the Father.  That fact was never disclosed before.

193.  When presented with the draft resolution, Richard’s first response[45] was that it was Ken and Lai who attempted to turn what was supposed to be a family meeting to deal with Seline’s departure to a shareholders’ meeting of Luen Tat to deal with issues which were not meant to be discussed or actually discussed.  In court, Richard explained that even if he had to attend a properly convened shareholder’s meeting of Luen Tat, he would be doing so on behalf of the Father.

Thetape-recorded conversation between Ken and the Father inDecember 2008

194.  Ken’s case was that ever since 1988, the group’s profits had been distributed and shared amongst the family members mostly, if not all, by way of agreements.  On the basis of Ken’s case, there was apparently no suggestion that controversy had arisen at the times of the distribution.  There was also no suggestion that the Father had reneged on any of the alleged agreements.  Notwithstanding that, Ken considered it necessary to secure some form of record particularly of the Father’s agreement to his entitlement to all the profits of the group since late 2008.  First there was the arrangement of Lai to attend the meeting on 30 October 2008 and the draft resolution.  When the Father and the rest of family refused to sign it, Ken arranged the meeting with the Father in December 2008 to get his confirmation with the tape-recording in secret.  All those premeditated steps tend to cast doubt on whether there in fact existed a common understanding that Ken was entitled to all the profits of the group since the end of 2008 as he alleged.  No doubt he perceived he should be so entitled.

195.  Ken relied on the tape-recorded conversation as evidence of the Father’s alleged admission that the Father and Richard had received their final entitlement to the group's profits, and that Ken would now be entitled to receive or use all the moneys of the group[46].

196.  The Father’s bilateral hearing problems were obvious at the time of the trial, which the Father would not have managed to take part without hearing aid equipment.  The Father’s side took strong exception that Ken carried out the secret tape-recording while realizing that notwithstanding the use of hearing aid at the material time as well, the Father had difficulty in catching up with conversation[47]. It is a matter of judgment by actually listening to the recording instead of merely referring to the transcript, which itself was not entirely agreed between the two sides.

197.  Listening to the recording, it is not difficult to trace the premeditated line of leading questions rather quickly put by Ken to the Father with a view to getting the latter’s confirmation of his entitlement to all the moneys of the group, with which the Father tried hard to catch up.  In the course of that, what the Father said did not impress me as unequivocal, if at all, acceptance of whatever that were put to him.  For instance, he accepted that he had agreed not to distribute profits to himself but was equivocal as to whether all the moneys of the group since 2006 belonged to Ken.  He certainly denied that all the moneys in Yuen Hing belonged to Ken[48].

198.  Much was said about what the Father actually said in reply to what Ken put to him about the meeting on 31 October 2008[49]. In particular, it was sought to resolve the dispute even by putting to the Father in court that he replied “yes, yes, yes” to Ken’s question that all the moneys in the group belonged to no one but him.  Contrary to that, the Father’s side invited the court to listen to the recording to form a view as to whether it was that or simply the Father’s uttering in trying to get to listen to what Ken put to him.  I did that, as there is no better way, and am not impressed that it was such a clear indication of acceptance by the Father of what Ken said at that juncture.  Any doubt, however, could be removed if one considers the entire conversation.  The Father unequivocally denied any discussion in the October 2008 meeting in relation to Shenzhen Lianda, which he had solely invested and owned, contrary to what Ken put to him.  That, I find, was unequivocal.  It follows that the Father could not be taken to accept that all the moneys in the group belonged to Ken as he asserted.  Such stance aligned with that of the Father’s side regarding the accuracy of the draft resolution alleged reached during that meeting and prepared by Lai Yuk Wah.

199.  Ken argued that he had caused a total sum of HK$28 million to be paid out of the group to his personal account as his profits entitlement, which were arranged with Seline’s knowledge subsequent to the October 2008 meeting[50].  The Father said that that was misappropriation of Luen Tat’s money, and the sum of HK$28 million used to form part of his claim against Ken.  The claim was dropped to avoid complication as the same should now be matter for Luen Tat’s liquidators.

200.  According to Seline, she was re-engaged as a contractor and was not involved in the decision making of Luen Tat after the meeting.  Initially she did not realize any problem with Ken’s instruction for the transfer of money from Yuen Hing into his personal account, and assumed that the Father was aware of that[51].  When the instructions to transfer further sums repeated, they started to appear unreasonable to her unless those were loans by the company to Ken. For that matter, Seline therefore made a contemporaneous remark at the back of some of those subsequent cheques for payment to Ken that they were loans.

201.  Due to the above reasons, it could not be reasonably said that by administering Ken Li's withdrawal of the 28 Million, she indirectly acknowledged his entitlement to all the profits of the Group.

202.  Ken referred to the cessation of the Father’s keeping of his ledgers since the meeting[52].  But the reality was that by then, the Father had been stripped of his authority to sign cheques for Luen Tat, and, according to the Father in court, Seline became unable to provide him with the monthly figures of the business so that he simply could not keep his ledgers anymore[53].  As mentioned, and Ken did not dispute that, both the Father and Seline had been prevented from inspecting the books and records of Luen Tat since mid-2009[54].

The alleged admission in March orApril 2009

203.  Ken suggested that in around March to April 2009, the Father approached him through the Mother and Kitty So to request a 30% share in the group's profit, which he rejected.  The Father explained that he made the request because of his reluctance to litigate against his own son[55].  By then, Ken had seized de facto control of the group.  The Mother also testified that the Father was frustrated by Ken’s usurpation of control of the group, and in an attempt to settle with his son without litigation, he offered to allow Ken to continue to manage the group and to take 70% of the profits[56].  The Father did so, as he still considered himself the head of the group.

204.  The Father also expressed his helplessness, when it came to his decision to pay bonus to Seline upon her departure from the group.  According to him, he simply had no way to deal with it, as his authority to sign cheques of Luen Tat had been cancelled.  The reality then was that only Ken could carry that into effect, not whether or not it was agreed by the Father.  According to Seline, she decided to take what the Father decided to give her.  As only Ken could carry that into effect, she demanded for payment from Ken and came to a settlement with him.  Once again, Ken secretly tape-recorded the conversation with Seline.  But the same did not serve to evidence the alleged agreement in respect of his entitlement to all the moneys of the group since then. According to Seline, she just let him say what he wanted during the conversation.

205.  According to Ken, Kitty So told him that the Father said he would accept Ken's offer of 10% share and the usual pocket money and living expenses because Ken was in charge of the group[57].  That was double hearsay. In any event, even on Ken’s own case, there was no deal as the Father persisted in refusing to sign the draft resolution prepared by Lai Yuk Wah mentioned above.  Reference was also made to the handwritten note by the Father[58].  According to the Father, and as apparent from that note, he made clear that he would not sign the draft resolution.  2 sums of HK$100,000 were indeed given by Ken and received, but according to the Father, they were meant for the Mother instead of consideration for any alleged agreement on his part.

206.  In my view, one thing remains clear.  The Father's persistent refusal to sign the draft resolution, which was passed on to him again by Ken through Kitty So, reflected his denial of Ken's legitimacy in taking control of the group or his entitlement to the profits, be it a matter of agreement as alleged or not.  The characterization of this episode as evidence of the Father’s admission does not align with the overall view of the evidence.

Alleged agreements binding?

207.  It was questioned, in particular by Ms Lok, whether the alleged oral agreements between Ken and the Father, assuming they existed, would have been legally binding and enforceable.

208.  It is presumed that parties to an agreement of a domestic or social character do not intend their agreement to be attached with legal consequence, unless otherwise specified by the time of the agreement: see Sun Er Jo v Lo Ching [1996] 1 HKC 1, at §§36-39, per Yeung J (as he then was).  Whether or not the parties have given consideration for the agreement is not conclusive in determining the binding effect of the family arrangement.  All the surrounding circumstances are relevant in determining whether it is intended to be legally binding contract: see Jones v Padavatton [1969] 1 WLR 328 at p. 332 and 336 per Danckwerts and Atkinson LJ.

209.  The present context in which any such profit-sharing arrangements were allegedly agreed was a traditional Chinese family and business headed by the Father.  As discussed, the Father ran the business his own old-fashioned way, in particular, in his overseeing of the financial situation of the business.  His children joined the family business one after the other.  It became clear and hardly disputable that the Father to begin with dictated the distribution of the business profits in the form of performance bonus to whichever children who participated in the business.  The Father also undisputedly dictated the timing of the distribution, which, according to the Father, depended on the cash flow situation. No formality was alleged in respect of the formation of the alleged agreement.  Hence the repeated premeditated steps taken by Ken to obtain confirmation from the Father, and thus evidence of his alleged entitlements, only at the later stage.

210.  The real and valuable consideration in support of the alleged agreements in the present case remained unclear, if at all pleaded.  In court, Seline actually confirmed that the Father had been generous to the children over the years, and would not have taken issue, had the Father changed his mind about provision for her. Indeed, even according to the witness for Ken[59], the Father was understood to have been in a position to change his mind about the profits distribution, if he so wished.

211.  In court, Ken suggested, but not without hesitation, that he had the right to bring the Father to the court, if the latter changed his mind about the distribution of profits allegedly agreed upon.  Yet what was it that would have prevented the Father from changing his mind?  Throughout the trial, Ken kept labouring on the significance of his contribution towards the business of the group[60].  Reference was made to specific instance such as the so-called “Apple” business.

212.  The Father did fairly acknowledge his son’s contribution to the family business. So did he with respect to his other 2 children’s contribution.  Ken’s evidence, particularly that in court, was testament to his own perception of what he deserved, which was largely premised on his mentality that he was the major contributor by bringing in business to the group.  But one should not lose sight of the very fact that it was equally Ken’s duty towards the company, for which he received his remuneration and performance bonus.  Business, albeit introduced by Ken, was concluded with Luen Tat’s group, and the goodwill of this manufacturing business had presumably been in the forefront of its business counterpart’s consideration.  In other words, his contribution per se was not of such nature and did not arise in such circumstances that would have created some kind of equity estopping the Father from changing his mind about the profits distribution, even if agreed upon.  There was no clear, if at all, evidence suggesting otherwise.

213.  For the above reasons, even assuming that the Father had somehow agreed with Ken as to the latter’s entitlement to the profits of the group, I doubt they were binding and legally enforceable.  Without the factual backing of beneficial interest in the companies of the group or some form of equity, as discussed above, Ken could not complain if the Father changed his mind.

CHANGES OF CASE

214.  Both Mr Wong and Ms Lok made special emphasis on the instalments of substantial amendments to Ken’s pleading since the commencement of the present action.  The material changes to Ken’s pleaded case in respect of his alleged taking over of Luen Tat, beneficial ownership of Pak Tat and the alleged profits sharing agreements were mentioned above.  They were described as sea changes.  That these assertions, which effectively formed the factual backbone of Ken’s case, did not come about fairly and squarely at the first opportunity but only introduced by way of substantial amendments far from swiftly indeed called for explanation.

215.  Whenever asked to explain, Ken almost invariably blamed it on his former legal representatives.  Caution must be exercised before accepting such excuse as fact, when it came handy for Ken to blame the former legal representatives who could not be heard.  I must say that his evidence as to the manner in which he had instructed his legal representatives, to the extent it could legitimately be revealed and considered by the court, at different stages of his evidence in court was far from impressive.  Nor was his reference to time constraint a full, if any good, answer.  I have no reservation in categorizing his explanation as wholly incredible.

CONCLUSION

216.  It comes to where a view could be formed as to which side’s version was true.  I do so, after considering the extensive analysis of the evidence and submissions by counsel[61], including those specifically discussed above.  All considered, I prefer the evidence adduced on behalf of the Father’s side, and accept his case as fact. I reject Ken’s case that he was at any material time the beneficial owner of Luen Tat or Pak Tat.  I find as a matter of fact that Ken (and Joseph) holds the shares in Luen Tat and in Pak Tat both on trust for the Father.

217.  I find as a matter of fact that the profits distribution had at all material times been a matter of the Father’s discretion.  No realistic view could be taken in favour of any of the alleged profits sharing agreement in isolation.  I reject all of them.  The alleged profits sharing agreement, if at all existed, would not have been binding or enforceable against the Father, who was in position to change his mind.  The claim by Ken on the basis of alleged entitlement to the profits of the group arising out of the alleged profits sharing agreements fails.

THE OTHER ASPECTS OF THE COUNTERCLAIM

218.  In view of the above conclusion, the other aspects of the counterclaim, which essentially form the fourth major issue in this trial, do not really call for determination.  Therefore I would be brief.

219.  An amount of HK$25,602,977.76 being alleged unpaid profits belonged to Ken was said to have been converted by the Father or Seline and retained in Yuen Hing’s bank account.  They were said to be accountable to Ken for such sum as constructive trustees.  There is dispute as to whether there was such an amount in Yuen Hing’s account.

220.  Contrary to Ken’s suggestion, the Father did not admit that in his previous affirmation.  This was the amount Ken claimed, and the Father deposed to nothing more than that[62]. The figure was what Ken calculated on the basis of Mazars’ analysis of the Father’s ledgers, which was discussed above.  According to the Father, cash in Yuen Hing would not have remained idle in the bank account, as the group relied on that as the source for business expenses and distributions to the family members.  That had been the practice known to the family, and there had been no suggestion of any complaint about such practice.  Ken admitted that prior to at least mid-2008, the liquidity of the group was tight so that it took 2 years for Richard to receive his share of distribution.  Ken was able to retrieve the various sums of money from Yuen Hing allegedly in partial settlement of his share of profits also only after ensuring that it was put in funds by Luen Tat.

221.  The counterclaim is essentially based on constructive trust and breach of trust.  The movement of money of the group into Yuen Hing per se could not give rise to any legitimate complaint.  Yuen Hing was supposed to receive such business money pursuant to the re-invoicing operation.  That even included the time when Ken subsequently became the bank signatory of Luen Tat.  All these years, little formality had been observed in the distribution of profits of the group, and none of the family members could deny knowledge or complain.

222.  Ken needs to establish first and foremost his entitlement to the profits of the group.  He fails to do that.  No part of the money going into Yuen Hing could be said to be Ken’s trust property.  Nor did the transfer of any part of such money constitute breach of trust, it follows.  The essential components of the causes of action against the Father’s side did not exist as a matter of fact.

223.  In the submissions on his behalf, Ken somehow claimed that the Father, Richard, Seline and Yuen Hing were liable for the sums of HK$9,094,000, HK$7,376,970, HK$9,966,443.80 respectively.  Reference was also made to the alleged over-distribution of profits by the Father by the end of 2008 and alleged right to claim for regurgitation of the bonuses by the recipients.  These contentions went beyond the pleading.  The cause of action, even if existed, would have belonged to Luen Tat.  As to Richard, he is not even a party to the counterclaim.

DISPOSITION

224.  In line with the above conclusion, I grant the declarations and orders sought by the Father as pleaded.  I see no reason why failing on liability, Ken’s counterclaim should not be dismissed.  I so order.

225.  As to costs, both Mr Wong and Ms Lok indicated that this case warrants an indemnity costs against Ken, if he fails, in order to demonstrate the court’s disapproval of his conduct.  Both sides touched upon the issue in their submissions, and a few authorities were listed out for the argument.  In a case with such litigation history and factual composition, the justification for indemnity costs order requires consideration after full argument.

226.  For the time being, I make a nisi order that the Father shall have his costs of the action, including those of defending the counterclaim; and Seline and Yuen Hing shall have their respective costs of defending the counterclaim.  Costs include those that have been reserved, and shall be taxed, if not agreed.  If either side takes the view that some other costs order should be made, application could be made in the usual way within 14 days to vary the nisi order.  In that event, appropriate directions may be proposed and given for the disposal of the argument on paper.

POSTSCRIPT

227.  The irony is that in normal course of events, and as the Father had apparently contemplated at one point, some of the interests in the group had been arranged to be held by the sons or their corporate vehicles or nominees so as to facilitate the succession by the sons upon the passing of the Father.  Yet until then, the interests, as I find, were held on trust for the Father, who never retired from the ultimate control of the group.  That apparently fell far short of what Ken perceived he deserved, and that brought about his dispute with the other members of the family.  It was that which caused the Father to resort to the present litigation, which I accept was his last resort.  Unfortunately the Father did not live to see the result as he passed away less than a fortnight after the conclusion of the trial[63].

228.  I am grateful for the assistance from counsel on all sides.

HCA 1711/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1711 OF 2009

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DECISION NO 4

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I. INTRODUCTION

1.  This is the fourth tranche of rulings in the present action in respect of pre-trial interlocutory applications before me.  For convenience, I shall adopt the abbreviations in my earlier Decisions Nos 1, 2 and 3 handed down on 15 May 2013, 31 May 2013 and 10 January 2014 respectively (“Decision Nos 1, 2 and 3”).  This Decision, which hopefully will be the last interlocutory ruling before the Liability Trial commences in March 2014, concerns costs.

2.  The outstanding issue of costs concerns claims and/or applications involving the Misappropriation Claim and the New Shares Claim.

3.  In respect of the Misappropriation Claim, on 6 November 2012, FS issued the Misappropriation Claim Summons for leave to re-amend the ASOC and to amend the witness statements of the Father and Seline both filed on 20 March 2012.  The effect of these proposed amendments is to withdraw the cause of action which I have described as the Misappropriation Claim.

4.  On 21 November 2012, L Chan J granted leave for the Father to withdraw the Misappropriation Claim and to re-amend the ASOC and for FS to amend their witness statements, and he adjourned the Misappropriation Claim Summons to be heard together with various other interlocutory summonses.  The RASOC and FS’ amended witness statements were filed on 30 November 2012.  At the 1^st, 2^nd and 3^rd Hearing Days, I canvassed with the parties the remaining aspects of the Misappropriation Claim Summons, ie the consequential amendments to Ken’s RAD&RAC and Joseph’s Defence following the withdrawal of the Misappropriation Claim. This was resolved on the 3^rd Hearing Day with Mr Joffe (and Mr Wou with him), counsel for KJ, and Mr Wong (now Mr Wong SC) (and Mr Kwong with him), counsel for FS, identifying and agreeing on the consequential amendments to the RAD&RAC and the AR&ADC.

5.  On 3 August 2012, Ken issued a summons to strike out parts of the Father’s ASOC and FS’ AR&ADC and also parts of the witness statements of the Father and Seline pursuant to Order 18 rule 19 of the RHC.  The striking out application concerned the Misappropriation Claim and New Shares Claim. But following the Father’s withdrawal of the Misappropriation Claim, Ken subsequently amended and re-amended his striking out summons.  The re-amended summons (ie the Striking Out Summons) filed on 28 March 2013 sought to strike out corresponding parts of the updated pleadings (ie the Father’s RASOC and FS’ AR&ADC) and the updated witness statements (ie the Father’s and Seline’s amended witness statements).

6.  The impugned parts of the AR&ADC and paragraphs 18-19 of Seline’s amended witness statement which Ken sought to strike out all related to the Misappropriation Claim.  The impugned parts of the RASOC, the impugned parts of the Father’s amended witness statement, and paragraphs 20-21 of Seline’s amended witness statement which Ken sought to strike out all related to the New Shares Claim.

7.  On the 1^st Hearing Day, Mr Joffe made submissions on the Striking Out Summons.  On the 2^nd Hearing Day, FS applied for leave to amend the RASOC to introduce re-amendments in relation to the New Shares Claim as per the Father’s Draft Pleading supplemented by the FBP Answers.  Without objection by Ken, I granted leave for the Father to further amend the RASOC as per the Father’s Draft Pleading and for Joseph to consequentially amend his Defence with costs of and occasioned by such application to be paid by the Father to Joseph in any event to be taxed if not agreed.  As for Ken, on the 2^nd Hearing Day, I directed him to lodge and serve Ken’s Draft Pleading and to identify which parts of his proposed amendments related to inter alia the Father’s revisions in the RRASOC concerning the New Shares Claim, the Father’s withdrawal of the Misappropriation Claim, and Ken’s own proposed amendments under the Amendment Summons.

8.  As explained in paragraph 4 above, by Decision No 1 handed down on 15 May 2013, I granted leave to KJ to further amend the RAD&RAC in the manner marked in purple as per Ken’s Draft Pleading, and leave to FS to consequentially amend the AR&ADC, and I also directed FS to file and serve their RAR&RADC with (a) consequential amendments pursuant to the RRAD&RRAC and (b) deletions of paragraphs 8, 10(2) (1^st sentence), 10(2A) (2^nd sentence), 10(2B), 10(2C) and 11(3A) (save for the following words: “… the Plaintiff makes no admission as to whether the 1^st Defendant used his personal financial means or Luen Tat’s financial means to fund the proceedings under HCCW 497/2009 …” (which were consequential amendments following the removal of the Misappropriation Claim).  I also struck out paragraphs 18-19 of Seline’s amended witness statements consequential upon the Father’s withdrawal of the Misappropriation Claim.

9.  Mr Joffe and Mr Wong (now Mr Wong SC) also agreed that costs of and occasioned by the Misappropriation Claim Summons be paid by FS to Ken in any event to be taxed if not agreed.  But such order has not been formally granted pending the disposal of the contested issue of costs referred to in the paragraph below.

10.  The remaining issue of costs in relation to the Misappropriation Claim has two aspects:

(a) Ken sought his costs of and occasioned by the Misappropriation Claim. Such costs do not concern the application for withdrawal of such claim or the consequential amendments to the pleadings and witness statements as a result of such withdrawal, which costs had already been dealt with. Ken claimed that as a result of the Father’s withdrawal of the Misappropriation Claim, he should be entitled to costs of and occasioned by such abandoned cause of action. The Father disputed this, and suggested that costs be reserved for resolution at the Liability Trial.

(b) Ken also sought costs of and occasioned by the Striking Out Summons in respect of the impugned parts of the AR&ADC (now RAR&RADC) and paragraphs 18-19 of Seline’s amended witness statement concerning the Misappropriation Claim. FS disputed this, and suggested there be no order as to such costs.

I heard submissions from Mr Joffe on this remaining costs issue at the 1^st Hearing Day, and further submissions from Mr Wong SC in opposition and Mr Joffe in reply at the hearing on 26 September 2013 (“Costs Hearing”).

11.  As for the New Shares Claim, Ken sought costs of and occasioned by the Striking Out Summons in respect of the impugned parts of the RASOC, the impugned parts of the Father’s amended witness statement, and paragraphs 20-21 of Seline’s amended witness statement. FS disputed this.

12.  For costs in relation to the Striking Out Summons, Mr Joffe and Mr Wong SC agreed that the impugned parts of FS’ amended witness statements would stand and fall together with the impugned parts of FS’ pleadings.  In the circumstances, it would be unnecessary to give independent consideration to Ken’s criticisms against FS’ amended witness statements since any determination as to the viability of the Misappropriation Claim and New Shares Claim as pleaded would be determinative of the corresponding witness evidence by way of witness statements.

13.  Mr Joffe and Mr Wong SC also agreed that in respect of the argument on the aforesaid cost dispute, costs should follow event.  In respect of the Striking Out Summons, Mr Wong SC went on to clarify that FS would not resist KJ’s claim for costs as set out in paragraphs 10(b) and 11 above if the impugned parts in the Father’s pleadings in respect of the Misappropriation Claim and New Shares Claim were either liable to be struck out or only salvageable by further amendments thereto. In the circumstances, the crucial issue is whether or not the Misappropriation Claim and New Shares Claim as originally pleaded were viable causes of action without assistance by further amendment of pleadings.  It is only if they were that FS would escape liability for costs as sought by Ken.  However, if they were liable to be struck out or if their viability depended on further amendments of pleadings, then FS would have to bear the aforesaid disputed costs. Hence, for the purpose of this Decision, I shall focus on the original pleas.

II.  BACKGROUND

14.  As regards FS’ and KJ’s respective case as originally pleaded, brief summaries can be found in paragraphs 69-90 and 91-113 of Decision No 1. I shall not repeat them here save as required.

III. COSTS – MISAPPROPRIATION CLAIM

15.  In paragraphs 29-31 of the ASOC, the Father raised the Misappropriation Claim against Ken for his alleged misappropriation of funds/assets allegedly belonging to Luen Tat and/or for his alleged wrongful instruction to Luen Tat’s employees that Luen Tat would cease operations soon and it was no longer necessary for them to work for Luen Tat. The Father claimed that such wrongful conduct injured his interest in Luen Tat and/or diminished the value of his beneficial shareholdings in Luen Tat.

16.  Mr Joffe agreed that although the general rule is for the court to order a plaintiff to pay the defendant’s costs upon obtaining leave to discontinue a cause of action, the court retains a wide discretion as to costs and can depart from the general rule if there are exceptional circumstances.[1]  He argued that in all the circumstances, the Father failed to show any ground let alone exceptional circumstances to depart from the usual rule.

17.  Ken argued that in respect of the Misappropriation Claim, they should have the costs as sought in paragraph 10 above because such claim was an obviously unsustainable reflective loss claim.  In Waddington Ltd v Chan Chun Hoo,[2] the Court of Final Appeal affirmed the no reflective loss principle which debarred a shareholder from suing to recover a loss which was merely reflective of the loss said to be suffered by the company.

18.  Here, the Father through Allied Ever was merely a shareholder of Luen Tat, so Mr Joffe submitted that he could not seek relief for alleged misconduct against the properties/assets of Luen Tat. Even if a case were made out against Ken, the proper plaintiff would have been the Liquidators who had already commenced action against Seline and Yuen Hing in HCA 1428/2012, against inter alia Richard, Ken and the Father in HCA 1952/2012, against Richard, Ken and the Father in HCA 1996/2012, and against Ken, Seline, Richard and the Father in HCA 2137/2012.

19.  The Father argued that when Luen Tat was wound up pursuant to the order by Harris J dated 6 July 2010, the court made no factual findings in respect of Ken’s wrongdoings in misappropriating Luen Tat’s assets, so there would be no risk of inconsistent factual findings in HCCW497/2009 and the present action, and no risk of wasting judicial resources.[3]  Mr Wong SC submitted that the present action and HCCW497/2009 served different purposes.  The former concerned the Father’s attempt to recover his shareholdings in Luen Tat, which he claimed were held on trust for him.  The latter concerned the management and affairs of Luen Tat, and the Father succeeded in seeking the relief he prayed for when Harris J granted a winding up order to wind up Luen Tat. Mr Wong SC submitted there was no reason why the Father could not rely on matters averred in HCCW 497/2009 in the present action.

20.  In my view, these arguments do not really assist the Father unless he can surmount the no reflective loss principle.  If the Misappropriation Claim is barred by such principle, now that Luen Tat has been wound up, it will be up to the Liquidators to decide whether or not to pursue and/or continue to pursue such claim against Ken.

21.  Mr Wong SC argued that Ken’s reliance on the no reflective loss principle overlooked the exception that such principle might not apply when a wrongdoer had disabled the company from bringing claims against himself. He turned to Giles v Rhind [4] in support.  In particular, he relied on the following observations by Waller LJ at p 633:

“33. In Johnson v Gore Wood & Co there was no difficulty about the company having a cause of action and being able to recover on the cause of action. I also think that in the light of Lord Bingham of Cornhill’s observation, at p 36C, that it is important for the ‘court [to] be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied compensation’, it is clear that there had been nothing to stop the company continuing with its action if it had so chosen.

34. One situation which is not addressed is the situation in which the wrongdoer by the breach of duty owed to the shareholder has actually disabled the company from pursuing such cause of action as the company had. It seems hardly right that the wrongdoer who is in breach of contract to a shareholder can answer the shareholder by saying, ‘The company had a cause of action which it is true I prevented it from bringing, but that fact alone means that I the wrongdoer do not have to pay anybody.’”

Similar sentiment was expressed by Chadwick LJ at p 643 when he said that the principle laid down in Johnson v Gore Wood & Co [5] did not apply where the claim is made against:

“a wrongdoer who, in breach of his contract business, with the intention that the company should be so denuded of funds that it cannot pursue its remedy against him, and who gives effect to that intention by an application for security for costs which his own breach of contract has made it impossible for the company to provide, is entitled to defeat a claim by the shareholders on the grounds that their claim is “trumped” by the claim which his own conduct was calculated to prevent, and had in fact prevented, the company from pursuing.”

22.  Mr Wong SC submitted that the above observations must be correct bearing in mind that the purpose of the no reflective loss principle was to avoid double recovery and to ensure that the company’s assets were preserved for creditors.  However, in Pico North Asia Holdings Limited v Cheung Yuk Ting Linda,[6] Fok JA (as he then was) explained that the principle is not rooted simply in the avoidance of double recovery in fact; it extends to heads of loss which the company could have claimed but has chosen not to and therefore includes the case where the company has settled for less than it might.

23.  Despite Mr Wong SC’s persuasion that the Giles v Rhind exception would be relevant, I note that Lord Millett NPJ in discussing such exception in Waddington Ltd held (and other members of the court agreed) it did not exist in Hong Kong and those English authorities establishing and affirming such exception should not be followed in Hong Kong.

24.  In Giles v Rhind, the company, which was in administrative receivership, brought proceedings against the wrongdoing director, who demanded and obtained an order for security for costs which successfully stifled the proceedings.  When the company discontinued the action a shareholder brought proceedings on its own behalf to recover its own loss. It was conceded that this was reflective loss, but the English Court of Appeal permitted the action to proceed since some way was needed to allow the company to recover damages despite the discontinuance of its own proceedings. Lord Millet NPJ in Waddington Ltd [7] said:

“86. …… If the company had not been in administrative receivership, the simplest course would have been to allow the shareholder to bring a derivative action. As it was, this course would not have been open, for the company was no longer under the control of the wrongdoer. But the court could have given the shareholder leave to apply to direct the administrative receiver to bring the action if the shareholder was willing to fund it. The discontinuance should not have been an obstacle to either course. There is no logic in allowing such an action where the wrongdoers are in a position to stifle any proceedings by the company, and disallowing it where they have succeeded in doing so.

87.The Court of Appeal may have assumed that the principle established in Johnson v Gore Wood & Cois not engaged where the company has lost the right to sue. But the House of Lords expressly applied the principle not only where the company had the right to sue but also where it had declined or failed to sue. There was nothing new in this. In Prudential (supra) it had been submitted that a personal action at the suit of the shareholder will lie to recover reflective loss if the company’s remedy is for some reason not pursued. The Court of Appeal countered the argument (at p.223) by posing the rhetorical question: “How can the failure of the company to pursue its remedy against the robber entitle the shareholder to recover for himself?”

88. The facts of the present case do not bring it within measurable distance of the exception described in Giles v Rhind. But Barma J went further and held that the supposed exception does not exist, and I respectfully agree with him. The case has been followed in England at first instance in Perry v Day [2005] 2 BCLC 405 and referred to without enthusiasm by the Court of Appeal in Day v Cook [2002] 1 BCLC 1 and Gardner v. Parker [2004] 2 BCLC 554. But in all these cases the court was bound by the decision in Giles v Rhind. In my opinion Giles v Rhind and Perry v Day were wrongly decided and should not be followed in Hong Kong.” (my emphasis)

25.  In any event, I am of the view that the present position did not bring the Misappropriation Claim within the Giles v Rhind exception. Mr Wong SC submitted that when the present action commenced in August 2009, Ken as the wrongdoer was in control of Luen Tat in that he was the sole director and his corporate vehicle Joesh held 51% shareholding in Luen Tat, and the Father and/or his corporate vehicle Allied Ever were unable to bring proceedings in the name of Luen Tat. Mr Wong SC suggested the Father was therefore entitled to raise the Misappropriation Claim, which explained why Ken did not mount any striking out application until after Harris J wound up Luen Tat on 6 July 2010 in HCCW497/2009 and the Liquidators were appointed (ie when Ken ceased to have control of Luen Tat).  The Striking Out Summons was issued only on 3 August 2012 upon such change of circumstances.  But in my view, even if Ken was in control of Luen Tat at the material time, no explanation was forthcoming as to why the Father through his corporate vehicle Allied Ever as minority registered shareholder of Luen Tat could not have applied to bring derivative action on behalf of Luen Tat against Ken.  A more drastic course of action was to apply to wind up Luen Tat and allow the Liquidators to bring action against Ken on behalf of Luen Tat for the benefit of the creditors of the company as they see fit.  This latter course of action was what eventually happened. In all the circumstances, the Giles v Rhind exception would not have assisted the Father.

26.  But that is not the end of the matter for Mr Wong SC still had a bagful of arguments to say that the no reflective loss principle was inapplicable.

27.  First, Mr Wong SC submitted Ken failed to highlight that his counterclaim for the balance of his profit share up to November 2008 and for the cumulative profits of the Group as from 1 December 2008 (which Ken said wholly belonged to him) that he would pursue at trial was a mirror image of his defence to the Misappropriation Claim.  He claimed it would be unfair for Ken to say the Father could not claim for the monies/assets Ken misappropriated whilst Ken was able to and did claim that such monies/assets belonged to him in his counterclaim, and there was no reason for the Father to pay for part of the cause of action relating to the Misappropriation Claim.

28.  The short answer to this proposition is that the Father was of course entitled to defend the counterclaim, and after the Liability Trial the Father might well recover costs of the counterclaim if his defence contentions were upheld by the court.  But at this stage pending trial, there was no certainty that Ken would eventually be allowed costs of his counterclaim.  In any event, the Father’s defensive entitlement to oppose the counterclaim and to seek costs in respect of such defence would not translate into a right to bring an offensive attack to pursue the Misappropriation Claim if such claim was reflective of the loss said to be suffered by Luen Tat.  The Misappropriation Claim pleaded that Ken’s wrongful conduct “injured [the Father’s] interest in Luen Tat and/or diminished the value of [the Father’s] beneficial shareholdings in Luen Tat”,[8] but Ken’s counterclaim for his profit shares was a personal claim and not a claim via Luen Tat.  I agree with Mr Joffe that the Misappropriation Claim as pleaded is reflective loss par excellence in that such plea acknowledged that the alleged misappropriation of Luen Tat’s monies/assets was neither the Father’s personal loss nor injury to his personal assets.

29.  Mr Wong SC then argued that the Father’s claim was based on a trust in his favour over 100% shareholding of Luen Tat and his personal right to decide how to distribute profits.  In my view, whilst the Father’s overall claim for declarations as to his ownership of the shares in Luen Tat and Pak Tat and for orders to transfer such shares held by KJ back to him might well be based on such contentions, the Misappropriation Claim was wholly different in that it sought monetary relief and/or equitable compensation for reflective loss.  It was Luen Tat that had the right to recover its monies/assets which had been misappropriated, and once recovered it would be a matter of debate between the Father and KJ to be resolved at the Liability Trial as to whether or not the Father had a personal right to decide how to distribute the profits of Luen Tat.  Even a 100% beneficial shareholder of Luen Tat (as the Father claimed himself to be) could not overcome the corporate personality to seek recovery of Luen Tat’s monies/assets so that he could distribute Luen Tat’s profits as he saw fit.

30.  In his written submissions, Mr Wong SC referred to the proposition in Johnson v Gore Wood & Co that where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so) even though the loss is a diminution in the value of the shareholding.  At the Costs Hearing, Mr Wong SC said he would not rely on such proposition.  But since Mr Joffe canvassed this in his submissions, I will deal with it briefly.

31.  In Johnson v Gore Wood & Co, Lord Bingham of Cornhill said as follows:[9]

“…… (1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. …… (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. …… (3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by a breach of duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other ……

These principles do not resolve the crucial decision which a court must make on a strike-out application, whether on the facts pleaded a shareholder’s claim is sustainable in principle, nor the decision which the trial court must make, whether on the facts proved the shareholder’s claim should be upheld. On the one hand the court must respect the principle of company autonomy, ensure that the company’s creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation. The problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether …… the loss is “merely a reflection of the loss suffered by the company”. In some cases the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of the shareholding attributable solely to depletion of the company’s assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for. At the strike-out stage any reasonable doubt must be resolved in favour of the claimant.” (my emphasis)

It was suggested that the above principles in Johnson v Gore Wood & Co were not affected by the Court of Final Appeal decision in Waddington Ltd. Mr Wong SC also referred to Waller LJ’s observations in Giles v Rhind [10] which reiterated the aforesaid second and third principles in Johnson v Gore Wood & Co.

32.  Again, the short answer is that, for the reasons set out in paragraph 28 above, I do not see the present situation as falling within the second proposition that Luen Tat had suffered a loss but had no cause of action to sue for recovery of such loss.  Plainly, Luen Tat would have been entitled whether by derivative action before it was wound up or via the Liquidators after it was so wound up to seek recovery of such loss. In my view, whilst there is no quarrel with the principles in Johnson v Gore Wood & Co, it would not assist in the present case.

33.  Secondly, Mr Wong SC argued that Ken had failed to discharge the burden that Luen Tat had an identical cause of action covering exactly the same claim as the Misappropriation Claim. Mr Wong SC added that in considering whether such burden was discharged, likely defences should be taken into account.  Mr Wong SC further submitted that since Ken’s pleadings did not identify any cause of action belonging to Luen Tat, and Ken’s stance (as evident from his counterclaim) was that Luen Tat did not have any such cause of action, the no reflective loss principle would not apply.

34.  Mr Wong SC cited Shaker v Al-Bedrawi.[11] But in that case, Peter Gibson LJ accepted that if the claim is for an account that is in substance a claim to monies to which the company has a claim against the wrongdoer, such claim would be barred under the no reflective loss principle, and it matters not that the causes of action are different or the company has not yet brought proceedings.[12] The learned judge went on to say that the no reflective loss principle:

“83. …… does not preclude an action brought by a claimant not as a shareholder but as a beneficiary under a trust against a trustee for a profit unless it can be shown by the defendants that the whole of the claimed profit reflects what the company has lost and which it has a cause of action to recover. As the Prudential principle is an exclusionary rule denying a clamant what otherwise would be his right to sue, the onus must be on the defendants to establish its applicability. Further, it would not be right to bar the claimant’s action unless the defendants can establish merely that the company has a claim to recover a loss reflected by the profit, but that such claim is available on the facts. If in the present case it can be shown that the $6 million was misappropriated from ANA Inc or unlawfully distributed so that ANA Inc was entitled to the whole of the $6 million, we would accept that the Prudential principle applied to bar Mr Shaker’s action.

84. However, for the reasons already given, that has not been, and cannot be without a trial be shown. It is possible that at least part of the $6 million was lawfully taken by Mr Bedrawi. Accordingly we respectfully disagree with the conclusion of the judge that the Prudential principle applies to prevent Mr Shaker proceeding against Mr Bedrawi in relation to the proceeds of sale.” (my emphasis)

35.  Mr Wong SC also referred to Perry v Day [13]in which Rimer J said:

“…… I recognise that when, in litigation such as this, the court has to determine whether the company had its own claim against the wrongdoer, it is not concerned to conduct any sort of notional trial of the alleged claim. But, whilst I have no developed argument on this point, my provisional view is that it must at least be satisfied on the evidence whether or not the company had a claim which was likely to succeed, an exercise which involves considering not just the case which the company could have made, but the defences which could have been raised to it.”

36.  In Pico North Asia Holdings Limited, the defendants applied to strike out the statement of claim on the ground that such claim offends against the no reflective loss principle. In that case, it was suggested that the losses claimed by the plaintiff might well be greater than those recoverable by the companies in the derivative action, so the plaintiff’s claim was unlikely to be merely reflective of the companies’ loss.  Fok JA (as he then was) said as follows:

“44. It is important to note that an essential difference between Shaker’s case and Perry v Day is that in those cases no derivative claim had yet been advanced. Hence, in those cases, the courts were speculating as to what the company’s claim against the relevant defendants might be. Here, the Derivative Action has been commenced and API and AHI’s case against the defendants fully pleaded.

45.Furthermore, in Shaker’s case it was not part of the plaintiff’s case that the abstraction of monies from the company was in breach of his duty to the company or an unlawful distribution or otherwise involved a breach of duty by Mr Al-Bedrawi to the company (see per Peter Gibson LJ at §60). In those circumstances, the court held that the defendants had to satisfy the court that it was the inevitable conclusion from the facts which were admitted or agreed to be assumed that the abstraction of monies was a breach of duty by Mr Al-Bedrawi to the company.

46.Similarly, in Perry v Day, the company had no cause of action against Mrs Day for the relevant loss (see §69).

47.That is to be contrasted with the position here where, in the Derivative Action, it is pleaded that the very same conduct complained of by the plaintiff in this action constitutes breaches of fiduciary duty owed by the defendants to API and AHI and that, by reason of such breaches, those companies have suffered loss and damage (see AmSoc in Derivative Action §§78-81). In this context, assuming the facts pleaded in the Derivative Action are established, I do not think the dictum of Laskin J in Canadian Aero Service Ltd v O’Malley (1973) 40 DLR (3rd) 371 at p.382, relied upon by Mr Burns, would lead to the conclusion that the activities complained of did not constitute a breach of fiduciary duty on the part of the defendants as a director and former director respectively of API and AHI.

48.I therefore do not accept that this, fourth, point advanced on behalf of the plaintiffs demonstrates that the no reflective loss principle cannot operate in this case.  On the contrary, I am satisfied that it has been demonstrated clearly by the defendants that the loss sought to be claimed by the plaintiff in this action is purely reflective of loss suffered by API and AHI, which loss is being claimed by those companies in the Derivative Action. A comparison of the claims made in this action and the Derivative Action shows, in my opinion, that the claims are for the same loss.”

37.  In Shaker, there was concern whether at the stage of the preliminary issue it was an inevitable conclusion on the facts and on an issue over foreign law that the whole of the claimed profits reflects what the company has lost, and given such doubt it would not be right to bar the claimant’s claim.  But Peter Gibson LJ recognised that if it can be shown that the misappropriated monies were from the company or the company was entitled to those monies, the no reflective loss principle would apply to bar the claimant’s claim. I do not find Perry to be saying anything different in this respect even though this authority must be viewed with caution since the Court of Final Appeal held that Perry was wrongly decided and should not be followed in Hong Kong.

38.  Turning to the present situation, it is a far cry from the uncertain situation in Shaker. For reasons explained in paragraph 28 above, the Misappropriation Claim as pleaded plainly shows that Luen Tat would have a cause of action in respect of such claim, and if it had been brought by the Liquidators or in a derivative action before it was wound up, it would have extinguished the Misappropriation Claim.

39.  I am also unable to accept Mr Wong SC’s submission that one looks to the alleged wrongdoer’s defence allegations to determine whether the shareholder’s claim falls foul of the no reflective loss principle.  If that were the case, the no reflective loss principle can be easily circumvented whenever the wrongdoer denies liability or wrongdoing.  In my view, it is only when the alleged reflective loss claim itself inherently causes some anxiety or when the issue of whether or not the alleged loss is reflective loss depends on how the evidence turns out that one may argue against the applicability of the no reflective loss principle.  If the defence merely denies wrongdoing without alleging any factual underpinning that goes to the question of whether or not the loss claimed is reflective of the loss said to be suffered by the company, its relevance to the issue is doubtful.

40.  It must be remembered that there are two aspects of costs arising out of the withdrawal of and the application to strike out the Misappropriation Claim that are in issue.  I agree with Mr Joffe that for the former costs it is not for Ken to establish the applicability of the no reflective loss principle but for the Father to justify why costs would not follow event.  For the latter costs, Mr Joffe submitted that in a striking out application or trial of preliminary issue, one would focus on the pleadings or agreed/admitted facts.  He referred to the passage in Johnson v Gore Wood & Co set out in paragraph 31 above in which Lord Bingham of Cornhill drew a distinction between a strike out application when one turned to the pleadings and a trial when one turned to the evidence.  This is also borne out in Shaker which concerned determination of a preliminary issue in which “unusually” the court heard some oral evidence, [14] in Perry which concerned a preliminary issue as to whether the claimant’s loss merely reflected loss caused to the company in respect of which Rimer J heard a limited amount of oral evidence and assumed that certain allegations of facts in the particulars of claim were capable of being proved at trial, and in Pico North Asia Holdings Ltd which concerned a striking out application.[15]  Here, as explained in paragraph 28 above, the Father’s own pleadings made it abundantly clear that the Misappropriation Claim was a claim reflective of Luen Tat’s loss.

41.  Ultimately, the question here is whether the Misappropriation Claim is sustainable or not.  I have no doubt that it infringed the no reflective loss principle, and as such there was no reasonable cause of action and it had been appropriately withdrawn.  It was also liable to be struck out. In this respect, I can do no better than to refer to Lord Millett’s speech in Johnsonv Gore Wood & Co where he said as follows:[16]

“…… If the shareholder is allowed to recover such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company’s creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder. ……” (my emphasis)[17]

42.  On such basis, there is no sufficient reason why the Father should not bear the costs sought by KJ under paragraph 10 above. However, for completeness, I will mention some other points raised by counsel.

43.  Ken argued that the Father had plenty of warning as to the fundamentally misconceived nature of the Misappropriation Claim, and there was no excuse for not arresting such erroneous claim earlier than 21 November 2012 when it was formally withdrawn:

(a) In KJ’s Listing Questionnaire dated 12 April 2012, KJ had already indicated their intention to challenge the Father’s locus to sue Ken in respect of the Misappropriation Claim.

(b) The Father applied by summons dated 10 May 2012 to re-amend the ASOC by adding further particulars of misconduct[18] and a further sub-paragraph which stated that the Father repeated the wrongful conduct and/or breach of fiduciary duties on Ken’s part as already pleaded in the AR&ADC.[19]

(c) By a letter dated 15 May 2012, KJ Solicitors wrote to FS Solicitors to inform them that Ken would oppose such summons on the basis inter alia that it was trite under the principles in Waddington Ltd that the Father as a shareholder of Luen Tat was barred from suing to recover an alleged loss which was merely reflective of the loss allegedly suffered by Luen Tat, and specifically he was barred from recovering damages for a diminution in the value of his shares. KJ Solicitors stated that the Father held the shares in Luen Tat through Allied Ever, and similar allegations were made by the Father through Allied Ever pursuant to section 168A of the Companies Ordinance Cap 32 in HCCW 497/2009.

(d) In paragraph 62 of the written submissions dated 20 July 2012 by FS’ counsel for the global CMC before Harris J on 25 July 2012, it was said that “bearing in mind that liquidators have already been appointed, with a view to save the Court’s resources and to obtain an early trial date, the Father, as a matter of effective case management, is now agreeable not to argue these misappropriation claims at trial”.

(e) By a letter dated 23 August 2012 (ie after the issuance of the original Striking Out Summons) to KJ Solicitors, FS Solicitors confirmed that the Father indicated at the global CMC that he would withdraw the summons.

(f) On 6 September 2012, Master Ho granted an order by consent for the Father’s summons to be withdrawn.

44.  Ken argued that the Striking Out Summons was necessary and proper since the Misappropriation Claim remained alive until its formal withdrawal at the hearing before L Chan J on 21 November 2012, and Ken had to meet such claim until it was formally withdrawn.  At the hearing on 21 November 2012, harking back to paragraph 43(d) above, the Father confirmed that he was not minded to pursue the Misappropriation Claim at trial “bearing in mind that liquidators have been appointed [for Luen Tat], …… and as a matter of effective case management”. It was suggested that the eventual withdrawal of the Misappropriation Claim and the proposal to re-amend the ASOC to put such withdrawal into effect were plainly attempts made to pre-empt the Striking Out Summons which was also before L Chan J and to avoid an adverse costs order.  Mr Joffe submitted that this was borne out by a comparison of the impugned parts of the ASOC and the parts now removed by amendments initiated by the Father. He argued that these machinations by the Father would not aid his attempt to escape liability to pay costs for his erroneous claim when he chose to turn a blind eye to the grounds advanced by Ken for the Striking Out Summons based on the no reflective loss principle and the warnings given by Ken.  Mr Joffe said that Seline mischaracterised Ken’s reliance on the no reflective loss principle as an abuse of process for the Father to make a similar claim in the present action when the Father made the same misappropriation complaints in HCCW 497/2009.[20]

45.  Mr Wong argued that it was only as a result of change in circumstances (ie the winding up of Luen Tat and the appointment of the Liquidators) and the Father’s wish to have an early trial date given his poor health and the complexity of the Misappropriation Claim (which would involve forensic accounting and be better pursued by the Liquidators) that he decided not to pursue the Misappropriation Claim in the present action. As explained above, the Father through his counsel informed Harris J at the global CMC on 25 July 2012 that he intended to drop the Misappropriation Claim.  But a week later on 3 August 2012 Ken issued the Striking Out Summons that targeted inter alia the Misappropriation Claim. In the 5^th affirmation of Seline filed on 10 October 2012, she claimed it was difficult to understand why Ken would bother to issue the Striking Out Summons on 3 August 2012 when the Father had made clear by counsel’s written submissions for the global CMC that the Misappropriation Claim would not be pursued at trial.  The Father claimed that the Striking Out Summons in respect of the Misappropriation Claim was wholly unnecessary and opportunistic (given the unequivocal indication by the Father of dropping such claim), and was intended to cause delay and generate costs. Indeed, upon leave being granted for withdrawal of the Misappropriation Claim by L Chan J on 21 November 2012, the Father was able to and did set the present action down for trial and thereafter obtained a trial date.

46.  Ken said (and I agree) it could not be right to say the Misappropriation Claim was withdrawn because the Liquidators had been appointed and the Father had health and age concerns. In fact, the Liquidators were appointed in July 2010, long before the global CMC in July 2012 and the withdrawal of the Misappropriation Claim in November 2012.  Yet when FS made their witness statements in March 2012, it was plain that the Father was still determined to pursue the Misappropriation Claim. Even in May 2012, the Father by the summons referred to in paragraph 43(b) above was still determined to add particulars and pleas to bolster the Misappropriation Claim by proposing to re-amend the ASOC.  The Father only abandoned such summons in August 2012 and withdrew the Misappropriation Claim in November 2012.

IV.  COSTS – NEW SHARES CLAIM

47.  In paragraph 22 of the RASOC, it was averred that in/around 1995 Ken and Richard restructured the shareholding in Luen Tat “with the approval of [the Father]” in that:

(a) the authorised capital of Luen Tat was increased “by creating an additional 1,000 “new ordinary shares” of HK$100 each”;

(b) the existing 15,000 ordinary shares which were held by Ken and Richard “on trust for and on behalf of [the Father]” be converted to “5% non-voting deferred shares”;

(c) 51 “new ordinary shares” be allotted to Joesh (wholly owned and controlled by Ken) and 49 “new ordinary shares” be allotted to Full Moon (a BVI company wholly owned and controlled by Richard); and

(d) no consideration was paid by Full Moon.

48.  In paragraph 23 of the RASOC, it was asserted that “[for] the avoidance of doubt, …… at all material times, each of the aforesaid “new ordinary shares” …… were held on trust for and on behalf of [the Father] since their creation”.

49.  Mr Joffe submitted that paragraph 23 of the RASOC and the pleas for consequential reliefs in paragraphs 40-41 of the RASOC were liable to be struck out since there was insufficient and/or incomplete plea for a trust claim.  He reminded that the Father introduced substantial new amendments to his pleadings after the 1^st Hearing Day, and that they were necessary amendments in order to make good the New Shares Claim. In my view, it is unnecessary for me to dwell on the recent amendments because the issue before me is whether the New Shares Claim as originally pleaded was sustainable. If it were not or if it were only salvageable by further amendments to the pleadings, then Ken would be entitled to costs of the Striking Out Summons in respect of the New Shares Claim.

50.  There is no dispute over the trite principles for striking out applications. Hong KongCivil Procedure 2014 provides inter alia as follows:[21]

“…... It is only in plain and obvious cases that the court should exercise its summary powers to strike out …… any pleading under this rule. …… Disputed facts were to be taken in favour of the party sought to be struck out. Nor should the court decide difficult points of law in striking out proceedings. The claim must be obviously unsustainable, the pleadings unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out. …… The mere fact that the case is weak and not likely to succeed is no ground for striking it out ……

It is for the party seeking to strike out …… pleading to demonstrate that the case is a plain and obvious one in which the other party’s claim is bound to fail. ……

…… This rule also empowers the court to amend …… any pleading.  If a statement of claim does not disclose the cause of action relied on, an opportunity to amend may be given, ……  However, unless there is reason to believe that the case can be improved by amendment, leave will not be given.  Or where the amendments would be far-reaching and so radical as to amount to a totally new pleading which would probably provoke a fresh application to strike out, the correct course is to strike out. ……”

51.  Pursuant to Order 18 rule 19(2) of the RHC, the court will not consider any affirmation evidence to decide whether the pleadings disclose any reasonable cause of action.  A reasonable cause of action means a cause of action with some chance of success where only the allegations in the pleadings are considered.[22]

52.  Mr Joffe contended that the creation of trust required inter alia:[23]

(a) There be intention to create a trust and the essentials for such creation are: (i) property or rights capable of being subjected to the trust, (ii) a declaration of, or disposition on, trust by a person competent to create a trust, or an obligation for valuable consideration to create a trust, (iii) certainty of property and objects so that the trust is administratively workable; and (iv) compliance with the statutory requirements regarding evidence, the rule against remoteness and the rule against perpetuities.

(b) There be property or interest in property which a person can, at law and in equity, transfer or assign, or dispose of inter vivos, which is the subject matter of the trust.

(c) The objects of a trust must be indicated with sufficient precision, for a valid trust must be one in which the court can control and execute.

(d) There be a beneficiary or beneficiaries of the trust.

53.  Mr Joffe submitted there could not be any trust in respect of the 51 “new ordinary shares” in favour of the Father as pleaded or at all, so the New Shares Claim was doomed to fail and was liable to be struck out. He argued that looking at paragraphs 22-23 of the RASOC the Father failed to plead any declaration of trust or any material facts that would justify the bare (and inadequate) assertion that the shares were or had ever been held on trust for the Father.  It was said that such lacunae were not addressed in the pleadings or in the affirmation evidence filed for the Striking Out Summons; Seline’s 5^th affirmation merely stated that she did not understand Ken’s application.

54.  Mr Wong SC submitted that the reason why Seline did not understand Ken’s application to strike out the New Shares Claim was because notwithstanding the requirements in paragraph 5 of Practice Direction 19.1, Ken failed to disclose the basis of his complaint of no reasonable cause of action until Mr Joffe’s written submissions for the Striking Out Summons were served.  Mr Wong SC complained that this was unacceptable since litigation was not about “playing a game of snakes and ladders”,[24] especially in light of the underlying objectives after the Civil Justice Reform.[25]

55.  Mr Joffe referred to my Reasons for Decision in Ng Fui v Kam Chi Ming & ors[26] in which I said that non-compliance with Practice Direction 19.1 should not prevent the court from striking out a claim (or counterclaim in that case) or anything in such pleading if a case for striking out was plain and obvious, but in that case the other party did not take issue over any lack of notification pursuant to Practice Direction 19.1.  Here, even though Mr Wong SC raised complaint, he was able to put in written submissions and to fully address Mr Joffe’s arguments. In my view, there is no substantive prejudice or concern arising from these procedural issues, but it does not mean that in another case the court will smile kindly on procedural default if it causes concern or prejudice.

56.  I agree with Mr Wong SC that in a striking out application it would inappropriate to take a blinkered view of paragraphs 22-23 of the RASOC without reading the pleading as a whole, especially when Ken had to show that it was a plain and obvious case for striking out.  For the reasons set out below, I am unable to say that the New Shares Claim was doomed to fail.

57.  Mr Wong SC argued (and I accept) that one could not take a narrow view of the “new ordinary shares” and “5% deferred voting shares” allotted upon the restructuring of Luen Tat’s shareholdings in 1995 without putting such allotment in the contextual background as pleaded in paragraphs 8-22 of the RASOC that set out the history of how a trust arose in respect of all shareholdings in Luen Tat.

58.  I set out below Mr Wong SC’s useful summary of the relevant pleas in the RASOC:

(a) As a result of a copyright dispute with the manufacturer of “Charles Jourdan” goods in/about 1986, the Father and Mother arranged for Ken and his wife to hold all Luen Tat shares on trust for the Father and to act in accordance with the Father’s instructions. The Father averred that at all material times, he “did have the intention to create and did constitute a trust over the shares in Luen Tat in favour of himself and retains beneficial ownership over the entire shareholdings in Luen Tat. The same was made known and/or declared to [Ken and his wife] at the time of transferring the above shares to them respectively”.[27] The Father further averred that at all material times, Ken and his wife “also understand and understood that they are and were merely trustees holding the shares in Luen Tat for and on behalf of [the Father] and that they had no beneficial interest in those shares”.[28]

(b) In May 1993, at the Father’s instructions, 49% of the shares of Luen Tat was transferred to Richard for no consideration. As a result, Ken and Richard respectively held 51% and 49% of Luen Tat’s shares in trust for the Father.

(c) In 1995, with the Father’s approval, Ken and Richard restructured Luen Tat’s shareholdings for tax planning and emigration purpose so that the existing ordinary and unallotted shares were converted to “5% non-voting deferred shares”, and 51 and 49 “new ordinary shares” were allotted to Joesh (Ken’s corporate vehicle) and Full Moon (Richard’s corporate vehicle) respectively.

(d) All shares of Luen Tat, including the “5% non-voting deferred shares” and the 51 and 49 “new ordinary shares” held by Ken and Richard respectively were held on trust for the Father.

59.  In my view, it is at least arguable on the pleadings that the 51 “new ordinary shares” held by Ken’s corporate vehicle Joesh was not something completely new that came into existence in 1995 separate and distinct from the original trust in favour of the Father.  Upon reviewing the RASOC as a whole, whilst the New Shares Claim could have been more clearly worded to put the matter beyond any doubt, it does not mean that the existing pleas were so defective that the Father’s case was unknown.  I agree with Mr Wong SC that the reality (as evident from the RASOC as a whole) was that the 51 and 49 “new ordinary shares” were derived from the pre-existing 51/49 trust arrangement between the Father on one hand and Ken and Richard on the other hand.  Since Ken did not argue that the original trust was not a good plea, it is, in my view, at least arguable on the pleadings that the purpose of the restructuring under the Father’s approval was to render the original Luen Tat shares useless and to issue a new lot of shares to the corporate vehicles of Richard and Ken in the same ratio to reflect the original trust arrangement simply for the purpose of tax planning and emigration. There was no suggestion on the pleadings that the original trust over Luen Tat shares had ceased, and it must be arguable on the pleadings that Ken through Joesh continued to hold 51% shareholding in Luen Tat for the Father after the restructuring, which arrangement was still based on the trust that was created way back in 1986. In the circumstances, I am not persuaded that the lack of a plea of fresh declaration of trust is fatal.

60.  I bear in mind Mr Wong SC’s reminder that the “new ordinary shares” of Luen Tat had voting rights, so if the Father could not claim back the 51 “new ordinary shares” the necessary implication would be the trust over Luen Tat’s shareholdings would be defeated and Ken would become the majority shareholder controlling 51% voting rights in Luen Tat following a restructuring which the Father approved merely for tax planning and emigration purpose, which in turn was against the whole thrust of the pleas and the reliefs sought in the RASOC.  It is a necessary plank of the Father’s case, which I am persuaded Ken must know from the detailed pleadings, that the “new ordinary shares” were imbued with a trust in the Father’s favour.

61.  On such basis, there is no need for me to consider the following legal propositions which Mr Wong SC relied on to bolster his contention that no express declaration of trust was required in respect of the 51 “new ordinary shares” of Luen Tat, but I shall deal with them briefly since they had been canvassed in arguments before me:

(a) any property acquired by trustees by reason of their legal ownership of trust property or by reason of the trusteeship must be held by them as trustee only;[29]

(b) the fruit of the original trust property will be held  by the trustee as part of the agreed express trust since “[the] trust fund comprises not just the trust property originally owned by the trustee as trustee but all the fruits from time to time thereof (including interest payments, rents, dividends from shares or bonus issue of shares) ……”;[30]

(c) subsequent authorised additions or authorised substituted property subsequently acquired by the trustee on behalf of the trust forms part of the subsisting trust fund;[31]

(d) beneficiaries are entitled to claim that the trust fund comprises any property purportedly acquired by the trustee for himself from his sale or exchange of trust property or even, it seems, from his misuse of his position as trustee (eg secret commissions or bribes);[32]

(e) an asset may be added to the trust if it is acquired by the trustee qua trustee, even if it may not be the fruit of original trust property or its substitute, eg if an agent who agreed to acquire a property on behalf of his principal acquires it in his own name he becomes trustee of it for his principal, and the principal can acquire a proprietary interest in the asset even though the principal had no pre-existing interest in the asset, and the asset was, in the first instance, acquired by the agent with his own money.

62.  In relation to (a)-(b) above, Oliver LJ in Swain v Law Society[33] said as follows:

“ It seems to me, therefore, …… that what one has to do is to ascertain first of all whether there was a fiduciary relationship, and if there was, from what it arose and what, if there was any, the trust property was; and then to inquire whether that of which an account is claimed either arose, directly or directly, from the trust property itself or was acquired not only in the course of, but by reason of, the fiduciary relationship.

 If it is found as a result of that inquiry both that there is a fiduciary relationship and that the fiduciary has derived from it a profit which has not been made available to his beneficiary, the it matters not that that profit is one achieved openly and in the utmost good faith nor, in the absence of consent, that it has been fully and frankly disclosed: the principle of equity is inflexible and the fiduciary must hold it for the benefit of the person for whom his fiduciary duty was undertaken or assumed.”

63.  Indeed, in Underhill and Hayton, Law Relating to Trusts and Trustees, it is said as follows:[34]

“Often the constructive trust is imposed to vindicate fundamental equitable rights under an express and resulting trust and to give effect to the settlor’s intentions (as agreed to expressly or impliedly by the trustee as a core incident of his office) that the original trust property and subsequent additions to it and the fruits thereof and property subsequently replacing such property (in the rightful operation of the trust or, if accepted as beneficial by the beneficiaries, even in the wrongful operation of the trust, as whether proceeds of sale of trust property are used purportedly to augment the private patrimony of the trustee) are to be held as the trust fund for the beneficiaries. Indeed, …… it seems more correct to regard the substituted property as continuing to be held by the trustee as part of the agreed express or resulting trust property, so the court declares simply that the trustee holds the relevant property on the terms of the express or resulting trust ……”

64.  In relation to (e) above, Mr Wong SC relied on the observations of the English Court of Appeal in FHR European Ventures LLP & ors v Mankarious & ors,[35] a case which explored the question of what would be the appropriate remedy against an agent who has received a secret commission from the seller of property which his principal bought at a price negotiated on his behalf by the agent.  In that case, there was no dispute that where an agent was engaged to purchase property on behalf of his principal but purported to acquire it on his own account, he held the targeted property thus acquired on a (true) constructive trust for his principal.[36]  Lewison LJ held that this line of authorities showed that “the principal can acquire a proprietary interest in an asset acquired by his agent, even though the principal had no pre-existing proprietary interest in the asset, and the asset was, in the first instance, acquired by the agent with his own money”.[37]  Sir Terence Etherton reviewed the authorities which he said showed “the mere fact that the fiduciary obtains the benefit from a third party, or obtains a benefit that could never be or would never be obtained by the principal, or that the principal has obtained what he or she wanted or intended from the opportunity, is not necessarily a bar to a constructive trust of the benefit wrongly obtained by the fiduciary by taking advantage of the opportunity. ……”[38]

65.  In the earlier Privy Council case from Hong Kong, Attorney-General for Hong Kong v Reid, their Lordships cited with approval the following extra-judicial speech by Lord Millet:[39]

“[The fiduciary] must not place himself in a position where his interest may conflict with his duty. If he has done so, equity insists on treating him as having acted in accordance with his duty; he will not be allowed to say that he preferred his own interest to that of his principal. He must not obtain a profit for himself out of his fiduciary position. If he has done so, equity insists on treating him as having obtained it for his principal; he will not be allowed to say that he obtained it for himself. He must not accept a bribe. If he has done so, equity insists on treating it as legitimate payment intended for the benefit of the principal; he will not be allowed to say that it was a bribe.”

66.  Before I deal with Mr Wong SC’s propositions, I note Mr Joffe’s complaint that these arguments were newly introduced in Mr Wong SC’s supplemental submissions dated 15 April 2013 (ie some time after his original written submissions dated 19 March 2013) in breach of paragraph 7 of Practice Direction 5.4.  But given the substantial adjournment between the 3^rd Hearing Day and the Costs Hearing, I cannot see how Ken could be said to be prejudiced in his response to Mr Wong SC’s submissions in this respect.  As I see it, it is the merits of the arguments that matter.

67.  Mr Wong SC argued that the conditions for creation of trust set out in paragraph 52 above were prerequisites for the creation of new express trusts, but there was no such requirement for additions to a subsisting trust, ie fruits of property already on trust or arising from the trusteeship by operation of law, and it would not be right to require a declaration of trust to be made every time a new property was added to the trust. Here, Ken and Richard restructured Luen Tat’s shareholdings (through the exercise of their trustees’ powers as registered shareholders of Luen Tat). The acquisition of the 51 “new ordinary shares” by Ken in such circumstances would be sufficient to establish that such shares were either the fruits of the original trust property or additional property acquired under his trusteeship and/or trustee’s duties, such that those shares were held on trust for and on behalf of the Father in addition to the “5% non-voting deferred shares” of Luen Tat.  Mr Wong SC submitted the fact that the “new ordinary shares” were issued by Luen Tat was neither here nor there.

68.  It does not appear from Mr Joffe’s submissions that he was disagreeing with the aforesaid legal propositions, but his response was that they were not applicable to the present situation or the impugned pleadings did not meet the necessary requirements to satisfy those legal propositions.

69.  Mr Joffe argued that the RASOC did not expressly state that the “new ordinary shares” of Luen Tat were allotted in accordance with the original trust arrangements.  He said that the plea in paragraph 12(1) of the RASOC in relation to the original trust did not aver that the original trust covered all shares in Luen Tat.  But in my view, the whole thrust of the above legal propositions is to deal with after-acquired properties being either the fruits of property already on trust or acquisitions by the trustee by reason and in virtue of his fiduciary office.  It cannot be expected that the original express trust would deal with or cover such after-acquired properties. In any event, the RASOC did plead the original trust covered all shares of Luen Tat since between Ken and his wife they held all such shares on behalf of the Father.

70.  Mr Joffe next argued in any event it was pleaded that Ken and his wife “undertook to hold their respective shares in Luen Tat transferred to them on trust for and on behalf of [the Father]” (my emphasis), and the “new ordinary shares” of Luen Tat were allotted and not transferred, so there was no plea that tied the original trust arrangement with such subsequent allotment of shares to Joesh and Full Moon.  Mr Joffe said this was important because for a trust to be created the trust property (ie subject matter of a trust) must be certain, definite and belong to the settlor, which prerequisites could not be established on the averments in the RASOC.  Mr Joffe went on to say the “new ordinary shares” were created by Luen Tat, and there was no evidence or plea that the Father acquired interest in such shares, or such shares ever belonged to the Father in law or equity.  To be the creator/settlor of the alleged trust, the Father had to plead that he was capable at law or in equity of alienating, transferring, assigning or otherwise disposing of any property or an interest in the property inter vivos.[40]

71.  Mr Joffe further argued there was nothing in the RASOC that in implementing the restructuring of Luen Tat’s shareholdings and in acquiring the “new ordinary shares”, Ken and Richard were exercising their trustees’ power as registered shareholder of Luen Tat or acting under the instruction or direction of the Father. There was no express averment that Ken used the trust property (ie the old Luen Tat shares) to acquire new trust property (ie the 51 “new ordinary shares”).

72.  In my view, the New Shares Claim as pleaded in the RASOC viewed through the prism of the above legal propositions cannot be said to be completely unsustainable and unarguably bad.  Mr Joffe’s contentions set out in paragraph 70 above focused on the requirements for creation of trust, but when one considers the fruit of the original trust or property acquired by the trustee by reason or in virtue of his office, it is at least arguable that the acquisition of such property need not be in the same manner as how the original trust property was settled in the first place.  More significantly, according to the original trust as pleaded by the Father, Ken and Richard held the Luen Tat shares as trustee only and they had no beneficial interest in the ownership of Luen Tat as shareholders.  The restructuring of Luen Tat’s shareholdings was expressly pleaded to be for the purpose of tax planning and emigration made with the Father’s approval.  Nowhere was it suggested that the original trust had ceased, and this is bolstered by the reliefs sought by the Father in the RASOC. On the Father’s pleaded case, the involvement of Ken and Richard in the implementation of the restructuring (given they had no beneficial interest in Luen Tat or in its shares) must be by reason of and in virtue of their fiduciary office as trustees (ie legal owners of the Luen Tat shares).  That being the case, then notwithstanding that the mechanism of the restructuring was by allotment of the “new ordinary shares” to Joesh and Full Moon in the same ratio as between Ken and Richard as for the old shares (which restructuring was known and approved by the Father), it is, in my view, arguable on the pleadings that the “new ordinary shares” were additional or substituted property still imbued with the original trust.

73.  In respect of the proposition drawn from FHR European Ventures LLP that a beneficiary could acquire proprietary interest in an asset even though such beneficiary had no pre-existing interest in the asset and the asset was acquired by the trustee with his own money, Mr Joffe submitted it was not so pleaded in the RASOC either as a proposition of law or fact. Mr Joffe reminded that the 51 “new ordinary shares” of Luen Tat were issued not to Ken but to Joesh (which was a separate legal person even though it might be controlled by Ken), and it was not pleaded that Joesh held those shares on trust for the Father. Mr Joffe submitted that FS were well aware of the concept of separate legal personality,[41] and this could not be brushed aside by saying that Joesh and Full Moon were Ken’s and Richard’s corporate vehicles.  Further, it was not pleaded that the Father had proprietary interest in such shares.  Unlike the group of cases discussed in FHR European Ventures LLP in which the principal instructed the agent to acquire property for him, there was no averment in the RASOC that the Father expressly instructed Ken or Joesh to acquire the 51 “new ordinary shares” for him, and Mr Joffe submitted it would be nonsensical to rely on implied instructions.

74.  I am not persuaded that this is necessarily the only view on the pleadings. It was expressly pleaded that the restructuring of the Luen Tat shareholdings was made with the Father’s approval for tax planning and emigration purpose. It is at least arguable that the restructuring exercise was carried out by Ken and Joseph qua trustee without disturbing the underlying original trust even though the result of such restructuring was that the shareholdings were held in another form, ie the “new ordinary shares” held through Joesh and Full Moon. That being the case, the various express averments suggested by Mr Joffe arguably are counsel of perfection rather than necessary pleas.

75.  Mr Wong SC next argued that in any event it was unnecessary to plead any express words constituting a trust when it was clear that Ken received the 51 “new ordinary shares in a fiduciary capacity”. He relied on David Lyell v John Lawson Kennedy[42]in support.  In that case, the agent collected rent for the principal, and after she passed away the agent continued to receive rent as before without telling the tenant of the principal’s death.  The agent claimed the monies on his own account 12 years later. The Earl of Shelborne said as follows:[43]

“…… A man who receives the money of another on his behalf, and places it specifically to an account with a banker ear-marked and separate from his own moneys, though under his control, is in my opinion a trustee of the fund standing to the credit of that account. For the constitution of such a trust no express words are necessary; anything which may satisfy a Court of Equity that the money was received in a fiduciary character is enough. It is not requisite that any acknowledgment of such a trust should be made to the cestui que trust or his agent; to whomsoever made it is evidence against the trustee.”

76.  Mr Joffe submitted that David Lyell did not support Mr Wong SC’s proposition because it did not deal with a pleading issue. It was held in that case that no express words were necessary to establish a trust, which was quite different from saying that as a matter of pleading it was unnecessary to set out clearly the basis of the trust.  I agree with Mr Joffe’s reading of David Lyell, but it does not detract from what I have considered to be sufficient pleas for the New Shares Claim in answer to the striking out application.

77.  Mr Joffe further argued that it was Ken’s case that the trustee of Ken’s trust (BNP Paribas) took into account his request and not that of any other person to subscribe the 51 “new ordinary shares” in Luen Tat for consideration.[44]  In paragraph 21B of the RAD&RAC, KJ expressly pleaded as follows (which, Mr Joffe suggested, showed that consideration had been paid for the 51 “new ordinary shares”):

“Consistent with [Ken’s] beneficial ownership of 51% stake in Luen Tat, [Ken] was the settlor of the said Ken Li’s Trust and BNP Paribas Jersey Trust Corporation Limitd (formerly known as BNP Jersey Trust Corporation Limited), acting as trustee, took into consideration requests of only [Ken] bit not any other person. On 31 March 1995, the said trustee, upon [Ken’s] request, subscribed for consideration 51 new ordinary shares in Luen Tat that were issued and allotted as part of the capital restructuring scheme.”

Further, the RASOC did not suggest that Ken (like Richard) obtained his 51 “new ordinary shares” in Luen Tat for no consideration, and although the Father denied the existence of Ken’s trust (without setting out the grounds), he stopped short of denying that Ken through BNP Paribas subscribed his 51 “new ordinary shares” for consideration.[45]

78.  On the other hand, Mr Wong SC submitted that other than possibly payment of the par value of the 51 “new ordinary shares” of Luen Tat, the alleged consideration was not identified in Ken’s pleadings or affirmation evidence.  Anyway, the Father could not have pleaded the issue of consideration since he had no knowledge/evidence of the same. I agree with Mr Wong SC that to make out a viable trust claim in respect of the New Shares Claim it is not necessary for the Father to plead that no consideration was paid for the 51 “new ordinary shares” of Luen Tat.  Following on my analysis above, it is arguable on the pleadings that the subscription for such shares were nothing but part and parcel of the restructuring exercise to achieve tax planning and emigration purpose without altering the underlying trust arrangement in which Ken and Richard held 51% and 49% of Luen Tat’s shareholdings for the Father. Even if consideration (eg payment of par value of the shares) were provided upon subscription of the 51 “new ordinary shares” of Luen Tat, it is still arguable that it would not negate the existence of the trust arrangement between the parties or make Ken/Joesh beneficial owner of those shares.

79.  In all the circumstances, I am not persuaded that it is plain or obvious that the New Shares Claim should be struck out, and I am convinced that Ken clearly knew the Father’s case all along.

V.  CONCLUSION

80.  I therefore grant the following orders:

(a) the Father do pay Ken’s costs of and occasioned by the Misappropriation Claim (including the argument on costs of such claim);

(b) the Father do pay Ken’s costs of and occasioned by the Striking Out Summons in respect of the impugned parts of the AR&ADC in paragraph 2 of such summons and paragraphs 18-19 of Seline’s amended witness statement for the Misappropriation Claim (including the argument on costs of such application);

(c) Ken do pay the Father’s costs of and occasioned by the Striking Out Summons in respect of (i) the impugned parts of the RASOC in paragraph 1 of such summons, (ii) the impugned parts of the Father’s amended witness statement in paragraph 3 of such summons, and (iii) paragraphs 20-21 of  Seline’s amended witness statement for the New Shares Claim (including the argument on costs of such application);

(d) the costs awarded in (a)-(c) above shall include all costs reserved (if any) and shall be taxed in any event if not agreed with certificate for two counsel.

Mr William Wong SC and Mr Alan Kwong, instructed by D S Cheung & Co for the plaintiff by original action and 1^st and 3^rd defendants by counterclaim

Mr Victor Joffe and Mr Jean Paul Wou, instructed by Stevenson Wong & Co, for the 1^st and 2^nd defendants by original action and the plaintiff by counterclaim

21 March 2013

Ms Frances Lok, instructed by Christine M Koo & Ip, for the 4^th defendant by counterclaim

26 September 2013

Mr Wong Chor Wan, of Christine M Koo & Ip, for the 4^th defendant by counterclaim

HCA 1711/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1711 OF 2009

_________________________

________________________

___________________

DECISION NO 3

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I. INTRODUCTION

1.  This is the third tranche of pre-trial interlocutory applications before me.  For convenience, I shall adopt the abbreviations in my earlier Decisions Nos 1 and 2 handed down on 15 May and 31 May 2013 respectively (“Decision Nos 1 and 2”).  

2.  Pursuant to the order of Master K K Pang dated 7 September 2011, FS filed their List of Documents on 4 October 2010, and KJ filed theirs on 6 October 2011.

3.  On 23 March 2012, Master Ho granted inter alia the following order:

“1. Unless by 4:00pm on 13 April 2012 [Yuen Hing] do file and serve its Defence to Counterclaim, failing which [Ken] be at liberty to apply for judgment to be entered against [Yuen Hing].

2. [Ken] and [Yuen Hing] do, after the filing and service of the Defence to Counterclaim by [Yuen Hing], exchange the list of documents within 14 days, with inspection of documents within 7 days thereafter.

……”

4.  On 19 April 2012, Master Ho granted inter alia the following order:

“5. [FS] and [KJ] do within 14 days from the date hereof serve Supplemental List of Documents, if any, on the other parties with inspection of the documents within 7 days thereafter. ……”

5.  On 13 April 2012, Yuen Hing filed the YH Defence. On 27 April and 3 May 2012 respectively, KJ filed their Supplemental and 2^nd Supplemental Lists of Documents.  On 3 May 2012, FS filed their Supplemental List of Documents.  But Yuen Hing did not file any List of Documents within the prescribed time or at all.

6.  On 26 April 2012, Yuen Hing filed a summons seeking an order inter alia that Ken’s counterclaim against the Father, Seline and Yuen Hing be tried separately from the main action as if they were separate actions, and further or alternatively, an order that the counterclaim be stayed pending the final determination of the main action (“Split Trial Summons”).

7.  On the same day, Yuen Hing filed the affirmation of Seline in support of the Split Trial Summons.  Such affirmation claimed that Ken’s counterclaim stood apart from the main action as it involved different parties and witnesses, and would fall away if Ken failed in his defence in the main action, hence a split trial order would save time and costs and would not cause any prejudice.  Seline went on to say in her affirmation as follows:

“8. …… substantial time, costs and efforts would have to be incurred by Yuen Hing to go through its accounting records and make discovery of documents dated back to 2008. Such time, costs and efforts will be completely wasted if [Ken]’s defence failed at the Counterclaim. Also, if [Ken]’s defence failed, he is in fact not entitled to the discovery of Yuen Hing’s accounting records.

9. …… The Counterclaim also involves a substantial amount of documentation not relevant to the main claim. The proceedings will be increasingly burdened and delayed with the additional facts, documentation and evidence brought in by the Counterclaim. The trial date will also be prolonged as a result.”

8.  On 21 May 2012, Ken issued a summons against Yuen Hing inter alia for an order that “[unless Yuen Hing] file and serve its List of Documents within 7 days from the date of the Order to be made herein, the Defence of [Yuen Hing] shall be struck out and judgment for the Counterclaim shall be entered accordingly” (“Unless Summons”).

9.  On 24 May 2012, Yuen Hing issued a summons inter alia for the following order (“Extension Summons”):

“1. The time for [Ken] and [Yuen Hing] to exchange their respective List of Documents be extended to 21 days after the adjudication of [Split Trial Summons] at the Global [CMC] before the Honourable Mr Justice Harris on 25^th July 2012, unless otherwise directed by the Court at the hearing on 25^th July 2012; ……”

10.  The Split Trial, Unless and Extension Summonses were adjourned to be heard by Harris J at the global CMC on 25 July 2012.  By the Harris J Order, it was ordered inter alia that:

(a)     the issues of liability and quantum in respect of the counterclaim in the present action be split, and the determination of quantum and issues (including interlocutory matters) relating thereto shall take place after the trial on liability in respect of the counterclaim (ie the Split Trial Order);

(b)     the Split Trial, Unless and Extension Summonses be dismissed with no order as to costs.

11.  The applications before me were the 1^st and 2^nd Discovery Summonses referred to in paragraphs 63-64 of Decision No 1.  To recap, the 1^st Discovery Summons was a summons issued by Ken against FS on 7 June 2012 (and amended on 5 December 2012 pursuant to the order of L Chan J dated 21 November 2012) for specific discovery and production of various documents and/or classes of documents specified in the schedule annexed thereto pursuant to Order 24 rules 7, 11 and 11A of the RHC, and the 2^nd Discovery Summons was a summons also issued by Ken against FS on 3 September 2012 (and amended on 5 December 2012 pursuant to the order of L Chan J dated 21 November 2012) for production of documents and/or classes of documents specified in the schedule annexed thereto pursuant to Order 24 rules 10 and 11 of the RHC.

12.  Ken claimed that none of the documents in respect of which discovery and/or production were sought were included in the List and Supplemental List of Documents filed by FS.

13.  The 1^st and 2^nd Discovery Summonses were first scheduled to be heard before me on the 1^st Hearing Day.  They were not dealt with on the 1^st, 2^nd and 3^rd Hearing Days because Mr Joffe (with him Mr Wou), counsel for Ken, and Mr Wong (now Mr Wong SC) (with him Mr Kwong), counsel for FS, anticipated that the ambit of such summonses would have to be revisited upon close of pleadings after the latest round of amendments following disposal of the Misappropriation Claim, Striking Out and Amendment Summonses and after finalising the witness statements following disposal of the Statements, Relief and Ken’s 1^st Statement Summonses. Following the disposal of the aforesaid summonses, the 1^st and 2^nd Discovery Summonses were restored before me for substantive argument on 3 December 2013 (“Discovery Hearing”).

14.  For the purpose of the 1^st and 2^nd Discovery Summonses, Mr Joffe relied on Parts V and VI of his written submissions dated 18 March 2013, and Mr Wong SC relied on paragraphs 77-108 of his written submissions dated 19 March 2013. At Yuen Hing’s request, this court excused their attendance at the Discovery Hearing.

15.  The first pre-trial review (“PTR”) for the Liability Trial was held before the trial judge DHCJ Leung on 10 December 2013. A further PTR will be held on 23 January 2013 (“Further PTR”).  The Liability Trial was due to commence in March 2014.

II.  1^ST DISCOVERY SUMMONS

16.  By the 1^st Discovery Summons, Ken sought specific discovery and production of the following documents and/or classes of documents against FS:

(a) register of members and directors for Rich Prime Limited from 2002 to date;

(b) all banking records and supporting documents of Luen Tat and Yuen Hing in respect of:

(i) distribution of the Group’s profits to Ken, Richard and Seline from 1992 to 2008;

(ii) withdrawals of profit share by Ken, the Father, Richard and Seline from 1992 to 2008;

(c) bank statements for Yuen Hing’s three specified bank accounts from 2002 to date;

(d) all accounting records and supporting documents of Luen Tat and Yuen Hing in respect of:

(i) distribution of the Group’s profits to Ken, the Father, Richard and Seline from 1992 to 2008;

(ii) withdrawals of profit share by Ken, the Father, Richard and Seline from 1992 to 2008;

(e) audited financial statements of Yuen Hing from 2002 to date;

(f) monthly management accounts of Yuen Hing from 1 December 2008 to 31 March 2009;

(g) all notes, records and documents relating to the re-invoicing operations and the setting up of Yuen Hing in Macau, including but not limited to minutes of board meetings and management meetings, written advices from Mazars and other professional advisor(s), etc;

(h) all notes, records and documents relating to the alleged transfer and assignment of the 49 “new ordinary shares” from Full Moon to Allied Ever on/around 20 April 2009;

(i) register of members and directors of Allied Ever from 2009 to date.

17.  On 7 June and 8 August 2012, Ken respectively filed his 3^rd and 5^th affirmations in support of the 1^st Discovery Summons.  On 11 July 2012, FS filed the 3^rd affirmation of Seline in opposition.

18.  Prior to the Discovery Hearing, the parties agreed as follows:

(a) Ken would abandon his application for the documents in paragraph 16(f) above;

(b) FS would discover and produce the transfer documents in respect of the transfer of 49% shareholding from Full Moon to Allied Ever, and Ken would abandon his application for the remaining documents referred to in paragraph 16(h) above;

(c) FS would discover and produce the register of members and directors of Allied Ever from 2009 to date referred to in paragraph 16(i) above.

19.  For paragraph 18(a) above, Ken’s 5^th affirmation referred to the Split Trial Order made at the global CMC, and accepted that the documents in paragraph 16(f) above “would only affect the quantum of [his] counterclaim, [so he] would make [such application] at a later date and after the trial of issues regarding liability”.

20.  I note that (a) by an order of the court dated 6 July 2010 in HCCW497/2009 Luen Tat was wound up pursuant to section 177(1)(a) of the Companies Ordinance Cap 32, and (b) subsequently the Liquidators were appointed. By the Pak Tak WU Order dated 1 December 2011, Pak Tak was also wound up by the court in HCCW 236/2011.  Hence, at the Discovery Hearing, I queried Ken’s basis for suggesting that the documents in paragraph 16(b) and (d) above concerning Luen Tat would be in the possession, custody and/or power of FS rather than with the Liquidators.

21.  Upon further consideration, Mr Joffe asked for an adjournment of the application for specific discovery and production of the documents in paragraph 16(b) and (d) above concerning Luen Tat to the upcoming Further PTR so that Ken could make inquiries about such documents with the Liquidators.  I declined such application in the exercise of my case management discretion.  I bear in mind that the Liability Trial is only a few months away and to defer the application to the Further PTR scheduled on 23 January 2014 would be quite unsatisfactory as (a) there would be other trial-related matters to be canvassed at such PTR, and (b) any delay in adjudication of such interlocutory application would serve to derail the parties’ preparations for trial.  More significantly, there was no or no good explanation why to date efforts had not been made to raise enquiries with the Liquidators.  Mr Joffe tried to shift the blame onto FS by saying they had not raised such complaint previously, but this did not alter the burden that fell on Ken to establish to the satisfaction of the court the Luen Tat documents in question were in the possession, custody or power of FS (as distinct from the Liquidators). Upon my dismissal of the application for adjournment, Mr Joffe confirmed that Ken would abandon his application for discovery and production of the Luen Tat documents in paragraph 16(b) and (d) above.

22.  Thus, the remaining application for discovery and production of documents under the 1^st Discovery Summons concerned the documents and/or classes of documents in paragraph 16(a), (b) (only for Yuen Hing for the period from 2002 to 2008), (c), (d) (only for Yuen Hing for the period from 2002 to 2008), (e) and (g) above.

III. 2^nd DISCOVERY SUMMONS

23.  By the 2^nd Discovery Summons (with reference to updated pleadings and witness statements), Ken sought an order for production of the following documents and/or classes of documents against FS:

(a) Charles Jourdan Undertaking referred to in paragraph 10 of the RRASOC;

(b) assets and liabilities status reports referred to in paragraphs 3 and 5 in Seline’s re-amended witness statement dated 20 March 2012 and re-re-filed on 30 May 2013 (“Seline’s Re-Amended Statement”);

(c) audited financial statements and audited accounts of Yuen Hing referred to in paragraph 69 in Seline’s Re-Amended Statement.

No affirmation was filed in support or opposition of the 2^nd Discovery Summons.

24.  At the Discovery Hearing, Mr Joffe confirmed that Ken would abandon his application for production of the document referred to in paragraph 23(a) above, which meant the remaining application for production of documents under the 2^nd Discovery Summons concerned the documents and/or classes of documents in paragraphs 23(b) and (c) above.

IV.  PARTIES’ RESPECTIVE CASE

25.  FS’, KJ’s and Yuen Hing’s respective case prior to the disposal of the Misappropriation Claim, Amendment and Striking Out Summonses were summarised in paragraphs 69-90, 91-113 and 114-115 of Decision No 1. As explained in paragraph 68 of Decision No 1, such summaries were made to give a broad overview of the parties’ respective case in order to put the interlocutory applications in context, and were not intended to be comprehensive.

26.  After the disposal of the aforesaid summonses, the Father filed his Re-Re-Amended Statement of Claim (RRASOC) on 10 April 2013, Ken filed his Re-Re-Amended Defence and Re-Re-Amended Counterclaim (RRAD&RRAC) on 29 May 2013, Yuen Hing filed their Amended Defence on 25 June 2013 (“AYH Defence”), and FS filed the Father’s Re-Amended Reply and FS’ Re-Amended Defence to Re-Re-Amended Counterclaim (RAR&RRDAC) on 26 June 2013.

27.  For the purpose of the 1^st and 2^nd Discovery Summonses, the most significant changes in RRASOC and RRAD&RRAC were the removal of the Father’s Misappropriation Claim and the inclusion of the Ken Investment and Profit Pleas.  The Ken Investment and Profit Pleas were amendments to existing averments in the pleadings summarised in paragraphs 123-130 and 178-180 in Decision No 1.

28.  Since the 1^st Discovery Summons and corresponding affirmations were filed before the latest round of amended pleadings, the issues discussed in those affirmations must be viewed through the prism of the current pleadings.

29.  In a nutshell, the disputed issues on liability concerned inter alia:

(a) the beneficial ownership of the shares held by KJ in Luen Tat and by Ken in Pak Tat, and the propriety of Ken’s arrangement to transfer 51 ordinary shares in Luen Tat to Joseph;

(b) the alleged Luen Tat and Pak Tat trust arrangements by the Father;

(c) the alleged misconduct by Ken in the affairs of Luen Tat;

(d) the alleged wrongful retention and/or conversion by Seline and Yuen Hing of HK$25,602,977.76 being the alleged balance of Ken’s share of cumulative profits of the Group up to 30 November 2008 (in addition to the partial payment which Ken had allegedly received); and

(e) the alleged claim by Ken to all cumulative profits of the Group from 1 December 2008 to date.

V.  LEGAL PRINCIPLES: ORDER 24 RULE 7 OF THE RHC

30.  There is no essential dispute between Mr Joffe and Mr Wong SC over the principles of discovery.  Under Order 24 rule 7 of the RHC, a party may apply for an order requiring any other party to make an affidavit stating whether any document or any class of document specified or described in the application is or has at any time been in his possession, custody or power, when he parted with it and what has become of it.  But if the court is satisfied that discovery is not necessary, or not necessary at that stage of the cause or matter, it may dismiss or adjourn the application, and shall in any case refuse to make such an order if and so far as it is of opinion that discovery is not necessary either for disposing fairly of the cause or matter or for saving costs (see Order 24 rule 8 of the RHC).

(a) Court’s approach

31.  Hong KongCivil Procedure2014 states inter alia as follows:[1]

“…… But this is not sufficient unless a prima facie case is made out of (a) possession, custody, or power, and (b) relevance of the specified documents …… This prima facie case may be based merely on the probability arising from the surrounding circumstances or in part on specific facts deposed to. …… See too Berkeley Administration v. McClelland[1990] F.S.R. 381 where at 382 the court restated the principles as follows: (1) There is no jurisdiction to make an order under RSC, O.24 r.7, for the production of documents unless (a) there is sufficient evidence that documents exist which the other party has not disclosed; (b) the document or documents relate to matters in issue in the action; (c) there is sufficient evidence that the document is in the possession, custody or power of the other party. (2) When it is established that those three prerequisites for jurisdiction do exist, the court has a discretion whether or not to order disclosure. (3) The order must identify with precision the document or documents or categories of document which are required to be disclosed, for otherwise the person making the list may find himself in serious trouble for swearing to a false affidavit, even though doing his best to give an honest disclosure ……”[2]

(b)  Existence of the documents

32.  In Ngan In Leng v Chu Yuet Wah (No 1), DHCJ Queeny Au-Yeung (as she then was) said as follows:[3]

“42. A prima facie case on existence may be established on merely showing the probability arising from the surrounding circumstances or on specific facts deposed to: Hong KongCivil Procedure 2012, Vol 1, p.553 para.24/7/1. For example, a prima facie case on existence may be established simply by assessing whether it is business practice for a certain type of document to exist: Union Bank of India v General Nice Resources (Hong Kong) Ltd(unrep., HCA 299/2007, [2010] HKEC 704), 10 May 2010, Bharwaney J, [10].”

(c)  Possession, custody or power over the documents

33.  “Possession” is distinguished from mere corporeal holding or actual physical possession, ie “custody”; it meant the right to the possession of a document.[4]  Since disclosure is required for documents that are or have been in a party’s custody, a company director who had the company’s documents in his physical custody was obliged to give discovery of them if relevant, although such custody was only in his capacity as an officer of the company.[5]

34.  “Power” includes all documents which, though they are not in a party’s possession or custody, he has a presently enforceable right to obtain from those whoever actually holds them without the need to obtain the consent of anyone else.[6]

35.  If a defendant is a shareholder, chairman and managing director of a company, the decision as to whether documents relating to the company are in his power (as opposed to his possession or custody) cannot be determined based solely on the extent of his shareholdings in the company.[7]  In Ngan In Leng, DHCJ Queeny Au-Yeung (as she then was) referred to the principles in B v B as follows:[8]

“44. Where documents are in the possession of a company of whom the respondent to an application is a director, the applicable principles are as follows:

…

(2) The documents of a company are in the legal possession of the company. If they are or have been in the actual physical possession of a director who is a party to litigation they must be disclosed by that director, if relevant to the litigation, even though he holds them as servant or agent of the company in his capacity as an officer of the company.

(3) Whether or not documents of a company are in the power of a director who is a party to the litigation is a question of fact in each case. “Power” in this context means “the enforceable right to inspect or obtain possession or control of the document”. If the company is the alter ego of such a director so that he has unfettered control of the company’s affairs, he must disclose and produce all relevant documents in the possession of the company.

(4) Where relevant documents in the possession of a company are disclosed by a director as being in his custody or power, the court has a discretion whether or not to order production of them.

(5) The discretion is a judicial discretion, and in exercising it the court will have regard to all the circumstances. The court will balance the relevance and importance of the documents and the hardship likely to be caused to the [applicant] by non-production against any prejudice to the [respondent] and third parties likely to be caused by production. It has not hitherto been the practice of the court to order production of company documents to which the board of directors objects on affidavit, provided that the court is satisfied that the objection is not contrived for the purpose of frustrating the powers of the court. The court will not in exercise of its discretion order parties to do that which they have no power to do. The court will not order production unless it is satisfied that production is necessary either for disposing fairly of the issues between the parties or for saving costs.

B v B (Matrimonial Proceedings: Discovery) [1978] Fam 181, 193D-194A”

36.  In the situation of “one man companies”,[9] it was suggested that disclosure might be ordered where companies in possession of relevant documents were under the “unfettered control” of the litigants “so as to be their alter egos”.[10]

37.  In the Canadian case of Dallas v Dallas, the court held on the facts of that case the company was the alter ego of the controlling director and shareholder, and therefore the companies’ documents were within his power.[11]

38.  On the other hand, there were cases where the company was held, on the facts of the case, not to be the alter ego of the controlling director and shareholder.[12]  In B v B, it was said that the respondent may not be ordered to give discovery if his control of the documents is in another capacity, eg as a director of a company.[13]  In Re Tecnion Investments Ltd, it was said that documents of a company are not necessarily “in the power” of its majority shareholder; dominance in the running of the company’s business does not prove the requisite degree of control; it must be shown that the company is under the unfettered control of the shareholder.[14]

39.  In Innovisions Ltd v Chan Sing-chuk Charles & ors,[15] Kaplan J found that the company was not the alter ego of the 1^st defendant and not under his unfettered control, but the Court of Appeal noted the 1^st defendant was founder, chairman, managing director and substantial shareholder who had a dominant role in the executive and management functions of the company. Whether or not it could be properly said that the company was his alter ego, the Court of Appeal was satisfied that there was prima facie evidence which indicated a real likelihood that the contested documents would have come into his possession or custody during the relevant period.

40.  In Re The Prudential Enterprise, Limited,[16] Chu J (as she then was) also said:

“10. In the context of corporate documents, normally dominance in the running of a company’s business does not necessarily mean that the person has the requisite degree of control so that he can access the corporate documents without obtaining the consent of anyone else: Innovisions Ltd v. Chan Sing Chuk & Ors at p.354. On the other hand, if the company is the alter ego of such a person so that he has unfettered control of the company's affairs, he may be regarded as having power over the documents in the possession of the company: B v. B [1978] Fam 18. Each case, however, must depend upon its own facts.”

In that case, the petitioner sought various corporate documents from the 1^st respondent who was not a shareholder of the companies, and the 1^st respondent went on affidavit to say that he no longer had entitlement to access the documents of those companies and he did not then have them or copies of them in his possession, custody or power. It was held that the true question was whether it could be said that the affairs of those companies were controlled by the 1^st respondent to the extent that the companies could be regarded as his alter ego.  Even though the court found the 1^st respondent’s assertions that he had no control over the companies and that he had no access to the documents did not sit well with some of the assertions in his affidavits that he was able to control the board and the relevant scheme, and there was some force in the complaint over the timing of the 1^st respondent’s resignation as a director just two weeks after the petitioner’s request for discovery, the court should not conduct a mini-trial on the affidavits when the issues of whether there was failure to make full disclosure or of whether the 1^st respondent was the person in control of the companies were also part of the complaints in the main proceedings such that there should not be interlocutory pre-judging of those issues.  “The court should not conclude that the 1^st respondent was untruthful and that these companies are indeed his alter ego by just comparing the affidavits and before the evidence may be completed”.  Therefore, the learned judge was not prepared to conclude that the 1^st respondent’s affidavit was insufficient answer to the petitioner’s specific discovery application.

41.  In Chow Shiu Kei v Lee Wai Jane,[17] the petitioner alleged there was a deadlock and breakdown of trust and confidence between him and the 2^nd respondent such that the family company ought to be wound up. Although the 2^nd respondent was an active director of the company, Barma J (as he then was) was satisfied she did not exercise such overwhelming control over the affairs of the company to render it her alter ego, and indeed the deadlock in the management of the company suggested otherwise. In the circumstances, it could not be said that the company’s documents should be regarded as being within her control. Further, evidence as to her physical custody of the documents kept in locked drawers to which both sides had access was inconclusive.  The learned judge declined to make an order for discovery against her.

42.  In Ngan In Leng, the learned judge had reservations about the director’s denial that she had possession, custody or power of the documents sought and went on to infer that she had chosen to make disclosure only when it suited her, but the learned judge was not satisfied that the director was/is in possession, custody or power of the documents belonging to the company except for two classes which were documents which she would have. Since the company was not a one-person company and there were other shareholders from the public and other independent directors, the learned judge was unable to find the company was her alter ego or the directors contrived with her to pass board resolution to forbid disclosure and/or production of the company’s documents.[18]

(d)  Relevance

43.  It is for the party seeking specific discovery to demonstrate a prima facie case for inter alia the relevance of the documents sought to the “matters in question”.  The well-known test for determining “relevance” is set out in The Compagnie Financiere et Commerciale du Pacifique v The Peruvian Guano Company as follows:[19]

“…… It seems to me that every document relates to the matters in question in the action, which not only would be evidence on any issue, but also which, it is reasonable to suppose, contains information which may – not which must – either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary. I have put in the words “either directly or indirectly” because, as it seems to me, a document can properly be said to contain information which may enable a party requiring the affidavit either to advance his own case or to damage the case of his adversary, if it is a document which may fairly lead him to a train of enquiry, which may have either of these two consequences: the question upon a summons for a further affidavit is whether the party issuing it can shew, ……, that the party swearing the first affidavit has not set out all the documents falling within the definition which I have mentioned and being in his possession or control ……”[20]

44.  On the aforesaid test of “relevance”, the real question is whether the documents sought to be discovered are relevant to the issues between the parties to the litigation or, putting it in another way, to the “questions in the action”.[21]

45.  There has been suggestion that the issues or questions must be those identified in the pleadings,[22] but in Thorpe v Chief Constable of Greater Manchester Police[23] it was held that matters can be “in question” even though not expressly raised on the pleadings. At p 833, Neill LJ said as follows:

“…… It is clearly established, however, that “the matters in question” cover wider ground than the issues as disclosed in the pleadings.  Thus a party is obliged to disclose any document which it is reasonable to suppose contains information which may enable the party applying for discovery either to advance his own case or to damage that of his adversary or which may fairly lead to a train of inquiry which may have either of these two consequences.  It follows that discovery is not necessarily limited to documents which would be admissible in evidence.”

46.  But even if an issue is raised in the pleadings, it is not necessarily determinative as to whether it relates to a “matter in question”. Anthony Chan J in Li Tak Yee Samuel v Sociéte Générale Bank and Trust & anor said “…… the relevance of an issue cannot be dictated by a party unilaterally simply by importing it in the pleadings”.[24]  Cheung JA in Paul’s Model Art Gmbh & Co v UT Limited & ors[25] said as follows: “…… Discovery is not required of documents which relate to irrelevant allegations in pleadings which even if substantiated could not affect the result of the action: Allington Investments Corp & Others v First Pacific Bancshares Holdings Ltd & Another [1995] 2 HKC 139”.[26]  In Wu Ching Sau v New World First Bus Services Limited,[27] I also said that:

“…… although the pleadings and particulars will usually determine relevance to a matter in question, the obligation to provide discovery in respect of a matter in question does not necessarily mean a matter on which issue has joined in the pleadings, but the documents must be matters as to which an inference can properly be drawn that they are the subject of controversy between the parties ……”

(e) Necessity

47.  According to Hong Kong Civil Procedure 2014,[28] if the party seeking discovery establishes a primafacie case, it is for the party objecting to the order for discovery to satisfy the court that the discovery is not necessary either for disposing fairly of the cause or matter or for saving costs under Order 24 rule 8 of the RHC.[29]

48.  Linked to the requirement that discovery should be necessary either for disposing fairly of the cause or matter or for saving costs is the need to give effect to the new approach under the Civil Justice Reform (“CJR”).  Mimmie Chan J in Billion Lead Investment Limited v Union Joyce Limited said as follows:[30]

“It is also clear that post CJR, the Court should give effect to the underlying objectives of the rules and procedures when it exercises its powers under Order 24 and when it interprets the provisions of Order 24. In deciding whether any document relates to a matter in question in the action, whether any document is or has been in the possession, custody or power of a party, and whether discovery of a document sought is necessary either for disposing fairly of the cause or matter or for saving costs, the Court should always bear in mind the objectives of cost effectiveness, expeditious disposal of cases, proportionality, procedural economy and ensurance of fairness between the parties.”

It was also observed by DHCJ Lok in HSBC Private Bank (Suisse) SA v Mission Bridge Limited & anor that “following the CJR, the increasing emphasis is for the court to limit discovery in the context of its duty actively to manage the case”.[31]

(f)  Necessity – evidential materiality

49.  In Chan Hung v Yung Kwong Chung, DHCJ Horace Wong SC said as follows:[32]

“32. In any given case, there is likely to be a spectrum of evidential materiality within which documents may fall.  There may be documents which are central to the pleaded issues; but there may also be documents which fall at the other end of the spectrum in that though they may “fall within the letter of Lord Justice Brett’s formulation of relevance for discovery purposes”, they are documents which are unlikely to contain or yield information of such evidential materiality to the pleaded case (in the broad sense mentioned above) of the parties as to make their disclosure necessary for the fair disposal of the proceedings or to save costs.  The Court is entitled to take the view that although relevance in the Peruvian Guano sense has been established, it is not necessary for them to be disclosed.  The power to refuse unnecessary discovery of documents is expressly conferred by the rules of court.

33.  Indeed in the O Company v M Company case mentioned above, after dealing with the question of relevance, Colman J further held at p.352:

“… I would only add that if I had held that the applicable analysis of relevance derived from Compagnie Financiere du Pacifique v Peruvian Guano Co., sup., was wide enough to include as relevant those documents in respect of which I have refused to make an order for discovery, I should in each case have held that discovery was not necessary either for disposing fairly of the matters in issue or for saving costs under O.24. r.8. Documents of which discovery is necessary for the fair disposal of a matter in issue must at least have a demonstrable evidential materiality. For the reasons which I have given in relation to relevance I am not satisfied that all those documents covered by items 9,10 and 20 do so.”

Hence Colman J would have arrived at the same conclusion by applying O.24 r.8 if he had simply followed the “letter” of Brett L.J.’s formulation in the Peruvian Guano case on the question of relevance.”

50.  This is echoed in Hong Kong Civil Procedure 2014 which states that “[an] application for discovery of a specific class of documents was refused in Kahn (David) Inc. v. Conway Stewart & Co. Ltd [1972] F S R 69 upon the grounds that the probative value of the documents, if they existed, would be so slight as not to justify the inconvenience of giving discovery; and upon grounds that such discovery was not in the circumstances necessary for determining the issue to which it was said to relate ……”[33]

(g)  Width of discovery sought

51.  Where the applicant seeks to see a class of documents, the class must not be defined or described so widely as to include documents which are not relevant to the issue.[34]  In other words, the prerequisites for invoking Order 24 rule 7 of the RHC mentioned in paragraph 31 above must be established in respect of the class described as a class and not as regards some in the class only.[35]  Even though an excessively wide class remains a valid class, the fact that the party will be compelled to discover much irrelevant material in addition to relevant material is something which goes to the issue of whether a discovery order is necessary “either for disposing fairly of the cause or matter or for saving costs”.[36]  Put in other words, if the class of documents sought covers a large number of documents, and “disclosure is resisted on the grounds that it would be oppressive ……, the Court will weigh against any such potential oppression the possible injustice that would be caused if the material were not available at trial ……”[37] But where an oppressive, too wide or imprecise request contains within it a proper request which can be revealed without prejudice to the other side, the blue pencil test can be applied to limit the scope of the order.[38]

52.  In Culturecom Limited & ors v Chin Kwok Chung alias Tony Zie,[39] the 3^rd defendant sought specific discovery of “all papers and documents” relating to seven legal actions save and except for those papers and documents already discovered by the plaintiffs. It was held that:

“The first difficulty is that the very definition of the class of documents as “all papers and documents relating to” a particular legal action is far too wide to permit a person faced with an order in those terms ever to be sure that he has complied with it. Secondly, it is not enough that a document relates in some way to proceedings. ……

…… it appears to be the 3^rd defendant’s case that in the papers relating to [a particular legal action], there may be some documents which, if the defendant saw them, might be considered to be relevant to the issues in those proceedings, but [counsel for the 3^rd defendant] was unable to name a particular specific issue and identify a document or a class of documents which could be shown to be directly related to that issue in such a way as to satisfy the requirements for specific discovery.

As a matter of common sense, it must be that many documents relating to the various proceedings referred to must be quite irrelevant to the issues to be tried between the plaintiffs and the 3^rd defendant, and on that ground alone, the 3^rd defendant’s application must fail.

It is not enough to show the possible relevance of some parts of a class of documents: it is necessary to identify the documents or show that the whole class must be relevant. ……  It is not sufficient to speculate as to whether documents might be helpful.  It is necessary to demonstrate that they satisfy the criteria.

……

…… It is not enough to say that a particular class of documents may be relevant: it is necessary to be much more specific and to identify the issue, the document and the manner in which it relates to the issue and is probative. ……

…… The application is a fishing expedition.  It is misconceived and it will be dismissed.”

53.  In MolnlyckeAB v Proctor & Gamble Ltd (No 3), [40] Mummery J noted that an order for discovery was discretionary, and held that the specific discovery sought was too wide for it embraced documents which did not relate to the matters in question between the parties in the action, and were not necessary for disposing fairly of the action or for saving costs.[41]  He found it would have been oppressive to order discovery on the scale sought by the defendants of documents which were no more than marginally relevant background material to one of the issues in the action, and opined that the court would take into account considerations such as the value of the discovery to the person seeking it and the burden imposed on the party giving it with a view to restricting the volume of documents and the labour and expense involved to that which was necessary for fairly disposing of the issues in this case.[42]

(h) Fishing request

54.  There is no doubt that discovery will not be ordered for the purpose of “fishing” or to enable a party to turn a non-issue into an issue.[43]  In RetheEstate of Ng Chan Wah, Chu J (as she then was) stated that:[44]

“It is not sufficient for the plaintiffs to say that because there is on the pleading allegation of improper conduct against the defendants as executors, they are entitled to test the basis of the estate accounts generally or to check the accuracy of the items presented in the estate accounts, irrespective of whether they are in issue. It is not the purpose of discovery to give the plaintiffs an opportunity to hunt around the documents in the hope that they will reveal some improprieties on the defendants’ part or will provide information for them to pursue more enquiries.”

(i) Discovery affidavits are conclusive

55.  The making of an order for specific discovery does not preclude the other party from deposing in the affidavit that he in fact does not have the documents in his possession, custody or power. Generally speaking, the affidavit in answer is invariably taken at face value, and subject to limited exceptions, it is conclusive as to relevance and existence or otherwise of documents at the interlocutory stage so that the applying party cannot seek to contravene the statements or assertions in the affidavit either by way of a further contentious affidavit or by applying to cross-examine the deponent.[45]

56.  In Edmiston v British Transport Commission, there was already on the file an affidavit sworn by the defendant’s staff setting out certain documents and deposing to the fact that there were no other relevant documents before the application for further discovery was made.  Singleton LJ found there was nothing in the supporting affidavit for the application which enabled the court to go behind the conclusiveness of the discovery affidavit, and discovery was refused.[46]

57.  But if the affidavit is shown to be insufficient by its content or by admissions made in the proceedings, in such a case a further affidavit may be ordered.[47] “[The discovery] affidavit is not regarded as conclusive only where it can be shown that there has been insufficiency of discovery.  The insufficiency can be demonstrated by (a) the pleadings, the list and affidavit of documents themselves, or documents referred to therein; (b) any other source that constitutes an admission of the existence of a discoverable document not so far discovered; (c) an apparent exclusion of documents from discovery by a party under a misconception of the case: Matthews & Malek, §6.43”.[48]

VI.  LEGAL PRINCIPLES: ORDER 24 RULES 10 AND 11 OF THE RHC

58.  Order 24 rule 10 of the RHC provides as follows:

“(1) Any party to a cause or matter shall be entitled at any time to serve a notice on any other party in whose pleadings, affidavits or witness statements served under Order 38, rule 2A, or experts’ reports, reference is made to any document requiring him to produce that document for the inspection of the party giving the notice and to permit him to take copies thereof.

(2) The party on whom a notice is served under paragraph (1) must, within 4 days after service of the notice, serve on the party giving the notice a notice stating a time within 7 days after the service thereof at which the documents, or such of tem as he does not object to produce, may be inspected at a place specified in the notice, and stating which (if any) of the documents he objects to produce and on what grounds.”

59.  Order 24 rule 11 of the RHC provides as follows:

“(1) If a party …… who is served with a notice under rule 10(1)-

(a) fails to serve a notice under …… rule 10(2), or

(b) objects to produce any document for inspection, or

(c) offers inspection at a time or place such that, in the opinion of the Court, it is unreasonable to offer inspection then or, as the case may be, there,

then, subject to rule 13(1), the Court may, on the application of the party entitled to inspection, make an order for production of the documents in question for inspection at such time and place, and in such manner, as it thinks fit.”

60.  Order 24 rule 13(1) of the RHC provides as follows:

“No order for the production of any documents for inspection or to the Court or for the supply of a copy of any document shall be made under any of the foregoing rules unless the Court is of the opinion that the order is necessary either for disposing fairly of the cause or matter or for saving costs.”

61.  The court has jurisdiction to order discovery of a document referred to in a pleading or affidavit or witness statement, whether or not the document is in the possession, custody or power of the party in whose pleading or affidavit or witness statement the reference is made.  An order will not be made if good cause to the contrary is shown.  The absence of possession, custody or power may amount to good cause, but will not invariably be so; the decision depends on the facts of each particular case.  The party requesting inspection must satisfy the court that inspection is necessary either to dispose fairly of the matter or to save costs.[49]

62.  Mr Joffe cited Dynamic Way International Ltd & anor v Ho Kui Chee & ors.[50]  He submitted that the Court of Appeal in that case held that (a) where a document was referred to in an affirmation prima facie the party against whom it was sought to be used had a right to inspect the document and take copies of it, (b) in exercising its discretion the court should be satisfied that the order was necessary for disposing fairly the cause or matter or for saving costs, and (c) except in very unusual circumstances a party should not be faced with the predicament of having to deal with evidence which it was not permitted to see.

63.  Mr Joffe also referred to Zida Technologies Ltd v Tiga Technologies Ltd & ors,[51]and he submitted that DHCJ McCoy SC relied on the principles in Dynamic Way International Ltd and held that under Order 24 rule 11(1) of the RHC the court could as a matter of jurisdiction order discovery of documents referred to in an affidavit notwithstanding that they were not in the possession, custody or power of the party against whom the order was sought on the following basis:

“ …… The thrust of the rule was emphasised by Lindley LJ in Quilter v Heatly (1883) LR 23 Ch D 42 at p.50, namely that the intention was to provide the other party with the same advantage, just as if the document had been fully set out. In short, one party could not use or rely upon the probative value of the document, yet simultaneously deny the other party the same forensic advantage. That would be an approach to litigation that elevated the document into a status approaching that given to a privileged document ……”[52]

64.  However, neither Mr Joffe nor Mr Wong SC cited the rece