CHUNG PUI TAK AND ANOTHER v. TAM CHI LEUNG NOLAN AND OTHERS

HCA 1439/2012

[2023] HKCFI 325

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1439 OF 2012

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D E C I S I O N   O N   C O S T S

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1.  On 30 September 2022, this court handed down the decision (“the Decision”) in respect of the plaintiffs’ application for mareva injunction against the 1^st defendant (“D1”). Pursuant to that, the parties have lodged their respective written submissions on costs.

2.  The Decision refers, specifically §37 thereof whereby this court observed that the application could have been resolved by November 2021 without substantive argument. The parties are ad idem that the dividing line starts with the letter from D1 dated 7 October 2021 (“the Letter”).

3.  The consideration of the submissions does not alter this court’s preliminary observation stated in §37 of the Decision.

4.  In particular, D1’s offer in the Letter was put forward regardless of the merits of his resistance to the plaintiffs’ application. Argument would have been saved, if the application could be resolved on terms agreed between the parties.

5.  After exchange between the parties since the Letter, D1 agreed by letter dated 15 October 2021 to provide the undertaking.

6.  The argument in respect of the Disputed Term, as this court ruled in paragraphs 30-31 of the Decision, turned out to be against the plaintiffs.

7.  The plaintiffs also lost in their attempt to invoke the Chabra jurisdiction of the court.

8.  D1 did not change his position in respect of his undertaking at the hearing.

9.  The complexity of the case lies with the dispute and terms of the judgment for adjudication, but not the plaintiffs’ application for mareva injunction with reference to such adjudication.

10.  In the premises:

(1)  Costs of the application by the plaintiff’s summons filed on 26 July 2021 up to 15 October 2021 be to the plaintiffs, and those after 15 October 2021, including the hearing on 2 November 2021 and these submissions, be to D1.

(2)  Costs shall be taxed, if not agreed, with certificate for one counsel.

Written submissions by Mr Simon Chiu, instructed by Kam & Fan, for the plaintiffs

Written submissions by Ms Mandy Yau, instructed by Philip Tam & Co, for the 1^st defendant

HCA 1439/2012

[2022] HKCFI 3038

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1439 OF 2012

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JUDGMENT
(RELIEF AND ORDER)

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1.  This is the aftermath of the judgment of this court dated 27 January 2021[1] (“the Judgment”).  Save as referred to below, the discussion and findings made in respect of the various issues in dispute in the Judgment will not be repeated here.  The same definitions and abbreviations in the Judgment are adopted here.

2.  Pursuant to §221 of the Judgment, and as requested by the parties, this court gave further direction on 22 March 2021 for written submissions for the purpose of finalising the relief and order to be granted on the basis of the findings in respect of P2’s claim against the defendants.

3.  The disagreement between the parties principally lies in the nature and extent of relief to which P2 is entitled to consequential upon the findings made in the Judgment.

NATURE OF THE RELIEF TO WHICH P2 IS ENTITLED TO

4.  Essentially, according to the defendants, this is claim for an account in common form entitling P2 to an order from the court for an account and/or an inquiry.  No payment of any form should be ordered now[2].  The plaintiffs disagree, saying that the claim is based on expressly pleaded wilful default and breach of fiduciary duty on the part of D1 to account and not to be in conflict of interest in respect specifically the pleaded items of payments made by P2 caused by D1 which benefited the defendants.  It was in defence of that that D1 also sought statutory relief pursuant to section 358(1) of the CO, which was dismissed in the Judgment. Amongst other issues, the court was asked to adjudicate whether and to what extent D1 has accounted to P2 for such items.  This was what the court tried and found, and whilst P2 may be entitled to further account and inquiry, P2 says that it may also elect for an order against the defendants to make good the proven unjustified or unverified payments so made by P2.

5.  Considering the circumstances of this case, including peculiarly of the trial actually conducted by the parties, I can see the point of P2’s argument.

6.  The pleaded case of the plaintiffs was premised not merely on establishing whether P2 is entitled to an account from D1 as a fiduciary, though admittedly, it may require some stretching in construing the pleading, including the prayer, as a whole to see the plaintiff’s point.  The defence was also not that D1 owed no duty to account, but that all have been accounted for.  By the time when this case came to trial, in issue were the positive contentions of breach of fiduciary duty on the part of D1 to P2 by consistent refusal to render full account as well as actual self-dealings and breach of good faith by making use of his common directorship and control of the P2, Hui Guang and the defendants.  One should be reminded that P2 and Hui Guang are not in fact associated but related as a matter of business arrangement.  Further, the plaintiffs, which had to rely almost solely on the scrutiny of the financial and account documents obtained after the collapse of the business of Hui Guang to ascertain the state of affairs, and to identify items of payments by P2 revealed by the account which were said to be irregular, baseless and/or exorbitant and ought not to have been paid by P2 (ie the Items).  What was tried was also the contention of knowing assistance of such breach on the part of D2 and D3.

7.  This court made finding in respect of the scope of the duty of D1 to account.  At the same time, the exercise at the trial was tantamount to the undertaking of an account on the basis of the financial documents together with the assistance of the parties’ accounting experts, all poured in by the parties.  As referred to in the Judgment, many of these documents were disclosed by the defendants at different stages only after the commencement of the action and before the trial.  This court was asked to, and did, make findings in respect of each and every one of the Items after such an exercise in respect of them at the trial.  In defence, D1 also specifically raised the issue of equitable allowance in relation to the Management Fees, albeit not properly advanced for assessment at the trial.  This court eventually found that D1 has failed to account for the Items, some in part and some in their entirety in specific amounts.

8.  Unlike an ordinary case where the plaintiff claims against a fiduciary for an order for an account or inquiry, the plaintiff’s claim is framed and the case was tried in a form tantamount to the undertaking of an account exercise.  The court was asked to make findings in respect of the questioned items upon such exercise after hearing both sides’ evidence, accounting expert evidence included, as to whether the items were accounted for.  Pragmatically, one wonders what further account could realistically be expected perhaps except for inquiry as to the consequential loss and damages suffered by P2.  But P2 says it is not confined to such way forward.

9.  As to that, on behalf of the defendants, reference is made to §221 of the Judgment as if that contained this court’s indication or endorsement of a particular course to take.  However, what this court did in that paragraph was to recite what the parties put forward during the trial as different considerations that might have bearing on the appropriate relief to be granted and thus the order to be made.  Hence the premise on which counsel proposed to adjourn the issue of relief and order for further submissions on the basis of the findings then to be made.  The issue of the way forward is open.

10.  Relevantly §221 of the Judgment just mentioned immediately followed this court’s citation of Libertarian Investment Ltd v Hall (2013) 15 HKCFA 681 to address the argument of inconsistent remedies of an account and equitable compensation as advanced on behalf of the defendants.  I expressed my understanding of the explanation in that case to be not really one about the two being inconsistent remedies as such.  However, the explanation also made clear one point.  The plaintiff can at every stage elect whether or not to seek further account or inquiry.  This, I understand, essentially explains why Mr Chiu for the plaintiffs made it quite clear during the trial that the appropriate remedy would much depend on how this court found in respect of the Items on the evidence of the account before the court.

11.  For the present purpose, Mr Chiu makes clear that first, P2 seeks no further account; and second, P2 would not pursue the claim for damages for breach of fiduciary duty of D1 which might have entailed the consideration of ordering an inquiry as to damages.  The plaintiffs will seek remedy to make good the Items from the account undertaken at the trial, which D1 is proved to have failed to verify or justify.  It may perhaps be mentioned that at the same time of handing down this judgment, this court is also handing down the decision in respect of the plaintiffs’ application against D1 for a Mareva injunction on the basis of what P2 claims to be entitled to as relief pending herein.  The stance of D1 is that he now does not dispute his liability to account for the Items, but only the quantum.

EXTENT OF THE RELIEF TO WHICH THE PLAINTIFF IS ENTITLED TO

12.  Two issues are raised by the defendants as to quantum: (i) no loss suffered by P2 in respect of the Items; and (ii) limitation of claim in respect of the Items.

13.  The second issue can be addressed first and briefly. The parties do not dispute the applicability of limitation in principle in different circumstances.  Limitation does not apply to a claim for an account simpliciter, ie exercise of pure equitable right against the fiduciary for an account and nothing more: see Liu Hsiao Cheng v Wong Shu Wai [2018] 1 HKLRD 1087 (at §§17; 23-31).  As mentioned, the plaintiffs’ stance is that this is not, and was not tried as, an action for an account simpliciter.

14.  Where limitation is applicable, the starting point is that the issue must be properly raised.  Where the claim was framed and tried the way this case was, limitation issue in respect of the right to compensation on account of the questioned items should have been raised properly.  It could have been raised, because even in the context of the exercise of the court’s discretion whether or not to order mere account or enquiry (which per se is not remedy), any limitation issue as to an order for payment consequential upon such further account/enquiry (which is remedy) is relevant: see Al-Dowaisan & Anor v Al-Salam & Ors [2019] 2 BCLC 328 (at §150).  Had the limitation issue been raised, the plaintiffs would have had the proper opportunity to contend and to adduce evidence in answer.  To name a few, contentions on the basis of effective concealment on the part of the defendants, which were at the material times under the effective and sole control and management of D1, and the state of knowledge of the plaintiffs (albeit addressed in its specific context at the trial) could have been made.  Particularly, in the circumstances of the case as found, it seems the defendants have no reason for believing such contentions, if raised, might have turned out in their favour.  I say no more, save that submissions now in respect of limitation issue, in my view, exceed what the further submissions and deliberation of the court permit.

No loss

15.  The no-loss argument was raised and considered in the account exercise at the trial.  It is repeated for the present purpose. Essentially, D1 argues that except for the management fees (to the extent which D1 caused P2 to pay) as well as the two cheques and the journal entries (which D1 accepts are not accounted for), no loss was caused to P2 in respect of the rest of the Items essentially because they were correspondingly reflected somehow in the account of the related company.  Therefore, no order for payment to such extent should be made against D1.

16.  This is a tricky consideration, mainly because of the business model adopted by the parties involving the various entities (which were not associated but related) in the joint venture.  That was further convoluted by design with the various artificial accounting arrangement under the control and management of D1 as found in the Judgment.  Considering the circumstances of this case and the authorities cited by counsel, I am of the view that whilst the notion of loss to P2 is not relevant to whether D1 has discharged his duty to account, it is not entirely irrelevant for the purpose of considering the order for payment sought by P2.

17.  On behalf of P2, much is said about differentiating a claim for consequential loss and damages for failure to account and that for the making good of the defective account, ie the so-called falsifying or surcharging the account.  The final court in Libertarian Investment Ltd (above) described (at §§168-170) the following scenarios when the plaintiff is faced with an account:

(1)  If the account discloses an unauthorised payment, the plaintiff may falsify it by seeking to have it disallowed.  The plaintiff will then be entitled to have the deficit made good by an order for payment of the same by the defendant.  This is not consequential loss but the amount paid to be restored.

(2)  Alternatively, the plaintiff may seek an inquiry as to what has become of the unauthorised payment.  If the unauthorised payment was dissipated or applied so as to result in loss, the plaintiff will be entitled to still seek disallowance of the payment and an order for payment of the same.  If the unauthorised payment was applied so as to earn a profit, the plaintiff will be entitled to elect to adopt the application, and to trace and claim such profit which is not for the defendant to keep.

(3)  Where the account does not include any property which the defendant failed to obtain, but should have done so, for the benefit of the trust, the plaintiff can surcharge the account by asking the defendant to compensate for such that should have been obtained (on the basis of wilful default as discussed above).

18.  In any of the above scenarios, the starting point is the notion of remedy as a rational answer to the void which the plaintiff suffers as a result of the impeached disposition of property or payment of money belonging to the trust.

19.  The circumstances of this case were that the payments by P2 were made in the context of the operation of business under a model involving the various separate entities adopted by the parties.  D1 relies on the purported reciprocal accounting acknowledgement whereby the expenses of P2 on behalf of Hui Guang were recorded as receivables of P2 in the balance sheet, and therefore would have been reimbursed by the sales income collection by P2 on behalf of Hui Guang.  However, it was proved at the trial that insofar as the payments made by P2 that could not even be verified are concerned, it means not much by referring to a seemingly corresponding or reflective entry in the account of the related company which would be nothing more than another assertion on paper that could not be verified as a matter fact.

20.  On this basis, I turn to the order sought in respect of the Items.

The two cheques

21.  D1 does not object to an order for payment of the amount of HK$110,210.

The journal entries

22.  D1 does not object to an order for payment of the amount of HK$1,044,625.42.

The management fees

23.  The defendants seek to advance further argument on the basis of further analysis of evidence (if leave is given) in respect of whether or not the entire sum of HK$1,270,490.32 was paid as the management fees.  However, what this court has said in this respect in the Judgment should not be re-opened.  Nor may the argument about equitable allowance be.  When the sum of payment is found not to be justified as a matter of fact, P2 should be entitled to the restoration of the same.

Transportation expenses

24.  The amount of HK$572,543 paid by P2 could not be verified as transportation expenses payable by Hui Guang.  The defendants argue that such, if paid without justification, could only be loss to Hui Guang. However, the case presented at the trial was that D2 allegedly paid for those expenses for Hui Guang, and D1 caused P2 to reimburse D2 of the same; and this court merely made observation in the Judgment about the relevance of the defendants’ argument, ie this should be loss of Hui Guang, and only Hui Guang could complain about it.  This court did not make finding regarding that.  When the alleged liabilities cannot be verified, and thus proved as a matter of fact, the sum would be unjustified outright payments made by P2 as caused by D1, and P2 should be entitled to its restoration.

Subcontracting fees

25.  The sum of HK$2,305,477.37 charged by D2 against Hui Guang was settled by P2 for and on behalf of Hui Guang.  As found, this was not genuine subcontracting fees payable by Hui Guang to D2, but invented as a tool in the accounting to enable D2 to retrieve its own business receipts from its Mainland customers collected by Hui Guang.  The defendants argue that whilst the conflict of interest on the part of D1 without disclosure is found in respect of such dealings for the benefit of D2, no loss has been caused to P2.

26.  The Disputed Arrangement, accepted as a fact by the plaintiffs at the trial, had implications on Hui Guang and P2.  As for Hui Guang, its income became overstated but the same was somehow addressed by the liability to pay to D2 the subcontracting fees (representing income to D2 from its Mainland customers which was not for Hui Guang to keep).  The precise effect, if any, on its Mainland tax liability in monetary terms was not entirely clear at the trial.  As for P2, it was the pocket from which such subcontracting fees were made out to D2, which would not have been P2’s property to keep under the convoluted arrangement.  The complications discussed in the Judgment in this respect renders it difficult to form a net view of the result.  Insofar as P2 is concerned, it is equally difficult to conclude that such payments formed a deficit in its account regardless.  As the necessary premise for falsifying the account by an order for payment of the amount is uncertain, I refrain from making the order on the basis of the plaintiffs’ election.

Material processing fees

27.  The sums of HK$1,308,180.90 and HK$3,664,319.63 were outstanding amounts of the material processing fees payable by D2 to Hui Guang for D2’s contracts with its own Mainland customers.  It is argued that such amounts, which have not been received, would be loss to Hui Guang, in which the cause of action lies.  Unlike the above items, I tend to agree.  The mere fact that P2 is the pocket of Hui Guang does not change that.

The suppliers’ invoices

28.  The total amount of HK$3,298,851.30 paid by P2 in accordance with the suppliers’ invoices to Hui Guang in question cannot be verified.  On the basis of the account in this state, this amount, which cannot be verified as a matter fact, constituted unjustified deficit of P2.  P2 is entitled to have such payments restored to it.

Cash withdrawals

29.  As discussed in the Judgment in this respect, the total amount of HK$800,000 cash withdrawals from P2 simply could not be reliably verified as a matter of fact.  This constituted unjustified deficit of P2.  P2 is entitled to have this sum restored to it.

TERMS OF THE ORDER

30.  A couple more other points.

31.  At one point, there was argument as to whether the so-called “Basic Clauses”, effectively declaring the entitlement of P2 to falsify and surcharge the account, should be incorporated into the order to be made.    This court also raised the issue for consideration in the direction dated 22 March 2021. The clauses were objected to by the defendants mainly on the ground that they were not pleaded.  Insofar as they were meant to be declarations of a state of affairs actually sought, they were indeed not pleaded. It should however be clear by now that they are not actual relief sought by P2, but merely statement of the basis for the relief sought and for clarity.  P2 also does not seek to incorporate them in the order to be made any more.

32.  On the basis of the draft proposed order, adjusted in view of the above, and upon P2’s election not to seek any order for further account or inquiry, the following order is made in respect of P2’s claim against the defendants referred to in §227 of the Judgment and as proposed by the plaintiffs:

(1)  In respect of the management fees (§§125-147 of the Judgment):

(a)  D1 do pay P2 the sum of HK$15,000;

(b)  D3 do jointly and severally pay P2 the sum of HK$1,239,490.32;

(c)  D1 do pay P2 the sum of HK$16,000;

(2)  In respect of the transportation expenses (§§148-154 of the Judgment), D1 do pay P2 the sum of HK$572,543;

(3)  In respect of the suppliers’ invoices (§§192-195 of the Judgment), D1 do pay P2 the sum of HK$3,298,851.30;

(4)  In respect of the cash withdrawals (§§196-200 of the Judgment), D1 do pay P2 the sum of HK$800,000;

(5)  In respect of the two cheques (§§201-204 of the Judgment), D1 do pay P2 the sum of HK$110,210;

(6)  In respect of the journal entries (§§205-207 of the Judgment), D1 do pay P2 the sum of HK$1,044,625.42.

33.  The total amount comes to HK$7,096,720.04.  Considering the submissions, I am minded to just order the above sums to carry simple interest at 1% above HSBC prima rate from the date of writ to judgment (the date hereof) and judgment rate thereafter until payment.

COSTS

34.  As the aftermath of the trial and part of the Judgment, costs since the handing down of the Judgment and incidental to the finalisation of the relief and order, together with the costs of this action, shall be to the plaintiffs, to be taxed if not agreed.

HCA 1439/2012

[2022] HKCFI 3027

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1439 OF 2012

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DECISION

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1.  After trial, this court handed down judgment in favour of the plaintiffs. Pending finalisation of the relief and order in respect of the 2^nd plaintiff’s (“P2”) claim against the defendants upon the parties’ further submissions, the plaintiffs apply for a Mareva injunction against the 1^st defendant (“D1”).

Background

2.  The background was set out in detail in the judgment dated 27 January 2021 (“the Judgment”)[1], which will not be repeated here.  The same definitions and abbreviations in the Judgment are adopted for the present purpose.  Finalisation of the relief and order to be granted in respect of P2’s claim against the defendants has been adjourned pending further submissions of the parties.  This the parties did subsequently, and further judgment was pending.

3.  In the interim, by summons filed on 26 July 2021 (“the Summons”), the plaintiffs apply for a Mareva injunction against D1 restraining him from disposal of or dealing with or diminishing the value of his assets up to HK$14,374,797.94, which is the amount the plaintiffs say they should be entitled to in terms of relief which was then pending.

4.  The injunction sought specifically covers a residential property at Taikoo Shing, Hong Kong (“the Property”), which was then the residence of D1 and his wife, co-owned by them as joint tenants.  By the time of the Summons, the Property has been contracted to be sold at HK$11,800,000 but pending completion.  Hence the terms of the injunction restraining the disposal of half of the sale proceeds to which D1 as a joint tenant would be entitled. The injunction sought also specifically covers the property and assets of D1, including his business in D2 and D3[2] or, if sold, their proceeds up to the value of the plaintiffs’ claimed entitlement in monetary terms.

5.  At the first hearing on 30 July 2021, D1 gave undertaking essentially to pay into court half of the deposit received from the sale of the Property and the balance of the net sale proceeds to be received upon completion of the sale representing D1’s share of interest in the Property.  The two respective sums of HK$590,000 and HK5,247,075 were subsequently paid into court.  D1 also gave undertaking, until further order of the court, in terms similar to those sought under the injunction up to the specified value mentioned above while the Summons was adjourned for substantive argument.

6.  In view of the payments into court, the plaintiffs now adjust the value of the assets of D1 to be subjected to the injunction down to HK$8,537,722.94 (ie HK$14,374,797.94 – 590,000 – 5,247,075).

The principles

7.  The parties proceed on the basis that this is an application for a post-judgment Marvea injunction in aid of execution of the judgment, which the court has power to grant: see Menno Leendert Vos v Global Fair Industrial Ltd HCA 4200/1995 (25 March 2010)(at §9).  The principles remain that the plaintiffs have to demonstrate that they have good arguable case in their claim against D1, viewed in the light of the judgment already obtained.  The plaintiff must demonstrate by evidence a real risk of dissipation of asset on the part of D1 if not restrained.  The order will be granted if the balance of convenience between the parties tilts towards the grant of the injunction.

Merit of the claim

8.  This has to be considered in the light of the fact that first, there is the Judgment on P1’s claim against D1 and D3 as well as second, the findings against the defendants which form the basis for the pending finalisation of the relief and order in respect of P2’s claim against them.

9.  The plaintiffs project a good arguable case that P2, as it is indeed seeking, would be granted a judgment/order whereby the defendants will have to compensate P2 by paying a total sum of HK$14,374,797.94 as mentioned above or alternatively a substantial part of on the basis of the findings in this respect in the Judgment.

10.  The Summons is directed against D1 only.  D1 does not dispute his liability to account on the Items but the quantum.  He argues that he should not be ordered to pay substantial part of the amount projected by P2 on the ground that no loss to P2 is proved or in any event substantial part of such claim is time barred.

11.  At the same time of handing down of this decision, this court is also handing down the further judgment in respect of the relief and order between P2 and the defendants.  Yet even considering the present application, assuming that such judgment were still pending, I would say that the plaintiffs’ case is not short of being good and arguable.

Real risk of dissipation

12.  The following matters prompted the present application.

13.  An extraordinary general meeting of the shareholders of D2 (ie P1 and D3) was held on 30 April 2021, which was attended by D1, his wife and the wife of P1 (as his representative because P1 now spends most of his time in the Mainland).  One recalls that P1’s 40% beneficial interest in D2 was disputed by D1, but was found by this court in the Judgment and now acknowledged by D1.  At the meeting, D1 explained the dire financial situation of D2, said to be attributable to the impact of the economic downturn since the COVID-19 pandemic on the business of D2.  To maintain, D2 required a monthly budget of about HK$510,000 or a total of HK$2.5 million liquidity.  However, no decision to resolve the problem was reached.

14.  Another extraordinary general meeting of the shareholders of D2 was held on 18 June 2021.  Similar financial difficulty of D2 was discussed.  D1 then proposed injection of HK$1 million into D2 by the shareholders (P1 and D3) in the form of capital investment or shareholders’ loan.  P1’s wife did not agree.

15.  During the above two meetings, P1’s wife observed that there was not much operation at the factory of D2.  She also had distinct impression that D1 and D2 were indeed in dire financial situation, and the viability of continuing D2’s business was doubtful.

16.  The plaintiffs’ solicitors have apparently been monitoring possible dissipation of assets on the part of the defendants with focus on the status of the Property, which was D1’s asset known to them.  Their search in this respect on 23 July 2021 revealed the sale, which was contracted after the first extraordinary general meeting of D2 mentioned above.  The provisional sale and purchase agreement was dated 6 June 2021 and the formal sale and purchase agreement was dated 22 June 2021 (ie 4 days after the second meeting of D2).  The latter was lodged for registration on 2 July 2021 but registration has apparently been withheld.

17.  Whilst the business of D2 has slowed down and was in dire financial situation, D1 was adamant that he intends to maintain D2, which he describes is his sole source of earning.  He is also reluctant to lay off the employees.  Sale of the Property, according to him, was the only way out to raise the necessary liquidity for such purpose as well as his other family needs.

18.  Sale of the Property, without more, does not connotes real risk of dissipation.  The circumstances have to be looked at for an objective view of the matter to be formed: see for instance Lam Sik Ying v Lam Sik Shi & Anor HCA 4713/2001 (14 January 2011) (at §11); Chan Fai Cheung v HoChi Wing t/s Hanson Engineering Co & Anor[2018] HKCFI 399 (23 February 2018) (at §§5-6).  It is the burden of the applicant to establish by evidence such circumstances suggesting a real risk of dissipation: see ReChau Cham Wong Patrick (a bankrupt) [2016] 2 HKLRD 278 (at §43); Gee, Commercial Injunctions (7^th ed) at §12-041.

19.  By way of affirmation in opposition, D1 revealed that apart from putting the Property for sale, he has also made other financial arrangement during the first two weeks of June 2021.  He closed 2 out of his 3 personal bank accounts, and transferred the closure balances of the 2 accounts (about HK$221,000 and HK$2,110 respectively) to D3’s account.  He revealed that he had about HK$2.6 million cash in his remaining personal bank account at that time.

20.  Prior to the meeting on 18 June 2021, D1 provided D3 with funds by way of personal loan of HK$1.6 million.  Part of such loan came from the balance retrieved by D1 after closing his bank accounts earlier in the same month as mentioned above.  Seeing that his proposal at the 18 June 2021 meeting for injection of HK$1 million by way of shareholders’ loan or capital investment failed, D1 caused D3 to lend to D2 a sum of HK$1 million as shareholder’s loan on the same day.

21.  After scrutinising D1’s explanation above, the plaintiffs question the timing of the decision to put the Property on sale and to put D3 in funds, when first, D1 admittedly had sufficient cash on his own case by mid-June 2021, and second, the stance and reaction of P1, through his wife, to the proposal of cash injection into D2 was not even known until after the 18 June 2021 meeting.  Yet D1 must have put the Property on sale earlier than June 2021 or else the provisional agreement would not have been concluded in the first week of that month.

22.  On his behalf, it is submitted that D1 could not be expected to exhaust his personal cash liquidity before making any arrangement for the necessary finance.  He also objects to the suggestion of the plaintiffs that the timing of the putting the Property on sale and that of the filing of further written submissions for formulating the order between P2 and the defendants pursuant to the Judgment were somehow associated.  Relevantly, the pretext was partly to inject money into D2 which did happen.

23.  That said, it is also true that the injection of funds into D2 is not shown to have been enabled or facilitated by the sale of the Property.  By then, completion of the sale of the Property was still pending.  Further, the scrutiny of the explanation by D1 has also caused the plaintiffs to raise the issue of whether D1 has withheld from the court the true state of his assets.  In this connection, the plaintiffs, with the assistance of accountant scrutinising the audited financial statements of D2 between 2004 and 2020 previously obtained from D1, found that substantial earnings of D2 have been tapped out of D2 to D1 and/or D3 for the ultimate benefits of D1 and his wife over the past years.  Such observations were set out in the plaintiffs’ affirmation in reply.  On this basis, the plaintiffs question the credibility of D1’s reliance on the alleged dire financial situation of himself and D2 as the reason for the sale of the Property.

24.  D1 complains that the plaintiffs’ reply and related evidence went beyond their case for the present application.  Indeed, when it came to the plaintiffs’ affirmation in reply, they adduced evidence beyond what they said in their affirmations in support of the application. However, that was their evidence in response to D1’s explanation of his alleged asset status and financial situation as well as his alleged financial arrangement concerning himself, D2 and D3, which were unknown to the plaintiffs and first revealed by D1 in his affirmation in opposition.  The plaintiffs should not be criticised for coming up with a relevant reply.  In these circumstances, D1 could have sought leave to adduce further evidence to address the plaintiffs’ further evidence.  That has not happened, notwithstanding the filing of the plaintiffs’ affirmation in reply on 23 August 2021.  That could only be taken to be the conscious decision of D1, as he is legally represented.  This court shall therefore proceed on the basis of all the materials before it as summarised above.

25.  What the plaintiffs have discovered and deduce is the factual basis for believing that the true state of assets which D1 owns and controls should exceed what is represented by D1 in his affirmation, namely the cash balance in his personal bank accounts and his interest in the Property. This has bearing on the credibility of D1’s case that the alleged financial situation drove him and his wife to sell the Property as the only option.  Of course, these findings and deduction of the plaintiffs may be rebutted. Alternatively, even if true, these findings and observations of the plaintiffs from the evidence may not necessarily reflect the current situation of D1 and D3. However, the true state of asset owned and controlled by D1 now is within his own knowledge to tell if he wants to rebut the plaintiffs’ suggestion.  The plaintiffs raise a factual issue not without basis, and this is not about shifting the burden in this application or argument about duty of voluntary disclosure on the part of D1.  It is a matter of whether and, if yes, what D1 seeks to put forward in opposition.  As mentioned, D1 chose not to seek leave to adduce further evidence to address such matters notwithstanding ample time before the hearing.

26.  In these circumstances, the intention to salvage D2, which is supported by some evidence, is not the answer.  It is whether the sale of the Property, according to D1, was the only option for such purpose. As the state of evidence now stands, the objective view is that there is basis for believing that the sale of the Property was not so actuated as alleged, and hence the real risk of dissipation remains.

Balance of convenience

27.  The injunction sought would be to aid the execution of judgment.  In terms of inconvenience, D1 argues that the injunction will cause hardship.  However, the above discussion cast doubt on that. The injunction also contains express exception allowing not unreasonable amounts towards the ordinary household and living expenses as well as legal advice and representation respectively, which is also in line with the exceptions to the interim undertaking of D1.  D1 is not prevented from continuing the business of D2 and further consideration will still be possible on the ground of change of circumstances.

Other considerations

28.  In the course of the argument, the plaintiffs purportedly invoked the court’s so called Chabra jurisdiction insofar as the assets of D2 and D3 are concerned.  What gave rise to such argument was the parties’ difference in respect of the provision that no fixed assets in D2 and D3 may be disposed of by D1, which the plaintiffs then sought.

29.  The court has such jurisdiction, ie the so-called Chabra jurisdiction, to grant an injunction against a party against whom the plaintiff has no cause of claim, but on the basis that such party’s assets either belong to or controlled by the defendant in reality.  If such jurisdiction is invoked, the application for injunction should as well be directed against such party as a respondent.  In the present case, the Chabra jurisdiction of the court is not properly invoked against D2 or D3 so as to target the assets under their names.  The present application is directed against D1 only.  D1’s assets in the form of his interest, directly or indirectly, in these parties are already caught by the main terms of the injunction.

30.  At one point, issue was also taken as to some other terms of the injunction sought.  In its original form, the injunction (at §1(1)(b)(iii)) seeks to restrain D1 from dealing with or disposing of “the property and assets of D1’s business in D2 and D3” or the sale money if any of them have been sold.  D1 argues that the reference to “the property and assets of D1’s business in D2 and D3” is highly ambiguous and uncertain.

31.  I tend to agree.  The fact that similar reference exists in the undertaking given by D1 on 30 July 2021 (at §3) does not make it correct or justify the retention of such wordings.  As mentioned, D1’s assets, including his beneficial interest in the assets under the names of D2 and D3, should already be caught by the main terms of the injunction.  It is noted that the same has been removed from the terms actually sought at the time of the hearing on 2 November 2021.  I therefore say no more.

D1’s undertaking

32.  As mentioned, in place is the interim undertaking of D1 given at the first hearing of the Summons on 30 July 2021.  D1 has complied with that to make the payments into court.  Since then, the parties have corresponded with each other exploring if the Summons could be disposed of upon appropriate undertaking of D1 instead of an injunction.  Both sides seek to refer to such correspondence at the substantive hearing, and counsel confirmed their consent to doing so as some were marked “without prejudice”.

33.  What happened was that D1 offered, on top of the payments into court, further undertaking essentially in terms of the injunction sought for the balance of the value of P2’s claim projected (ie HK$8,537,722.94) as well as the ancillary asset disclosure order.  The undertaking would last until further order of the court.  The single disagreement that stood in the way arose out of the plaintiffs’ insistence on retaining the wordings discussed under §§30-31 above, which they now agree to remove. Subject to that, counsel for D1 confirmed during the hearing that his client would stand by such undertaking, even if he succeeds in resisting the injunction. On this basis, he argues that the injunction would in any event be unnecessary.

34.  In line with the discussion in this respect above, I agree with D1.  His undertaking in terms as offered until further order of the court would have sufficed in disposing of the present application.  Whilst the case of the plaintiffs for a Mareva injunction is made out, I would have made no order.  As D1 stands by his undertaking as offered until further order of the court, this will also be the way forward now and upon the handing of the judgment on the relief and order in respect of P2’s claim against the defendants.

35.  In view of the judgment in respect of the relief and order between P2 and the defendants, which entails orders for payment by the defendants to P2 of a total sum of HK$7,096,720.04, the undertaking in terms of value of D1’s assets on top of the payments now in court will also be adjusted to that amount.

Order

36.  Insofar as the Summons is concerned:

Upon D1 having paid into court the total sum of HK$5,837,075 pursuant to his undertaking to the court on 2 August 2021

And upon the further undertaking of D1 to the court that until further order of the court, he will not in any way, or cause others to, dispose of, or deal with, or diminish the value of, any of his assets in any way which are within Hong Kong, whether in his own name or not, and whether solely or jointly owned, up to the sum of HK$1,259,645.04

And upon the further undertaking of D1 to the court to disclose to P2 by way of an affidavit/affirmation within 28 days from the date hereof of all his assets of an individual value of HK$200,000 or more in Hong Kong, whether in his own name or not and whether solely or jointly owned, giving the value, location and details of all such assets.  D1 may be entitled to refuse to provide some or all of this information on the grounds that it may incriminate him.

(1)  No order is made in respect of the Summons.

(2)  The terms of the undertaking mentioned above do not prohibit D1 from:

(a)  Spending HK$24,000 per month towards his ordinary household expenses;

(b)  Spending HK$20,000 per month towards his ordinary living expenses;

(c)  Spending HK$120,000 per month towards legal advice and representation.

(3)  D1 may agree with the plaintiffs’ solicitors that the above spending limit should be increased or that the terms of this undertaking should be varied in any other respect, but any agreement must be in writing.

(4)  There be liberty to apply.

Costs

37.  As counsel indicated during the hearing, costs will probably have to be argued depending on the outcome.  The parties must now consider this court’s conclusion that the plaintiffs have made out a case for the Mareva injunction sought, but that an order would not have been and is not made given the undertaking of D1 which if the plaintiff has accepted, as they should have, the Summons could have been disposed of at a certain point of time by November 2021 without substantive argument. On that note, if the parties still fail to resolve the costs of and occasioned by the Summons by consent, the plaintiffs shall lodge written submissions on costs within 14 days, and D1 to lodge his within 14 days thereafter.  Written submissions, inclusive of appendix or enclosure, if any, shall be succinct and not exceed 2 pages of A4 sized paper in no less than 14 font size and in no less than 1.5 line-spacing.  The issue of costs will be ruled on paper without oral hearing, unless otherwise directed.

HCA 1439/2012

[2021] HKCFI 242

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1439 OF 2012

________________

________________

____________

JUDGMENT

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1.  The main protagonists of this action are the 1^st plaintiff (“P1”) and the 1^st defendant (“D1”), who were behind the business co-operation in question.  Dispute surfaced in about 2009 when trust and confidence between them broke down.  P1 started to demand D1 to disclose documents and for an account of their business venture.  This action was commenced in 2012.  The pleadings have since undergone rounds of substantial amendments, and discovery of documents has continued, including some not without substantive argument before the court.  The issues in dispute arising out of the claim are multiple, and there is also a counterclaim.  Chinese law experts and accounting experts were engaged by the parties, who all testified at the trial.  Mr Chiu appeared for the plaintiffs while Mr Ng, with Miss Ho, appeared for the defendants.

A.      BACKGROUND

2.  Prior to 2002, P1 and his family wholly owned and controlled Everbest Printing Company Limited (“Everbest”), a Hong Kong company in the business of printing and packaging.  Everbest has its factory in Nansha, Mainland China.  In 2002, 49% of the shares in Everbest were sold to a foreign entity, but P1 and his family retained control of the company until the remaining 51% of the shares were sold to that entity in 2005.  P1 however stayed as a consultant of the company.  He withdrew from Everbest completely in June 2006.  By then, P1 was over 70 years old.

3.  Printing Force Company Ltd (“Printing Force”) was at the material time a Hong Kong company in the printing business and a supplier of Everbest.  D1 was a part owner of the company and its sales director.  In such business context, P1 and D1 came to know each other in 1992-1993.

4.  P1 has since reposed much trust and confidence in D1.  This was apparent from various dealings between the parties.  In 1995, the two purchased two shops in Mongkok as investment in equal shares.  The properties were arranged to be held by Kid Art Limited (“Kid Art”), which was a Hong Kong company then owned by D1 and his wife as his nominee.  Not only did P1 leave the management and rental matters of the shops to D1, but he also extracted from D1 no shareholdings in Kid Art or written acknowledgment of his beneficial interest in Kid Art or the invested properties.  Kid Art held a bank account with HSBC which only D1 could operate.

5.  Further, in 2003, P1 and D1 came together to form a joint venture business in the Mainland, which became the subject matter of dispute in this action.  What is not in dispute about the joint venture is that whilst P1 and D1 agreed to share the beneficial interest in and profit from the joint venture, the registered foreign corporate investor of the business was Kid Art.  The joint venture business was also left to be operated and managed solely by D1.  Once again, P1 did not require from D1 any written acknowledgement or declaration of the former’s beneficial interest in the business.  It would appear that such arrangement was the personal preference of P1.  In any event, his trust and confidence in D1 at the time was once again evident.

6.  The joint venture business mentioned above, eventually known as Guangzhou City Hui Guang Packaging Materials Company Limited (“Hui Guang”), and various other related entities came into existence in the following manner.

7.  In September 2003, D1 resigned from Printing Force. According to him, he would be actually leaving his post there in mid-November 2003.  Learning that D1 intended to set up his own printing business, P1 introduced him to his friend, Kenneth Fung (“Fung”), and through whom D1 further came to meet Ho Shing Tung (“Ho”).  This led to D1’s eventual takeover of the printing business then owned or controlled by Ho through a Fine Arts Offset Printing Company Limited (“Fine Arts”).  D1 started operating the new printing business in Hong Kong in mid-November 2003 pending completion of the sale and purchase of the business, which happened later towards the end of the year.  The consideration for the sale and purchase of the printing business was HK$2.8 million.  The ownership of the printing business and printing machines were later transferred to Best Tri Printing Company Limited, the 2^nd defendant (“D2”), for onward sale by its shareholders, of which one was Ho’s wife.  D1 (and his wife) formed Fine Group Trading Limited, the 3^rd defendant (“D3”), another Hong Kong company, to purchase and to hold the printing business of D2.  D1 and his wife were the directors of D3.  It should perhaps be noted that according to P1, of the entities involved in their joint venture business, he had no idea about the existence of D3 until after their dispute arose.

8.  It was around that time in 2003 when P1 had discussion with D1 about the possible joint venture between them in the Mainland mentioned above.  They came to a verbal agreement (“the JV Agreement”).  The idea was that the joint venture would produce and supply carton boxes and packaging materials, which Everbest would also need for its business.  D1 would be solely responsible for the operation and management of the joint venture business, while P1, by virtue of his then control over Everbest, would cause Everbest to place orders with the joint venture to ensure that the new business venture would sustain initial profitability.  It was also agreed that P1 and D1 would respectively own 60% and 40% of interest, and would be entitled to the profits of the new company in proportion to their respective shareholdings.  As a matter of personal preference, P1’s 60% shareholding in the new company would be held either by D1 or indirectly by another company of D1 on trust for him.  So much of these terms of the JV Agreement are undisputed.  Those that are disputed are set out below.

9.  P1 contends that it was agreed that he would provide the bulk of the initial capital for setting up and enabling the joint venture business to reach a state of substantive operation.  In consideration of D1 being given 40% of the shares in the new company and sharing 40% of the profits (without having to contribute towards its capital), D1 would hold 40% of the issued shares in his newly acquired printing business, D2, or cause the same to be held, in trust for P1.  Essentially, P1 would have 40% beneficial interest in D2 pursuant to this trust in his favour (“Trust for D2 Shares”).

10.  D1 denies that there was agreement for P1 to be the sole contributor of the financial capital of the joint venture business. Further, whilst D1 does not dispute that the parties agreed upon P1’s (potential) entitlement to 40% shares in D2, he contends that it was not part of the JV Agreement.  Nor was it in terms as P1 contends.  It was, according to D1, a separate investment agreement between the parties reached prior to the JV Agreement.  According to D1, D1 agreed to give P1 an option to acquire 40% shareholding in his new printing business then being acquired, by paying him 40% of the cost of acquisition of that within a period of 3 years from November 2003.  If P1 did not exercise the option, any sum that P1 might be putting into the new printing business during the 3 years would be regarded as money lent by him to the business (“the Option Agreement”).

11.  There is no dispute that on 24 November 2003, P1 paid D1 by cheque drawn in favour of Kid Art for the sum of HK$400,000.00.  P1 says this was his first payment for the setting up of the joint venture business pursuant to the JV Agreement whereas D1 says this sum was P1’s contribution towards the first HK$1 million payment for acquiring the business of D2.

12.  Kid Art had also raised a HK$500,000.00 loan (“the Kid Art Loan”) from Pacific Finance (HK) Limited (“Pacific Finance”) on second mortgage of the two Mongkok shops.  The loan was utilised for the purpose of D2.  But there is dispute as to the exact purpose.  P1 says that he understood his share of the loan was deployed for the working capital of D2 whereas D1 says that it was P1’s further contribution towards the purchase price of the business of D2 pursuant to the Option Agreement.  What is not in dispute is that the parties already applied the 60:40 sharing ratio to the loan in accordance with the interest sharing ratio between them in D2.  On this basis, P1 was supposed to contribute 40% of the loan, ie HK$200,000, and the remaining HK$50,000 of his half share of the loan money obtained was supposed to be returned to him.  There is no dispute that this HK$50,000 was also extended by P1 to D1 as a personal loan at the request of D1.  It will be seen that D1 purported to return this sum of HK$50,000 to P1 in early 2004, an episode which is not without evidential significance.

13.  In other words, according to D1, P1 has contributed a total sum of HK$600,000, ie HK$400,000 by cheque plus HK$200,000 out of the Kid Art Loan, towards the acquisition of D2.  On the contrary, P1 says the HK$400,000 was his contribution to the capital of the joint venture business while his share of HK$200,000 out of the Kid Art Loan went to the working capital of D2 and not its acquisition.

14.  In March 2004, P2 was set up in connection with the joint venture business.  This Hong Kong company became the corporate vehicle facilitating the implementation of the JV Agreement.  P2 in Hong Kong would collect the business income, then contemplated to be the orders placed by Everbest, and settling the business expenses of the joint venture.  P2 would then distribute the profit between P1 and D2 in the 60:40 ratio.  The parties then contemplated the profit margin from sales to Everbest would be about 11%.

15.  Initially P2 was wholly owned by Gravipas Strategic Holding Ltd (“Gravipas”), a BVI company beneficially owned by P1.  On 24 May 2004, Gravipas transferred all its 10,000 shares in P2 to D1, who simultaneously executed a declaration of trust of the entire 10,000 shares in favour of Gravipas.  In other words, the beneficial ownership of P2 remained with P1 through Gravipas, which D1 held as its trustee.  D1 became the sole director of P2.

16.  In June 2004, the Mainland authorities finally granted approval for the establishment of the joint venture business, Hui Guang.  Kid Art became the registered foreign corporate investor of Hui Guang. D1 became the registered legal representative and sole director of Hui Guang. The factory of Hui Guang was set up in the vicinity of Everbest’s factory in Nansha.

17.  On or about 13 December 2005, 90,000 new shares of P2 were issued.  85,000 of those new shares were allotted to D1 and the other 5,000 were allotted to Ms Wang Yan Yun (“Wang”), who hold the same as nominee of Mr Bowen Lam (“Lam”), a business acquaintance of P1.  D1 then made a declaration of trust as regards 45,000 of those shares in P2 in trust for Gravipas.  The beneficial interest in P2 was thus 55% in P1 (through Gravipas held by D1 as trustee), 40% in D1 and 5% in Lam (through Wang as his nominee).

18.  In late 2005 to 2006, Kid Art was again used as the corporate vehicle for a separate joint venture investment in digital printing business in Beijing (“the Beijing Investment”).  The Beijing Investment involved P1, D1 and various other investors.  In that connection, the shareholding of Kid Art was altered and increased from 2 shares to 10,000 shares. 7,000 of those were held by D1.  It was agreed between P1 and D1 that 6,000 out of the 7,000 shares would be so held on trust for Gravipas.  In other words, P1, through Gravipas, which D1 held as its trustee, remained 60% beneficial owner of Kid Art.  The remaining shares were held by the various investors or their nominees.  In the same year, Kid Art opened an account with DBS Bank for the purpose of the Beijing Investment, which both P1 and D1 could operate.  D1 and his wife remained the directors of Kid Art.

19.  As mentioned, P1 withdrew completely from Everbest.

20.  In 2008, the Beijing Investment ran into problem.  The investors began to pull out, and P1 bought out most of them, thus leaving behind D1, Wang and P1.  Pursuant to P1’s request, on or about 21 May 2008, D1 transferred the 6,000 shares in Kid Art under his name to Gravipas.  P1 became legally 85% majority shareholder of Kid Art. D1 and Wang held 10% and 5% respectively.  P1 was also appointed a director of Kid Art in place of D1’s wife.

21.  In the same year, Hui Guang went into problem as well after less than 5 years of operation.  On 28 May 2008, the Mainland authority issued a writ of execution against Hui Guang, followed by closure of Hui Guang by the court.  The joint venture investment in Hui Guang ended up in total loss.  However, D1 brought such news to P1 and Lam, when they met in Shenzhen only in February 2009.  On that occasion, P1 asked D1 to formally transfer 40% of the shares in D2 to his son.  There is no dispute that D1 communicated to P1 his stance that P1 had to pay a price to be negotiated for purchasing the 40% of shares in D2.  According to D1, he also requested P1 to share his expenses incurred in an attempt to salvage Hui Guang.

22.  The relationship between the parties, including trust and confidence, broke down.  In mid-2009, P1 started to demand D1 for an account of the business of the entities involved in the joint venture business and the production of the business and account documents of P2 and Hui Guang.  The progress and the stance of the parties were documented in the contemporaneous email correspondence between them.

23.  On 9 October 2009, upon P1’s instruction, D1 transferred to Gravipas the 55,000 shares that he held in P2 on trust for Gravipas mentioned above.  After the transfer, 55% of shareholding in P2 was held by P1 through Gavipas, 5% by Wang and 40% by D1.

24.  On or about 24 March 2010, a joint extraordinary general meeting of P2 and Kid Art was held where it was resolved, with P1 plus Wang as the majority, to remove D1 from the directorship of P2 and Kid Art, and to appoint himself as the sole director of P2 and his wife, Ms Wong Wai Bun (“P1’s Wife”), as an additional director of Kid Art.

25.  With the accounting documents that P1 managed to obtain from D1 by the end of 2009 (“the Accounting Documents”), P1 had a certified public account, Yeung Kwok Keung (“Yeung), to study and to carry out audit, who produced his first report dated 11 January 2010 (“the Yeung 1^st Report”) and his second report dated 25 June 2012 (“the Yeung 2^nd Report”).  Various problems and queries were raised regarding Hui Guang and P2.

26.  On 14 August 2012, the present action was commenced.  However, the plaintiffs’ request for documents of P2 and Hui Guang ensued.

B.      THE CLAIM

27.  P1 claims against D1 and/or D3 (which held the shares in D2) for a declaration that D1 or D3 held 40% of all the issued shares in D2 as trustee for P1, and for the necessary vesting order.

28.  Further, the investigation into the Accounting Documents both prior to and subsequent to the commencement of action reveals the following items (“the Items”) that were said to be either falling outside the normal course of business of P2 or not backed up by contracts or supporting documents.  They on their face are said to be irregular, baseless or exorbitant, and ought not to have been paid by P2:

(1)  Management fees paid to D1, D2 and D3 in the total sum of HK$1,270,490.32 for the financial years from 2004 to 2008;

(2)  Payment of invoices of 4 transportation companies which allegedly rendered services to D2 (recorded in P2’s account as P2’s transportation expenses or as amount due from Hui Guang) totalling HK$719,158.00 for the financial years from 2005 to 2008;

(3)  Subcontracting fee paid to D2 (debited against P2’s current account with Hui Guang) totalling HK$2,305,477.37 for the financial years from 2004 to 2008;

(4)  Payment of material suppliers’ invoices for Hui Guang (debited against P2’s current account with Hui Guang) in the total sum of HK$4,174,751.98 for the financial years from 2004 to 2008;

(5)  Various cash withdrawals (recorded as amounts paid to Hui Guang) totalling HK$880,000.00 between 20 June 2005 and 30 January 2008;

(6)  Two cheque payments to D2, one in the sum of HK$232,960.00 on 13 October 2004 (HK$222,759.00 debited against P2’s current account with P1, and the balance of HK$10,201.00 debited against P2’s current account with D2), and the other in the sum of HK$100,000.00 on 14 August 2006 (debited against P2’s current account with Hui Guang); and

(7)  Journal entries found in the current account entries between P2 and D2 were not backed up by any supporting documents.

29.  P2 claims against D1 for breach of fiduciary duty to P2 for failing to give a full account of P2, particularly in respect of the Items, and breach of his duty of good faith to P2 and conflict of interest, which allegedly caused loss to P2 (and Hui Guang) for his own personal gain.  Accordingly, P2 claims against D1 for an account and an order for payment upon taking of such an account.

30.  In connection with the item of subcontracting fees mentioned above, P2 also has a claim on the basis that the defendants’ case in respect of that item is accepted.  It is averred that on such basis, P2 would be the authorized agent of Hui Guang to receive material processing fees incurred in the subcontracting done for D2, and a sum of HK$3,664,319.63 or HK$4,972,500.53 remains outstanding and payable by D2.

31.  P2 claims against D2 and D3 for dishonest assistance or receipt of trust properties, and for an account and an order for payment upon taking of such an account.  Against D2 and/or D3, P2 claims for an account.  Against all the defendants, the plaintiffs claim for further necessary account, enquiries and tracing.

C.      THE DEFENCE AND COUNTERCLAIM

32.  According to D1, P1 and D1 entered into the Option Agreement first.  Upon the subsequent proposal of P1, the parties then entered into the JV Agreement, and therefore the same did not contain the Trust for D2 Shares as alleged.

33.  D1 also denies the alleged breach of fiduciary duty to P2 in respect of the Items.  Insofar as the item of management fees paid to D2 is concerned, the defendants also raise an alternative defence, namely, in the event that the defendants, or any of them, should be liable in respect that item, they should nevertheless be entitled to an allowance for the actual provision of the human resources and management services by them to Hui Guang.

34.  D2 and D3 deny the alleged dishonest assistance or receipt of trust properties.

35.  D1 and D3 counterclaim against P1 and P2 respectively.  D3 counterclaims for the sum of HK$637,360.53 being the outstanding management fees owed by P2.  D1 also counterclaims against P1 is for the sum of HK$689,879.18 being the 60% share of the abortive salvage cost allegedly incurred by D1 for Hui Guang in October or November 2007, which D1 says P1 is liable to contribute pursuant to the parties’ agreement.

D.      THE ISSUES AND WITNESSES

36.  The parties have compiled a joint list of issues.  The majority of the issues are agreed formulation, with a few which the parties disagree mainly as to whether they have the necessary footing in terms of pleading.  The issues discussed below align with those set out in the list, albeit not in their exact formulations, and broadly fall into the following parts:

(1)  The Option Agreement versus the Trust for D2 Shares;

(2)  The fiduciary duties of D1 to P2;

(3)  The Items;

(4)  The question of relief (if and to the extent the plaintiffs’ claim succeeds); and

(5)  The counterclaim.

37.  For the plaintiffs, P1, P1’ wife and Lam mentioned above testified at the trial.

38.  For the defendants, D1, Tam Yim Fan (“Tam”) who was the assistant manager and cashier of Hui Guang, To Wai Chung (“To”) who was the auditor of D2 and D3 between 2004 and 2006, and Tse Yuk Ping (Brenda) (“Tse”) who was the auditor of D2 and D3 since 2011 testified.

39.  In connection with the legal issues arising out of the item of subcontracting fees, Yongjun Peter Ni (“Ni”) and Professor Xianchu Zhang (“Zhang”) were the Mainland law experts engaged by the plaintiffs and the defendants respectively.  They produced their respective written opinion on 27 March 2017 to be followed by their joint report dated 9 June 2017.  Zhang produced his supplemental opinion on 8 August 2017.  They testified at the trial.

40.  The accountancy experts engaged by the plaintiffs and the defendants are Yeung (who, as mentioned, prepared the Yeung 1^st Report and Yeung 2^nd Report) and John Robert Lees (“Lees”) respectively.  Yeung produced his 1^st expert report on 25 April 2016 and Lees produced his on 17 June 2016. Yeung produced his 2^nd expert report on 26 October 2016. They too testified at the trial.

41.  I would quickly mention for the record about Yeung as the plaintiffs’ accounting expert in this trial.  Obviously out of prudence, Mr Chiu made disclosure of information about Yeung that he said had just come to his notice after the trial has begun.  What came to Mr Chiu’s notice was that in 2005, Yeung was the financial controller of a company owned by Fung, the person whom P1 introduced to D1 as mentioned above.  P1 later became a shareholder of that company, but Yeung has not come to know P1 personally by the time when he resigned from that company a year later.  Yeung was subsequently introduced by Fung in around September 2009 to undertake the examination of the Accounting Documents for P1.  Yeung was also engaged as an auditor of North Pine Limited, which, as mentioned above, was beneficially owned by P1, as well as an auditor of another company of which P1 was a nominee director.  Other than that, Yeung and P1 are not personal acquaintances.  In his evidence, Yeung also gave evidence of the above background.  Throughout the trial until closing, no issue was taken by the defendants as to the independence of Yeung as an expert.  Nor am I impressed that there should be.

E.      THE OPTION AGREEMENT VERSUS THE TRUST FOR D2 SHARES

42.  This is a question of fact.  Counsel refer to numerous authorities in respect of the approach in assessing evidence and credibility.  The assessment entails consideration of undisputed facts, contemporaneous documents, inherent and relevant probabilities: see Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd, HCA 1957/2005 (28 July 2011) at §§21-24; Hui Cheung Fai v Daiwa Development Ltd (unreported) HCA 1734/2009 (8 April 2014) at §§76-81.

43.  Counsel also refer to the circumstances that allow the court to draw adverse inference from the absence of silence of a witness who may be expected to have material evidence to give on an issue: see for instance, Pacific Electric Wire & Cable Co Ltd v Texan Management Ltd & Ors, CACV 90/2012 (17 September 2013) at §§106-107, citing the principles set out in Wisniewski v Central Manchester Health Authority [1998] PIQR 324 at 340 and Prest v Petrodel Resources Ltd [2013] UKSC 34 at §44.  The incidence of the burden of proof of an issue and that of explaining matters concerning an issue when reasonably called upon or fairly expected to do so will have bearing on the application of this principle.  It does not appear to me that these principles are in dispute.

44.  As discussed below, it becomes clear that the major context in which the plaintiffs ask this court to draw adverse inference against the defendants is the explanation of the circumstances surrounding and the reasoning behind the treatment of the Items in the accounts.  In such context, it is indeed true that Jacky Chan, the account clerk, and Jacky Liu, the auditor, at the relevant time were not called as witnesses.

E1.    The evidence

45.  Much is said about the evidence of P1 and D1 in respect of the dates of the relevant events.  As mentioned, there is dispute as to the sequence of the JV Agreement and the Option Agreement alleged by the parties respectively.  The fact is that neither’s evidence in this respect was completely coherent.  It is really the construction of the sequence and content of the events, with reference to the available contemporaneous documents, that matters.

46.  According to P1, he learned about D1’s resignation from Printing Force, which undisputedly happened in September 2003.  It was upon D1’s expression of the intention to start his own printing business then that P1 introduced him to his friend, Fung.  Through Fung, D1 came to meet Ho, who D1 understands owned or controlled the printing business being sold.  P1 was not involved in the acquisition of D1’s new printing business.  There is no dispute that D1 started to operate his new printing business in mid-November 2003.  According to P1, it was in late November 2003 when D1 consulted P1 on this new printing business that P1 proposed their setting up of a joint venture business.  As a result, the two met at P1’s office in Nansha.  The JV Agreement was made, and P1 made payment on 24 November 2003 towards the initial capital of the joint venture to be set up.

47.  According to D1, he met Ho in about mid-October 2003.  They then engaged in negotiation for the sale and purchase of Ho’s printing business, including eventually agreement on the consideration for that at HK$2.8 million.  D1 stated that it was in late October 2003 when he invited P1 to consider if the latter would be interested in investing in his new printing business as well.  That brought about their meeting, where D1 informed P1 that the former would start operating the new printing business in November or December 2003.  Then the Option Agreement was reached.  In court, D1 said that the Option Agreement was reached when they met during the first half of November 2003.

48.  According to both P1 and D1, the former only made introduction that led to the latter’s negotiation and eventual agreement for the acquisition of the new printing business.  There is no dispute that P1 was not involved in such negotiation or agreement.  However, had D1 conceived the idea of co-investing with P1 in the printing business to be acquired, one would have expected him to have mentioned this plan to P1 before meeting or negotiating with whoever D1 got to know upon P1’s initial introduction.  It is not so much about whether P1 would then have been involved in the actual negotiation with Ho.  The past dealings between P1 and D2 tend to show the pattern of P1 so that he could probably have left it to D2 to handle the matter anyway.  It is more about the inherent probability of D2’s version, which effectively suggests that the idea of co-investment with P1 in the new printing business somehow came about between mid-October and early November 2003 after he had already come to agreement with Ho for the acquisition of the printing business.  Hence the credibility of the alleged discussion leading to the Option Agreement.

49.  D1 questions the lack of declaration of trust in respect of the Trust for D2 Shares alleged by P1. Instances such as the declarations of trusts in respect of the shares in P2 subsequently arranged to be executed by D1 in favour of Gravipas concerning P2 in 2004 and 2005 (mentioned above) are referred to.  However, putting aside any specific reason for those subsequent declarations of trust, I see the fact of those declarations to have existed side by side with the undisputed lack of any form of written acknowledgement of P1’s beneficial interest in the parties’ not insignificant co-investment in the Mongkok shops prior to the JV Agreement and of P1’s beneficial interest in the joint venture business of Hui Guang pursuant to the JV Agreement.  There is nothing inherently improbable about the lack of written acknowledgement or declaration to evidence the Trust for D2 Shares alleged by P1.  This to me is a neutral consideration in the circumstances.

50.  According to D1, the option to P1 to become a shareholder of D2 would last for 3 years from November 2003.  It is unknown why the alleged commitment of P1 to invest in the new printing business of D1 would have to take the form of an option and for such duration.  As far as D1 was concerned, he seemed to be in need of finance for acquiring the business.  The term D1 reached for the acquisition of the new printing business was to pay the agreed consideration by instalments in 4-5 months.  As far as P1 was concerned, his financial ability as well as trust and confidence in D1 in running business at the relevant time should not be doubtful.  There is no suggestion that P1 needed the time either for financial reason or for observation about D1’s performance in his new printing business. Quite on the contrary, according to D1, his confidence that P1 would exercise the option sufficed to cause him to already recognise and treat P1 as a 40% shareholder of D2 immediately.  Evidence of that will be discussed below.

51.  P1 honestly was unable to recall precise dates.  Nor was D1 actually.  However, P1 was reminded by other incidents and contemporaneous documents that were relevant and proximate in time.  According to him, the idea of forming a new joint venture business with D1 came about around the time when another joint venture of his in similar business in the Mainland did not turn out well, and problems about the financial situation and mismanagement of that venture became clear in late November 2003.  P1 was referring to his joint venture business with a Bolem Kay (“BK”) by the name De Bao Paper Factory in the Mainland (“De Bao”), from which Everbest used to obtain the supply of packaging materials such as carton boxes.  The email from BK dated 22 November 2003 confirmed the difficult situation then.  The email also revealed a similar pattern of P1 leaving the management of De Bao to BK.  According to P1, it was the timing of such situation and the opportunity arising out of D1’s new business venture that caused him to propose co-operation with D1.  On 24 November 2003, he caused a cheque to be drawn for his first contribution towards the initial capital of the joint venture.  He was adamant in his evidence about the purpose of such contribution as opposed to that alleged by D1.

52.  The above evidence of P1 is questioned on the basis that he is described as having effectively jumped at the decision of setting up a new joint venture to replace De Bao and coming to agreement with D1 within literally just days between De Bao’s email and P1’s payment of the HK$400,000.  In my view, this is not a fair reading of P1’s evidence.  It was never the evidence of P1 that the idea of forming a new joint venture with D1 to replace De Bao came about only as a result of and subsequent to that email.  When he referred to De Bao in his witness statement, P1 made clear that De Bao was not making profit and finally that email dated 20 November 2003 confirmed the mismanagement and liquidity problem in that venture.  In view of P1’s pattern of handling investment, the fact that he would come to agreement with D1 at the meeting (arranged after that email) in late November 2003 and then made payment towards the setting up of the new joint venture, in my judgment, is not inherently improbable.

53.  To clear any doubt, though, I should mention a couple of other points which may cause query.

54.  First, it can be seen that throughout his pleading and witness statement, P1 made references to the new printing business introduced to D1 by the name of D2 well from the outset. The evidence however tends to suggest that the name of D2 might have entered into the picture only just before December 2003 and thus prior to the JV Agreement. Apparently, the sale and purchase of the new printing business was originally intended to be effected by way of asset transfer, though somehow only two offset printing machines (described by D1 as the soul and spirit of the printing business) were involved, at the agreed consideration.  The vendor and transferor was one Fine Arts Offset Printing Company Limited (“Fine Arts”), which apparently operated the printing business under the control of Ho.  This later changed to become share transfer together with the assets.  What happened, according to D1, was that the machines were transferred by Fine Arts to the shareholders of D2, one of which was Ho’s wife, before the shareholders of D2, as vendor, transferred their shares together with the machines.  Hence the formal sale and purchase agreement entered into on 8 December 2003 between the shareholders of D2 as the vendors and D3 as the purchaser (“the 8/12/2003 Agreement”).

55.  There may be question as to how the eventual identity of the corporate vehicle owning the new printing business acquired by D1 came to be known by P1 at the time of the JV Agreement in late November 2003.  Considering all the circumstances, I think P1 probably did not at the time.  P1 quite consistently claimed no involvement or contemporaneous knowledge about how the new printing business was acquired by D1 or its terms.  He claimed no idea about the existence of D3 being formed to hold D2 until after the dispute in the present case has arisen.  I believe that.  The plaintiffs’ pleadings and witness statement were all compiled well after these facts were known, and there is nothing sinister about P1’s references to D2 and not Fine Arts for the purpose of identification of the relevant party in these court documents.

56.  Second, it became clear from the evidence in court that the Trust for D2 Shares under the JV Agreement might not have been agreed in terms as precise as that pleaded at the same time as the other terms.  In his witness statement, P1 explained that the term was agreed after the parties agreed that the initial capital to be registered for the new joint venture would be US$140,000, which P1 undertook to pay.  In court, he accepted that the registered capital investment amount of US$140,000 for the joint venture became known in early, most probably by February, 2004.  That said, and putting this together with all the other evidence, I will not say that this affects the integrity of P1’s evidence in respect of the Trust for D2 Share as a term of the JV Agreement between the parties.  It was only the exact percentage that might have been fixed by February 2004 upon the registered capital investment of Hui Guang being known.

57.  The cheque dated 24 November 2003 for HK$400,000 paid to Kid Art referred to above was drawn by D1 on the bank account of North Pine Ltd (“North Pine”), another company of P1’s. As mentioned, D1 said that this was payment by P1 as investment into D2 pursuant to the Option Agreement.  In support, he relied on his own acknowledgement of receipt written on a photocopy of the voucher in respect of the deposit of that cheque into the HSBC account of Kid Art on 24 November 2003.  According to him, it was P1 who presented to him the photocopy and asked him to acknowledge receipt of that during their meeting at Everbest’s office at Nansha in late November 2003.  In other words, D1 had no knowledge about the drawing and the deposit of the cheque, which was allegedly done by P1.

58.  P1 refuted the above allegation.  According to him, he just gave D1 the cheque.  P1 discovered among the documents disclosed by the defendants a HSBC counter advice on the balance of the HSBC account of Kid Art dated the same date as the above deposit voucher.  It bore the signature of D1 who obtained such advice.  It was printed one minute immediately after the time of the deposit as per the deposit voucher.  As Mr Chiu put it, this put D1 squarely at the bank one minute after the cheque was deposited there.  His version of P1 depositing the cheque and then produced the deposit voucher only when they met afterwards could not possibly be true.  When his version of how he came to write the acknowledgement on the deposit voucher is rejected, the evidential value of that in support of the truth of what the self-serving content of the acknowledgement became nil.

59.  Then there was the Kid Art Loan in the sum of HK$500,000 obtained from Pacific Finance.    There is no dispute that the parties acknowledged share of the loan for the purpose of D2 in the 60:40 ratio.  According to P1, that was in line with the understanding under the Trust for D2 Shares whereas according to D1, this was based on the understanding under the Option Agreement.  Both parties suggested that the loan was probably arranged in about October 2003.  D1 therefore argues that there had to be consensus between the parties regarding the 60:40 ratio for the purpose of D2 prior to the discussion and arrangement for such finance.  It follows that such consensus could not be reached under the JV Agreement, which was reached only in late November 2003 as alleged by P1.

60.  Indeed, P1 actually referred to the discussion about the Kid Art Loan after the JV Agreement had been reached in November 2003, but at the same time referred to his understanding that the loan was taken out in September or October 2003.  The need to reconcile the evidence was apparent.  P1 was indeed asked about this in court. Essentially, P1 claimed no prior knowledge about the application for the loan, and he came to know about that only afterwards.  Effectively, he agreed to join in to share the loan as represented by D1 to him. As other matters, the loan arrangement was made by D1, who was in a position to do so as it was he who controlled Kid Art then.  As mentioned, D1 said in court that it was during the first half of November 2003 when the Option Agreement was reached.  In other words, the Kid Art Loan would have been arranged prior to the Option Agreement even on the basis of D1’s case.  There was therefore no real inherent inconsistency or improbability in the evidence of P1 in this respect, if fully understood.

61.  The timing aside, the parties also differ in respect of the purpose of the Kid Art Loan.  D1 says this was applied to foot the bill for the cost of acquisition of D2 whereas P1 says he was given to understand that this was for liquid or working capital of D2.  P1’s share of that was HK$200,000.  As to the balance of HK$50,000 of his share of the loan, it was also lent to D1 personally.  Some evidence is particularly relevant to this dispute.  The Mongkok properties were apparently put for sale in late 2003, which was completed in December 2003.  According to P1, that was also handled by D1 through Kid Art.  Net of repayment to Pacific Finance (including the Kid Art Loan), the net proceeds were distributed between the two of them with each receiving a little less than HK$1.7 million.  The HK$50,000 out of P1’s share of the Kid Art Loan, which was lent to D1, had to be repaid.  Because of that, D1 caused Kid Art to draw the cheque dated 23 February 2004 for the sum of HK$50,000 payable to North Pine, P1’s company.  As mentioned, the parties by then already knew the registered capital investment of Hui Guang, and, according to P1, fixed the percentage for the Trust for D2 Shares.  Hence 40% of the beneficial interest in D2 for P1.  D1 made his own note on a photocopy of the cheque of such breakdown, namely that because of the capita shares (D1 60% and P1 40%), D1 had to repay HK$50,000 (out of the loan amount) to P1.  In addition, he himself recorded in the note that the Kid Art Loan was for the liquid capital (“流動資金”) of D2.  This record by his own hand, not being self-serving but adverse to his case in respect of the purpose of the Kid Art Loan, cannot be ignored.  D1 tried to explain that in court, which did not impress me.

62.  Whilst D1claims that the contributions by P1 (HK$400,000 and his HK$200,000 share of the Kid Art Loan) all went to finance the acquisition of D2, the tracing of such deployment of the funds was not entirely clear.  D1 explained that HK$1 million of the agreed consideration had already been paid by 1 December 2003.  Hence record of that in the payment schedule in the 8/12/2003 Agreement.  Whilst he claimed that this was partly funded by P1’s payment and the Kid Art Loan mentioned above, the tracing of that was also not clear.  Nor could D1 cast light on this in his evidence.  Further, whilst the 8/12/2003 Agreement set out the agreed payment schedule of the balance by two instalments on 29 January 2004 and 30 April 2004 respectively, there was the receipt for what was said to be the balance of the agreed consideration in the sum of HK$800,000 dated 15 December 2003, and it was somehow still issued by Fine Arts.  It is difficult to correlate the payment of this sum with the payment schedule under the 8/12/2003 Agreement.  There was leasing documentation concerning D2 in January 2004, and the 2005 financial statement of D3, which purchased the shares of D2, indeed recorded the purchase of D2 as a non-cash transaction because the consideration of HK$2.8 million was said to be financed by leasing.  The overall effect of the evidence, the plaintiffs say, cast doubt on D1’s case that P1’s payment and his share of the Kid Art Loan were contribution towards the cost of acquiring the new printing business of D2.

63.  I now turn to the observation mentioned earlier, namely that notwithstanding the alleged lack of exercise of the option by P1 during the option period under the Option Agreement, the evidence clearly shows that P1 was for all intents and purposes treated as a vested 40% beneficial owner of D2.  In a way, D1 did not dispute his such treatment of P1 but for a reason.

64.  There was a cheque drawn against the HSBC account of Kid Art in March 2006 with the corresponding deposit voucher of the DBS account of Kid Art dated the following day for the sum of HK$200,000.  A note dated 14 March 2006 written by D1 under the heading of P1’s name recorded such deposit of HK$200,000 as the declared dividend of D2 for 2004-2005.

65.  On a copy of the bank statement of the BEA account of D1 up to May 2006, D1 made a handwritten record that HK$200,000 from the sale of scrap by D2 would be distributed between P1 and D1.  In another note dated 8 June 2006 under the heading of P1’s name, D1 set out the breakdown of how this HK$200,000 dividend was apportioned to P1, namely, HK$200,000 x 40% = HK$80,000.  After deducting P1’s share of the tax liability of Kid Art in the sum HK$25,000, the net balance of HK$55,000 was deposited into the BEA account of P1.  This explained another cheque drawn by D1 in favour of P1 in the sum of HK$55,000 dated 6 June 2006.

66.  By pleading, D1 denied that the first sum of HK$200,000 mentioned above was dividend to P1 but repayment of P1’s share of the Kid Art Loan at P1’s request made in early 2006.  When it came to his witness statement in this respect, D1 explained that that this sum was however treated as dividend to P1, serving what he described as a “sweetener” to induce P1 to exercise the option for the 40% shares of D2 under the Option Agreement.  However, D1’s own written record mentioned above was an unequivocal reference to dividend payment instead of its alleged tentative nature.  D1 said the same about the nature of the other dividend from D2 derived from the proceeds of scrap, out of which HK$80,000 was apportioned to P1.

67.  It sounds odd that faced with P1’s alleged demand for repayment, when P1 had not and by such demand indicated that he would not exercise the option after 2 years had already elapsed, D1 would somehow see fit to give P1 dividend as “sweetener” with a view to inducing P1 to exercise the option.  If D1 remained confident even up to the latter half of the last year of the 3-year option period that P1 would exercise the option, it also sounds odd that he would somehow consider it to be necessary to induce P1 to exercise the option and to do so by actually distributing dividend.  In any event, on the basis of the prevailing general trust and confidence P1 had in D1, one would have expected that express recognition by D1 of P1’s potential beneficial interest in D2 would suffice.  There is no suggestion or evidence that P1 expected or demanded dividend from D2 when, according to D1, P2 must clearly know that his entitlement to that still depend upon whether he would exercise his option.

68.  D1 claims that when it became clear to him that P1 would not exercise the option, the money that P1 put into D2 – according to him, a total sum of HK$600,000 (HK$400,000 by cheque plus HK$200,000 from the Kid Art Loan) as mentioned above – would be treated as P1’s loan to D2.  It would then follow that the above sums of HK$200,000 and HK$80,000 paid to P1 in March and June 2006 respectively would have to be treated as repayment of P1’s loans.  If this was ever the understanding of the parties, P1 would have been expected to demand for the repayment of the outstanding debt from D2.  He did not, even prior to the breakdown of their co-operation, which happened in 2009.  In his evidence in court, D1 somehow made reference to some other settlement with P1, which was out of the blue.

69.  Perhaps not as implicating as the distribution of dividend, D1 has undisputedly rendered annual financial statements of D2 for 2005 to P1, while D1 was not a beneficial owner of the company under the Option Agreement.

70.  Last, putting aside the dispute as to the exact moment of the day when he did so, P1 did request D1 on the day when the parties and Lam met at Shenzhen in February 2009 to transfer 40% shares of D2 to his son.  According to his witness statement, D1 responded that P1 might do so if he would pay up his 40% of his investment and reimburse D2 60% of the alleged salvage expenses spent on Hui Guang.  The request by P1 should have been surprising to D1, given that P1 did not just let the option under the Option Agreement lapse but positively confirmed that he would not exercise the option back in 2006-2007, notwithstanding the “sweetener dividend” approach of D1.  It is equally surprising for P1 to make such a request, which would have been knowingly and utterly unreasonable.

71.  Contrary to D2’s case, the understanding of P1 was that he would be responsible for the bulk of capital investment in the joint venture.  Hence the backbone of the Trust for D2 Shares.  There is no dispute that in addition to the HK$400,000, P1 has subsequently put in a total sum of RMB810,000 into the joint venture, as set out in a record prepared by D1 among the Accounting Documents.  That basically met Hui Guang’s initial capital investment requirement of US$140,000 mentioned above.

72.  Insofar as this is to refute P1’s case mentioned in the preceding paragraph, D1 claims that he had also put in capital investment in the total sum of about HK$350,000 into Hui Guang.  He referred to the relevant records of those by August 2004 in the general ledgers of Hui Guang.  P1 queries whether any such payment, if at all, in fact came from D1’s own source independent from P1’ contribution.  P1 raises such query on the basis that his payment went into the HSBC account of Kid Art, which was under D1’s sole control.  The utilization and movement of funds after P1’s HK$400,000 injection should be identifiable from the relevant bank statements of that account of Kid Art, but the same are not available.

73.  P1 also queries the numerous withdrawals from P2 since January 2005, including 2 sums of HK$100,000 in February and May 2005 into D1’s personal bank account.  In cross-examination D1 sought to refer to an alleged documentary record of the 2 sums as dividends distributed among P1, D1 and Lam.  The document was not put to P1 or Lam in their evidence in court.  The nature of the document and its compiler were also unidentified.  Insofar as the document was said to document distribution of dividends among the beneficial owners, both the timing of the distribution and the recipients recorded are questionable.  Further, with D1’s written approval, such dividend distribution was subsequently adjusted by the auditor of P2 from dividend to amount due to D1 as director.

74.  As to Lam, his evidence was brief, and gave the impression he was a mere investor.  He frankly admitted that he was unable to recall the details, partly because of the lapse of time and partly because what he considered to be a relatively insignificant investment in the present case compared to his other investments.  However, he was certain that there had never been any general meeting or receipt of financial statement or report from D1 concerning P2 or Hui Guang.

75.  P1 and, even more so, Lam impress me that they were never hands on insofar as the operation and management of the joint venture business and the related companies were concerned. According to P1, after his complete withdrawal from Everbest in 2006, the business between Everbest and Hui Guang also became a matter for the former’s purchasing department.  This was consistent with P1’s pattern of dealings with D1 all along, and tends to cast doubt on the reliability of D1’s alleged practice of not only rendering annual financial statements but also consulting P1 on matters such as pricing.

76.  As to the meeting with P1 and D1 in Shenzhen on February 2009, when D1 brought them the news of the closure of Hui Guang, Lam recalled hearing P1 say that the latter had 40% in a Hong Kong company and the 40% share swap of Hui Guang and that Hong Kong company. Within Lam’s earshot, P1 mentioned his intention to sort out the matter with D1 and asked D1 to transfer the 40% shareholdings in the Hong Kong company to P1’s son.

E2.    Findings

77.  Considering all the evidence, including those specifically discussed above, on balance, I prefer the evidence of P1 and his witnesses, and make the following findings:

(1)  I find against the existence of the Option Agreement.

(2)  The JV Agreement contained the terms as alleged by P1.

(3)  Pursuant to the JV Agreement, P1 paid the sum HK$400,000 by cheque on 24 November 2003 as part of the initial capital required for the setting up of the joint venture.

(4)  Of the Kid Art Loan, HK$200,000 of P1’s share was intended to be deployed as the initial running capital of the business of D2 and the remaining HK$50,000 extended as a personal loan to D1.

(5)  The sum of HK$200,000 transferred by Kid Art on 16 March 2006 was dividend of D2 declared by D1, of which 40% amounting to HK$80,000 went to P1 pursuant to the Trust for D2 Shares.

(6)  Of the sum of HK$200,000 derived from D2’s sale of scrap, HK$80,000 was allocated to P1, who ultimately received a net balance sum of HK$55,000 by cheque on 6 June 2006 from D1 (after deducting HK$25,000 tax of Kid Art that P1 had to bear), it was dividend in accordance with P1’s 40% beneficial interest in D2 under the Trust for D2 Shares.

(7)  D1 provided P1 with the report and financial statement of D2 for the year ending 31 March 2005 on the basis that P1 was the 40% beneficial owner of D2.

E3.    Whether the Trust for D2 Shares is enforceable

78.  The defendants raise a further issue, as their alternative case, which the plaintiffs disagree.  The defendants contend that even if the JV Agreement contained the term in respect of the Trust for D2 Shares, the court cannot enforce the trust.

79.  Mr Ng argues that the trust for the Hui Guang shares were not constituted until D1 was given the Hui Guang shares and shared in its profit.  The Plaintiffs are seeking to enforce the term of the JVA as if the trust has already been constituted as consideration in support of the Trust for D2 Shares.

80.  Mr Chiu argues that what P1 has pleaded in the circumstances (at the time of the JV Agreement) was an executory agreement because both parties knew that the joint venture had yet to come to being.  It should be clear as a matter of fact to the parties when the JV Agreement was concluded.  It must be understood by the parties to mean an agreement to enter into such a trust when the joint venture would be established.  The undisputed fact was that in early 2004 the trust for Hui Guang shares did come into existence and was held by Kid Art as to 60% for P1 and 40% for D1.  The declaration sought now is to enforce a term of an executed agreement.  The promise to perform was in fact performed, and this constituted good consideration for the Trust for D2 Shares.  I agree.

81.  Mr Ng also raises the concern about the impact of the change of the shareholdings in Kid Art on the trust for Hui Guang shares.  D1 now holds only 5% of Kid Art (with P1 holding 85% and Wang holding 10%).  The eventualities were that Kid Art and Hui Guang are both defunct.  But Mr Chiu submits that that could not affect his client’s beneficial entitlement to the shares in D2 under the Share for D2 Trust.

82.  Mr Chiu submits that Kid Art was in law a legal person who was capable of acting as a trustee for others.  It was such, insofar as Hui Guang was concerned.  So was it, insofar as the Beijing Investment was concerned.  Regarding the former, Kid Art was the vehicle holding all the shares of Hui Guang as a trustee, and must execute such trust in accordance with its terms.  If Hui Guang should declare a dividend, the dividend would be proceeds of trust properties and must be distributed in accordance with the terms of the trust regarding Hui Guang, not the apparent interest of the legal shareholders of Kid Art.  I also agree.

83.  In the circumstances, P1 is entitled to the declaration of his 40% beneficial interest in D2 being held by D1 through D3 on trust for him, and the transfer of the same to him as claimed.

F.       FIDUCIARY DUTIES OF D1 TO P2

84.  The major contentions of P2 is that D1 in his capacity as the director of P2 owes it fiduciary duties, in particular the duty to account, including that to render a true and just account of P2, as well as the duty to act in good faith and to avoid conflict of interest with P2.  P1 contends that D1 cannot realistically discharge such duty without explaining the accounts and affairs of not only P2 but also Hui Guang in the circumstances of this case.  This is due to the specific role of P2 in relation to the joint venture business.

F1.    General

85.  The statutory and common law bases for the alleged duties are referred to.  Insofar as the former is concerned, there is no dispute that the predecessor of the current Companies Ordinance, Cap 622, ie Companies Ordinance, Cap 32 (“CO”), is the applicable legislation at the relevant time of the present dispute.

86.  Insofar as the duty to render just and full account is concerned, references are made by P2 to the following provisions:

(1)  Sections 116B (1), (7), (10) and 116BC (1), (3), (5), (6); 119 (1) and (4) (duty of the directors to enter resolutions and keeping of minutes of general and directors’ meetings); and

(2)  Sections 121 (1), (4); 122 (1), (3); 123 (1); 129B (1), (3) (duty of directors to keep books and account which should give and true and fair view of the state of affairs of companies).

Insofar as the duty of no conflict is concerned, references are made to the following provisions:

(3)  Sections 129D (1), (3) (j); 129F; 162 (1), (2), (5) (duty to disclose contracts involving conflict of interest by directors and the manner of this is to be done);

(4)  Sections 161 (1), (8); 161C (1) (duty to disclose director’s emoluments); and

(5)  Section 162A (disclosure of management contracts).

87.  Whilst specific penalty provisions for infringement of the above provisions exist, the statute does not serve to remove the applicability of the common law which imposes the duty: see Man Luen Corporation (a firm) v Sun King Electronic Printed Circuit Board Factory Limited [1981] HKC 407 at 413.  It is the breach of the duties imposed by the general law that affords the company the right to seek relief against the director.

88.  The duty to act in good faith entails not only the lack of mala fides but also the duty to act reasonably for the purpose of the company and in the best interest of the company: see Re Smith and Fawcett Ltd [1942] Ch 304 at p 306. A director, similar to an agent, has a duty not to put himself in a position of conflict of interest with his company: see Regal (Hastings) Ltd v Guilliver and Others [1967] 2 AC 134 (HL) at pp 137, 138.

F2.    Duty to account

89.  In connection with the duty to account, Art 50 of Bowstead and Reynolds on Agency (21^st Ed) at p 282 describes the following specific duties of the agent:

(1)  Where he holds money or property belonging to his principal, to keep it separate form his own and form that of other person;

(2)  To preserve and be constantly ready with correct accounts of all his dealings and transactions in the course of his agency;

(3)  To produce to the principal upon request, or to a proper person appointed by the principal, all books, correspondence and documents (including emails and other electronic materials) under his control relating to the principal’s affairs.

There is no reason why the same should not apply to a director.

90.  I agree with Mr Ng that the burden lies with P2 to establish the liability to account: see MA (HK) Ltd & Anor v Yeung Yuk Sing & Ors, HCA 1641/2010 (31 October 2017) at §§47-50.  However, Mr Chiu is equally right in submitting that in view of the director’s duty to keep and render true and proper account (as mentioned above), once doubt as to whether that was properly done is established on the facts, the burden is on the director to establish the propriety of any particular payment and to account for it, failing which everything is presumed against him: see Psycare Ltd v. Mundy & Ano [2013] EWHC 4573 at §§ 30 to 31, citing Ross River Limited & Anor v Waverley Commercial Limited & Ors [2013] EWCA Civ 910 at §§64 and 94; Boustead (above) at §6-092.

91.  Mr Ng emphasizes that a director only owes fiduciary duties to the company, not to other companies or bodies corporation with which the company is associated, eg its holding company or subsidiary: see Gore-Browne on Companies (Vol 1) at §15(8).  Based on the principle of separate legal entities, that is.  Mr Chiu does not dispute this legal proposition, but he argues that this proposition does not answer the question as to the scope of the director’s fiduciary duties to his company, which depends on the facts and circumstances of the case.

92.  Both counsel recognise that how the fiduciary duties are applied to the facts in any given case can only be ascertained by reference to the nature and character of the particular relationship in question: see Kao Lee & Yip v Koo Hoi Yan & Ors [2003] 3 HKLRD 296 at §48; Poon Ka Man Jason v Cheng Wai Tao (2016) 19 HKCFAR 144 at §87 (in the context of the no-conflict duty).  Both counsel refer to the so called “scope of business test”.

93.  For the purpose of ascertaining the scope of the fiduciary duties of D1 owed to P2, I start by considering the purpose of setting up P2 as well as the nature and character of the relationship between P2 and the joint venture business, Hui Guang.  P2 and Hui Guang were not associated but clearly related companies, and P2 also had a specific role in relation to the joint venture business.

94.  According to D1, the original idea was to use P2 as the investing foreign corporate vehicle of Hui Guang.  The fact, as mentioned, was that the parties eventually used Kid Art instead as the vehicle.  The role of P2 in fact became that to facilitate the implementation of the joint venture.  It had no production activity.  Nor did it have any business independent from the joint venture.  According to the pleadings and evidence of the parties, the role of P2 was collecting the income generated from the business of Hui Guang, and defraying the expenses incurred by Hui Guang in its business.  However, the parties differ as to the precise scope of P2’s such role.

95.  The plaintiffs contend that P2’s role was always intended, and in fact, the “pocket” of the joint venture business so that all the profits of Hui Guang, after defraying the expenses of Hui Guang, would be channelled to P2 for distribution between P1 and D1.  On this basis, anything which was done by D1 in respect of Hui Guang that had the effect of reducing the income from or increasing P2’s cost burden to Hui Guang were matters that D1 has to account to P2 in discharge of his duty to P2.  The matters now complained about by P2, including the Items, are those that D1 did or caused to be done with such effect on Hui Guang and P2 only to the benefit of him or his companies (D2 or D3).  Hence breach of D1’s fiduciary duties to P2.

96.  D1 disagrees, saying that the role of P2 was to provide management services to Hui Guang, and from which P2 was entitled it to an agreed 11% of the income of Hui Guang as its commission. This was maintained at least until the business of Hui Guang fell into loss. On this basis, whatever that D1 might have done with effect on Hui Guang did not affect such entitlement of P2.  The accounting arrangements of P2 and Hui Guang, D1 says, reflected this.  Every item paid by P2 for Hui Guang would be reimbursed by Hui Guang’s sales income collected by P2 on behalf of Huu Guang. Even assuming that D1 did or caused to be done anything causing loss to Hui Guang, that would have remained the loss of Hui Guang and thus breach of D1’s duty to Hui Guang, not P2.

97.  D1 relies on a service agreement between P2 and Hui Guang which was dated 1 April 2004 (“the Service Agreement”).  The Service Agreement was signed by D1 for and on behalf of Hui Guang, and by Jacky Chan for and on behalf of P2.  The short agreement essentially provided that P2 agreed to provide services such as banking and financial services (including arranging settlement on behalf of Hui Guang to suppliers and contractors as well as banking in the payment received from the customers of Hui Guang in Hong Kong).  In consideration of such services, Hui Guang agreed to pay service fee based on 11% of its monthly sales.  D1 also relies on the financial statements of P2 that treated and recorded such percentage as the income of P2 either as service fee or commission income from its business of providing management service for Hui Guang.

98.  As to the Service Agreement and the financial statements, which came about as contemporaneous documents, P1 claims no knowledge about them until after the dispute between the parties arose.  Essentially, his case is that they were designs without his prior knowledge, and they did not align with the understanding at the time of the JV Agreement.  They, Mr Chiu submits, do not serve to define the role of P2 or limit the scope of D1’s fiduciary duty to P2.

99.  P1’s case is not surprising, in the light of his pattern of leaving the operation and management of their co-operations to D1.  P1’s demands for accounting documents of P2 and Hui Guang since the breakdown of trust and confidence between the parties in 2009 evidence the genuine lack of knowledge about these mechanisms of implementation of the joint venture on the part of P1.  The Service Agreement also strikes me as a design in the form of a contract to regularize P2’ business of handling of the income and expenses of Hui Guang in Hong Kong as well as its own accounting of income and expenses.  D1 actually confirmed in court that this was the design of Jacky Liu, whom he consulted and Jacky Liu subsequently was appointed as the auditor of P2.  The design was apparently based on the profit margin then estimated to be about 11% of Hui Guang’s sales when the JV Agreement was entered into.

100.  At the time of the JV Agreement, the 11% profit margin came about with specific reference to sales to Everbest.  As found under the first main issue above, the parties then contemplated the source of business of Hui Guang during the initial stage would be the orders from Everbest and that 11% was the estimated profit margin from such orders.  That is the plaintiffs’ pleaded case, properly read.  So was P1’s evidence.  In that sense, that was all the profits from the joint venture business.

101.  Of course, and as Mr Chiu points out, there had to be business other than from Everbest, and the estimated percentage of profit margin applicable to Everbest could not possibly be understood to be applied across the board with other customers which might come to do business with Hui Guang with their own pricing policy.  That was also the fact.  I can therefore understand the surprise that P1 has about the defendants’ contention that first, P2’s role was limited to receive and retain 11% of the sales income of Hui Guang in the form of commission income for the distribution between P1 and D1; and second, any other profits from the joint venture business would somehow not be for P2 to keep for distribution between them.

102.  Indeed, D1’s stance is that such “remaining profit” should be transferred to the DBS account of Kid Art, as the corporate vehicle holding Hui Guang, before distribution between P1 and D1 in the 60:40 ratio.  However, the DBS account of Kid Art first came about an account to the use of both P1 and D1 for the purpose of the Beijing Investment mentioned above subsequent to the joint venture business.  Further, it is pointed out that D1 himself withdrew HK$100,000, saying that it was dividend, from the account of P2 directly on 24 May 2005 instead of the sum having been transferred first to Kid Art.  D1’s attribution of the propriety of doing that to the fact that the withdrawal was by way of a cash cheque, as Mr Chiu submits, is indeed difficult to follow.

103.  I see force in Mr Chiu’s argument that the Service Agreement, in these circumstances, could not by its terms negate the fact that P2 was from conception intended and understood by the parties to be the pocket of the income of Hui Guang, and from which P2 would handle the expenses and the resultant profit in accordance with the agreed ratio under the JV Agreement.

104.  There is no dispute that consolidated financial statements were prepared for the joint venture business every year.  Both sides agree with the observation of Yeung, the plaintiffs’ accounting expert, that according to the accounting standards, if two companies are of the same group eg one is holding one’s subsidiary, there would be a need for making a consolidated financial statement for every year.  Though P2 and Hui Guang are not in the same group (or associated through shareholdings), the users who would interpret these financial statements would hope to get the whole picture of how the business is run and also to know the result of this business.  In a consolidated statement, the inter-company transactions would be set off, and one can see the performance of the whole group.  P2 and Hui Guang in fact are under common ownership.  The user would like to group them together for a look at the status of their business.  If one simply looks at P2 or Hui Guang alone, that would not reflect the true picture.

105.  All circumstances, including those discussed above, I find that given the specific role and scope of the business of P2, as agreed and properly understood, D1 in discharge of his fiduciary to account to P2 was and is under a duty to account for:

(1)  all the expenses that were paid by P2 to Hui Guang so that P2 would know if the payments were properly made;

(2)  all the operation expense of P2; 

(3)  at least in relation to the “11% of net sales” from Hui Guang to Everbest, what were the amounts actually received, and if there was a shortfall, the reason for any shortfall; and

(4)  all the moneys collected by P2 on behalf of Hui Guang so that after deducting items (1) to (3) hereinabove, both Hui Guang and P2 would know (through the consolidated accounts) how much were the profits of Hui Guang available for distribution.

F3.    Duty of no conflict

106.  A director has a fiduciary duty that he must not place himself in a position of conflict of interest in relation to the company’s business.  The general law applicable to this case may be put as follows:

(1)  A director must avoid a situation in which he could have a direct or indirect interest that would conflict or might conflict with the interest of the company: see North-West Transportation Co Ltd v James Hughes Beatty (1887) 12 App Cas 589 at 594.

(2)  A transaction or arrangement entered into by a director who is in a situation of conflict will land liability against the director towards the company including to account for any profit he might have obtained, whether the transaction or dealing is fair or unfair, and whether it is done with a view to benefiting the company or not.  The liability arises from the mere fact of a profit having, in the stated circumstances, been made.  The transaction, however fair and reasonable, cannot escape avoidance by the company; and the profiteer, however honest and well intentioned, cannot escape the risk of being called upon to account.  The rule is strict: see Regal (Hastings) Ltd (above) at 143; 144-145; Transvaal Lands Company v New Belgium (Transvaal) Land and Development Co [1914] 2 Ch 488 at 502; Man Luen Corp (above) at 413-414.

(3)  This liability of the director over the impinged transaction or dealing may be excluded (a) by the director disclosing the situation of conflict to the shareholders in a general meeting and if they ratify the transaction or dealing with a resolution or if all the shareholders acquiesce, or (b) by the terms of the Articles of Association: see Man Luen Corp (above).

(4)  Before the transaction and the director may be impeached, a reasonable man looking at the relevant facts should think that there is a real sensible possibility of conflict: see Grand Field Group Holdings Ltd v. Chu King Fai [2016] HKLRD 1316.

107.  In Grand Field Group Holdings Ltd, the court explained:

“1) Conflict of interest:

4.2 No fiduciary shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which may possibly conflict, with the interests of those whom he is bound to protect, per Lord Cranworth LC in Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 , 471; [1843-1860] All ER Rep 249, 252. Lord Herschell in Bray v Ford [1895-1899] All ER Rep 1009 , 1011; [1896] AC 44, 51, described the rule as inflexible. This rule was applied in Bhullar v Bhullar [2003] 2 BCLC 241 (CA) at [27] per Parker LJ. Ma J (as he then was) observed in Kao Lee & Yip v Koo Hoi Yan [2003] 3 HKLRD 296 at [50] that the non-conflict duty imposed on the fiduciary involves an objective test, meaning that a reasonable man looking at the relevant facts would think there to be a real sensible possibility of conflict: Phipps v Boardman [1967] 2 AC 46 at p.124 (per Lord Upjohn).

2) Disclosure of interest:

4.3 No director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and approved by the shareholders.

4.4 A director in breach of this strict rule will be called upon to account no matter whether the company has in fact been damaged or benefited by his action, and no matter how honest and well-intentioned he is.

4.5  As Rich, Dixon and Evatt JJ of the High Court of Australia held in Furs Ltd v Tomkies (1936) 54 CLR 583 , 592:

… the inflexible rule that, except under the authority of a provision in the articles of association, no director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and by resolution a general meeting approves of his doing so or all the shareholders acquiesce. An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company. It is no answer to the application of the rule that the profit is of a kind which the company itself could not have obtained, or that no loss is caused to the company by the gain of the director. It is a principle resting upon the impossibility of allowing the conflict of duty and interest which is involved in the pursuit of private advantage in the course of dealing in a fiduciary capacity with the affairs of the company. If, when it is his duty to safeguard and further the interests of the company, he uses the occasion as a means of profit to himself, he raises an opposition between the duty he has undertaken and his own self-interest, beyond which it is neither wise nor practicable for the law to look for a criterion of liability. The consequences of such a conflict are not discoverable. Both justice and policy are against their investigation.”

108.  I do not see real dispute in respect of the above legal principles either.

109.  D1 relies on Art 10(a) of P2’s Articles of Association, which reads:

“No Director shall be disqualified from his office by contracting with the Company, nor shall any such contract or any contract entered into by or on behalf of the Company in which any Director shall be in any way interested be avoided, nor shall any Director so contracting or being so interested be liable to account to the Company for any profit realized by any such contract by reason only of such Director holding that office, or of the fiduciary relations thereby established but it is declared that the nature of his interest must be disclosed by him at the meeting of the Directors at which the contract is determined on if his interest then exists, or, in any other case, a the first meeting of the Directors after the acquisition of his interest. A director may vote in respect of any contract of arrangement in which he is interested.”

110.  The question of whether Art 10 literally applies insofar as the Items are concerned (which will be discussed below) aside, the questions remain first, whether D1 has put himself in a conflict with the interest of P2; and second, whether D1 has disclosed and obtained approval of P2.

111.  Until December 2005, when Wang became a shareholder (as nominee of Lam), P2 had a single registered shareholder, ie D1, who held the shares on trust for Gravipas which was in turned owned by P1.  D1 was also the single director.  Question arises in respect of how D1 was supposed to discharge his fiduciary duty to P2 to disclose any potential conflict in such circumstances.

112.  Indeed, Mr Chiu submits that the circumstances of the present case should constitute exception to the normal rule that a director owes his fiduciary duties to the company, and not to its shareholders.  Mr Chiu borrows analogy from the established exception where a special factual relationship between the director and the shareholders in the form of trust and confidence reposed on the director by the shareholders, and the director undertakes or is taken to have assumed responsibility to act on behalf of or for the benefit of the shareholders.  In such a case, a duality of duties may exist.  In Peskin v Anderson [2001] BCC 874, the court had this to say:

“32    A duality of duties may exist. In Stein v. Blake [1998] 1 All ER 724 at 727d and 729g Millett LJ recognised that there may be special circumstances in which a fiduciary duty is owed by a director to a shareholder personally and in which breach of such a duty has caused loss to him directly (e.g. by being induced by a director to part with his shares in the company at an undervalue), as distinct from loss sustained by him by a diminution in the value of his shares (e.g. by reason of the misappropriation by a director of the company's assets), for which he (as distinct from the company) would not have a cause of action against the director personally.

33    The fiduciary duties owed to the company arise from the legal relationship between the directors and the company directed and controlled by them. The fiduciary duties owed to the shareholders do not arise from that legal relationship. They are dependent on establishing a special factual relationship between the directors and the shareholders in the particular case. Events may take place which bring the directors of the company into direct and close contact with the shareholders in a manner capable of generating fiduciary obligations, such as a duty of disclosure of material facts to the shareholders, or an obligation to use confidential information and valuable commercial and financial opportunities, which have been acquired by the directors in that office, for the benefit of the shareholders, and not to prefer and promote their own interests at the expense of the shareholders.

34    These duties may arise in special circumstances which replicate the salient features of well established categories of fiduciary relationships. Fiduciary relationships, such as agency, involve duties of trust, confidence and loyalty. Those duties are, in general, attracted by and attached to a person who undertakes, or who, depending on all the circumstances, is treated as having assumed, responsibility to act on behalf of, or for the benefit of, another person. That other person may have entrusted or, depending on all the circumstances, may be treated as having entrusted, the care of his property, affairs, transactions or interests to him. There are, for example, instances of the directors of a company making direct approaches to, and dealing with, the shareholders in relation to a specific transaction and holding themselves out as agents for them in connection with the acquisition or disposal of shares; or making material representations to them; or failing to make material disclosure to them of insider information in the context of negotiations for a take-over of the company's business; or supplying to them specific information and advice on which they have relied. These events are capable of constituting special circumstances and of generating fiduciary obligations, especially in those cases in which the directors, for their own benefit, seek to use their position and special inside knowledge acquired by them to take improper or unfair advantage of the shareholders.

35    The court has been referred to the valuable and detailed surveys of the authorities, expounding the special circumstances which justify the imposition of fiduciary duties on directors to individual shareholders, in the judgments of Court of Appeal in New Zealand in Coleman v. Myers [1977] 2 NZLR 225 ( especially pp.323–325,328–330) and of the Court of Appeal of New South Wales in Brunninghausen v. Glavanics [1999] 46 NSWLR 538 (especially pp. 547–560). In both of those cases fiduciary duties of directors to shareholders were established in the specially strong context of the familial relationships of the directors and shareholders and their relative personal positions of influence in the company concerned.”

113.  There is no reason, Mr Chiu argues, why the circumstances of the present case did not constitute special factual relationship of the kind that could give rise to such fiduciary duty of D1 as the director of P2 to disclose to its shareholder.  He refers to the trust and confidence between P1 and D1 that founded the entire business venture, the trust of the entire shareholdings of P2 in D1 as well as D1’s acknowledgement of P1 (and since December 2005, Lam as well) as the shareholder, though beneficially through Gravipas (and in the case of Lam, through Wang).

114.  Mr Chiu also submits that when the court is to apply the rules of equity to a director’s fiduciary duties, it is the substance, and not the form that matters.  Hence in determining whether a director may have interest in another company which may constitute him in a position of conflict, it matters not whether the conflicting interest belongs to him beneficially or as trustee for others: see Transvaal Lands Company (above) at 503. It is argued that by parity of reasoning, it is difficult to see why in equity he would not also be required to disclose such conflict to a beneficial shareholder whose shares were entrusted to him, and whose interest would be directly affected by that conflict of interest of the director cum trustee in question.  Therefore, during the sole legal shareholder period, it is not an excuse for D1 to say that he was not required to disclose his potential conflict position to Gravipas (hence P1) because Gravipas was but a beneficial shareholder.

115.  In any event, the fact that the situation of a single (legal) member being also the single director in a company appears to render disclosure by the director to the company impracticable or academic does not therefore absolve the director from liability of conflict of interest to the company, about which the beneficial shareholders must have the locus of complaining.

116.  The above argument of P2 drives Mr Ng to argue that if P2 is right, Gravipas should be the party to sue.  However, being put forward is not a cause of action for loss suffered by Gravipas, which Mr Chiu accepts will be reflective of the loss of the company.  The cause of action is always breach of fiduciary duty owed to P2, which was a situation of a single legal shareholder and director being the one who has the duty to disclose real conflict.   In view of the special factual relationship between him and the beneficial shareholders, discharge of the director’s such duty to the company can only be disclosure to the beneficial holders of the shares of the company.

117.  All matters considered, I agree with Mr Chiu.

F4.    Production of accounting and supporting documents by D1

118.  Two points should be noted.  First, as a matter of fact in the present case, the plaintiffs have to rely on D1 as the sole person in charge of the entire business venture and the related companies for the rendering of their accounting documents.  Second, failure or refusal by D1 to render the accounting documents must be justified, when such documents are reasonably expected to have been kept by the related corporate bodies and to be readily available within 7 years.

119.  There is no dispute that P1 resided in Beijing during most of the relevant time.  Hence his original request for the documents to be supplied to him there.  The exchange between the parties in this respect was documented in the email correspondence between July 2009 and August 2010 which Mr Chiu went through when opening this case.  By September 2009, documents had been produced, which D1 claimed to be all.  However, P1 complained that a lot of supporting documents were missing, including the documents of P2.  By the end of September 2009, D1 suggested that P1 returned the documents previously provided to enable D1 to complete the outstanding accounts of Hui Guang within 3 months.  P1 did so.  Similar effort to obtain accounting documents of P2 did not meet with immediate success, and the documents were retrieved by P1’s wife on his behalf only after arrangement was made to enable D1’s representative to make photocopies of the documents in mid-October 2009.  However, there was no sign of the completed accounts of Hui Guang promised by D1 in September 2009 mentioned above.  When P1 subsequently requested for the documents of Hui Guang returned to D1, the response of D1 in December 2009 was that the documents would somehow be kept in custody of a Mr Kwong Sai Hung (鄺世雄) at Dongguan, Mainland, and would be available for inspection only.

120.  P1 saw the need to enlarge the scope of seeking disclosure of the accounting documents to those of Kid Art.  The correspondence since the end of 2009 shows that.  The lack of constructive response from D1 caused P1 to cause the taking over of control and management of P2 and Kid Art in early 2010.  As mentioned, the disagreement in respect of production of the documents ensued.  Production of voluminous documents continued after the commencement of action.

121.  It cannot be said that D1 was sufficiently forthcoming in rendering the account and supporting documents of P2 and Hui Guang.  D1’s explanation by reference to how Jacky Liu, the auditor, had somehow kept some of the company’s documents was not impressive.  Liu was not a witness to explain in any event.  D1’s explanation by reference to the difficulty arising out of the seizure by the Mainland court upon the closure of Hui Guang in 2008 did not avail him either.  D1 did explain in his letter in December 2009 impact of the closure of Hui Guang by the Nansha Court in 2008, but with reference to the alleged safekeeping of documents of Hui Guang by Kwong as mentioned above.  No reference was made to any loss of documents as a result of the closure.  Nor was such reference made in the email correspondence between the parties in 2009 mentioned above.  If D1 was in a position to offer to compile the audited accounts of Hui Guang by the end of November 2009 as mentioned above, one would have expected him to possess all the necessary documents.  Unless he was not even aware that he did not possess all the documents, which, even if true, was not likely to be a matter in his favour.

122.  As mentioned, the documents were not fully disclosed even after the commencement of this action and some only after argument before the court.  With the Accounting Documents obtained from D1, Yeung came up with the Yeung 1^st Report, in which Yeung had noted various documents in support were not found in the Accounting Documents.  The Yeung 1^st Report was disclosed to the defendants in May 2013.  Had the accusation by the plaintiffs been unwarranted, D1 should have been in a position to rebut the specifics, in view of the fact that the documents had been in the possession of D1, and copies of which were made by Jacky Chan, the account clerk, before they were handed over to P1’s wife in October 2009.

123.  It should be noted that Lees in his report in 2016 also recorded that D1 was yet to provide him with some necessary supporting documents (in connection with the subcontracting fees).  Yet the bulk of documents subsequently disclosed by the defendants did not seem to cast light on those that Lees expected as mentioned in his report. Even after the latest discovery by the plaintiffs a couple of months prior to the trial, the inspection and analysis by Lees, which led to his report dated 9 October 2018, did not add much to D1’s case.

124.  The bottom line is that the practical difficulties that D1 referred to, even assuming they were true, would not work in his favour insofar as his discharge of the duty to P2 to render full and true accounts of P2 and Hui Guang is concerned.  The two points to note set out at the beginning refer.

G.      THE MANAGEMENT FEES

125.  Mr Ng emphasizes the importance of the general ledgers of P2 and Hui Guang.  Yeung agreed as to their relevance from the accounting perspective.  In the general ledgers, the income and expenses of P2 were recorded in the profit and loss account section, while the income collected and expenses paid on behalf of Hui Guang were recorded in the balance sheet section, of the general ledger of P2.  Essentially, income collected on behalf of Hui Guang became P2’s payables (thus liabilities) and expenses paid on behalf of Hui Guang became P2’s receivables (thus assets) in the balance sheet.  On this basis, Mr Ng also emphasizes the importance of the different natures of management fees on the one hand and that of the other 6 items complained about on the other hand.  The management fees were expenses of P2 paid to D3, which were part of the profit and loss of P2.  The other items complained about were expenses of P2 on behalf of Hui Guang, and thus P2’s receivables.

G1.    The issue

126.  The Accounting Documents show that (i) D2 charged P2 management fee in the sum of HK$15,000 for 2004/2005; (ii) D3 charged P2 management fee in the total sum of HK$1,239,490.32 in 2004-2008; and (iii) P2 paid D1 management fee in the sum of HK$16,000 in 2005/2006.  The total management fee was HK$1,270,490.32.  The accounting experts managed to verify these figures.  According to D1, the management fees consisted of salaries of the staff employed by D3 to work for P2 and his own consultancy fee from P2. They were payable by P2, and recorded as its own expenses.

127.  There was no written agreement or written record of any agreement whereby these various management fees became payable by P2.  The accounting documents also did not record any disclosure of the basis for these management fees paid by P2 and the interest of D1 in D2 and D3 in this connection.  These were related party transactions, the disclosure of which were prima facie expected.

128.  D1’s case is that the facts were all disclosed to and known by P1 and Lam through annual meetings arranged by P1. According to D1, the first shareholders’ meeting was held with P1 and Lam in late 2004 at the Chinese Recreation Club.  During the meeting, Jacky Chan, the account clerk of P2, explained the accounting treatment of each and every item of P2’s management account for 2004.  Amongst them was the item of staff salaries of Mr Eddie Wong (“Wong”) and Mr Kung Chi Yim (“Kung”).  It was also resolved, apparently verbally without record, that consultancy fee in the sum of HK$8,000.00 would be paid to D1, and salaries would be paid to Wong and Kung.  Such consultancy fee to D1 and salaries to the staff would be consolidated into a single item of management fee in the future management accounts and audited Accounts.

129.  D1 also said that in early 2005, Jacky Liu, the auditor, proposed that the salaries of the management staff of P2, which were paid by D3, should be reimbursed by P2 and booked as management fee in P2’s accounts.  D1 agreed.  Since the financial year of 2004/2005, the item of staff salaries in the previous profit and loss account of P2 has become management fee.

130.  D1 expressed surprise that P1 claimed no knowledge about the payment of consultancy fee to him and management fees to D3 in reimbursement of the staff salaries that D3 had paid.  He referred to the instance of P1 requesting D1 to raise the salary of Wong, who was P1’s brother in law.  Wong in turn was P1’s representative at the office of Hui Guang.  Every year after compilation of the audited financial report of P2, D1 would sign it on behalf of Gravipas, and personally deliver a copy of the signed report to P1, which he believed would be passed on to Lam as well.  He added that the joint venture business was all along run in consultation with P1 at least through the annual shareholders’ meetings arranged by P1.

131.  P1 denied the existence of those shareholders’ meetings alleged by D1.  He also denied having ever received financial statements or reports of P2 from D1 annually as alleged.  This was corroborated by Lam and Wong.  As mentioned, the suggestion that P1 was hands on in the running of the joint venture business does not align with the P1’s actual entrusting of the operation and management to D1 solely or P1’s own pattern at the time.  In line with the assessment mentioned above, I find the evidence of P1 and Lam in these aspects to be relatively more credible.

132.  As to the alleged resolution in respect of D1’s consultancy fee, P1 said that it was during his attempt to retrieve the accounting documents of the joint venture business in 2009 when he came to notice the HK$8,000 director’s fee paid to D1.  There was then discussion regarding that, which involved D1 and Jacky Liu.  However, P1 and Lam were against that, and the email correspondence between the parties in October 2009 also contained P1’s statement of such stance.  What the correspondence suggested did not align with what D1 alleged.

133.  As to Wong, P1’s brother in law, P1 said he had seen him only once at the office of Hui Guang after the latter started to work for the joint venture business.  The evidence revealed that Wong had worked in the joint venture business for less than a year, and he passed away prior to the trial.  The factual basis for imputing knowledge on the part of Wong to P1 was flimsy.

134.  As to why the staff of P2 were not hired by P2 but came to employed by D3, which D1 used to hold D2, Lees in his report stated his understanding obtained from D1.  Lees was given to understand that there was concern about the lack of steady income or cash flow in P2 to support the payment of staff salaries.  This is surprising, because the undisputed understanding behind the joint venture when conceived was for P1 to secure the orders from Everbest that ensure the income of Hui Guang and thus profit of P2 when it commenced operation.

135.  The fact was that the financial statements of P2 for the years ended 2005 up to 2009 did not record any disclosure of the payment by P2 to D3 management fees as reimbursement of the salaries paid by D3 to the staff.  These were transactions of related parties, which ought to have been disclosed under normal accounting practice.  In court, D1 eventually had to admit that he had not informed the other shareholders of P2 and to obtained their endorsement of the arrangement for D3 to pay the staff salaries and for D2 to reimburse D3 in the form of management fees.

G2.    The staff and D1

136.  D1’s case is that the staff employed by D3 were all deployed to station at the office of Hui Guang 6 days a week.  Documentary evidence, which P1 did not accept, and Tam, the manager assistant and cashier of Hui Guang, confirmed the arrangement. I am impressed that she was a generally truthful witness.  On balance, I find the stationing of the staff in Hui Guang was fact.  However, P2 raises the query on the basis of the actual operation in Hui Guang’s business which involved D2. In a sense, such query may still be raised, even assuming that the members of staff mentioned above were employed by P2 under D1’s de facto control for deployment to Hui Guang.

137.  The stance of P2 is that the defendants may be exonerated, if it can be shown that Wong, Kung and Kwok Chi Yim (who was employed in succession of Kung) were seconded by D3 to serve P2 and Hui Guang exclusively so that D2 and D3 received no benefit other than in the form of reimbursement of the staff salaries that D3 had paid for P2.  In that case, it may be that the court may consider the management fees were justified.  Mr Chiu submits that the circumstances suggest the contrary.  In this context, the business operations leading to the subcontracting fees, which is another item of complaint discussed below, become relevant.  Essentially, the subcontracting fees came about as a result of D2’s own contracts with its Mainland customers.

138.  In explanation of the subcontracting fees that D1 caused P2 to pay D2, D1 alleges that he caused D2 to import semi-finished goods into the Mainland for Hui Guang to carry out sub-processing work, and after which the finished goods were delivered by Hui Guang directly to D2’s Mainland customers.  Hui Guang would issue unified involves to D2’s Mainland customers for the entire contract price charged by D2 (inclusive of the processing fees charged by Hui Guang) and collect payments from them.  D1 would then cause P2 to pay subcontracting fees on behalf of Hui Guang to D2, representing the part of the contract price received from its Mainland customers that D2 was entitled to.  This is what is defined as the “Disputed Arrangement” when this item of subcontracting fees is discussed below.

139.  Subject to the dispute in respect of such arrangement, and for the present purpose, such arrangement so caused by D1 to be conducted by Hui Guang such as liaising with D2’s Mainland customers, delivering the finished goods to them, issuing unified invoices, collecting payments, transferring the payments collected to D2 and the subsequent working out of the account undeniably involved the utilization of the staff of Hui Guang for the business of D2.  Such business contracted between D2 and its Mainland customers indeed benefited Hui Guang in terms of the material processing fee that Hui Guang would be entitled to keep as its income.  However, the bulk of such business remained that of D2, which was conducted largely by the staff seconded to Hui Guang whose salaries paid by D3 were made to be reimbursed by P2 in the form of management fees.  Mr Chiu describes this as “piggyback ride” on Hui Guang by D2. 

140.  One may query how P1 would complain about undisclosed self-interest of D2 in the subcontracting fees arrangement mentioned above, as, according to P1, he was a 40% beneficial interest holder of D2.  Could it be said that the conflict is more perceived than real or sensible?  However, the question of fiduciary duty owed by D1 has to be viewed from the perspective of D2, to which the duty was owed.  In the circumstances, the self-interest of D1 and D2 in this arrangement is real.  So was the conflict between D1 and P2.

141.  D1 could supposedly have accounted by factoring in the element of the extent of utilisation of such resources of Hui Guang in fixing Hui Guang’s share of the payments collected from D2’s customers with a view to ensuring that Hui Guang or P2 is properly indemnified to the extent of the cost of D2’s use of Hui Guang or P2’s resources.  There is however no suggestion or evidence of that. Coupled with the lack of evidence of that sort from the staff, this attributes to the practical difficulty in the alternative case which D1 also seeks to run, namely to seek equitable allowance in recompense for the effort, skill and enterprise in making those profits.  This is also the non-agreed issue under this item which will be discussed below.

142.  D1 himself also received what according to him used to be consultancy fee but later also incorporated into management fees from P2.  To begin with, D1 acknowledged his difference in position from the other employed staff.  Hence the original distinction between his consultancy fee from the staff’s salaries.  As far as such fee was director’s emolument, his evidence that this was resolved to be payable in the shareholders’ meeting in late 2004 mentioned above was not documented and also nowhere to be disclosed in the financial statement of P2 until that for 2009.  As mentioned above, I do not find there was such disclosure as a matter of fact.  Further, such financial statement recorded HK$96,000 for 2008 and HK$80,000 for 2009 as his such fees, and his charge for consultancy fee was not consistent according to his alleged monthly rate even according to his accounting expert.  There was record of payment of HK$16,000 by P2 for 2004/2005, HK$32,000 by D3 for 2005/2006 and HK$104,000 for 2006/07 and 2007/08, which varied from the monthly fee of HK$8,000 allegedly resolved in 2004.  The email correspondence dated as late as October 2009 mentioned above suggests that P1 and Lam did not have prior knowledge about such fees.

143.  The fundamental difficulty for D1 is that under the JV Agreement, D1 was entrusted with the responsibility to operate and to manage Hui Guang and P2 that was set up to implement it.  It was already the agreement between the parties to the JV Agreement that D1 would be entitled to 40% beneficial interest and thus entitlement to share profits of Hui Guang in consideration of his such contribution and service.  Therefore, the lack of specific contrary or additional agreement that would have entitled D1 to remuneration should be the end of the matter.  It is argued that the monthly fee of HK$8,000 claimed by D1 was modest, but subjective greed is irrelevant in this context.  Unlike the case of the other employed staff, who were employed to provide their service and reasonably expected to be paid for that, it would not be inequitable for D1 without such fees as if he were deprived of remuneration for his service.  As to the practical difficulty of assessment of any equitable allowance, the discussion above refers.

G3.    Equitable allowance

144.  Mr Ng argues that where there was a breach of fiduciary duty on D1’s part and D1 is found liable to account for profits to P2, D1 and/or D3 is nevertheless entitled to equitable allowance for the provision of human resources and rendering printing management services to Hui Guang for P2.

145.  Equity recognizes that the equitable remedy available to the party injured by the fiduciary is non-penalising in nature, so that allowance may be given to the fiduciary for the time, energy, skill and financial contribution he has made: see Kao Lee & Yip (above) at §143.

146.  Mr Ng argues that the claim for equitable allowance in case of proven liability under this item of complaint is purely a question of law that his client may run without pleading in the present case.  I refer to the discussion of the facts that would be relevant to any assessment of reasonable equitable allowance for the staff’s service for Hui Guang.  Had this question been raised by pleading, such relevant facts would have been investigated and pleaded, and evidence thereof adduced, for the assessment.  At least, P2 would have been entitled to the opportunity to do so.  Now for the reason already explained above, there is no fair or meaningful way of making the assessment.

G4.    Findings

147.  All considered, including those matters specifically discussed above, I come to the following findings in respect of this item:

(1)  The payments of management fees by P2 to the defendants in the total sum of HK$1,270,490.32 were dealings made by D1 in circumstances of real conflict of interest in breach of D1’s fiduciary duties as a director owed to Hui Guang and P2.

(2)  The dealings ought to have been disclosed to the beneficial shareholders of P2, but was not done.

(3)  The defendants fail to prove that the salaries paid by D3 to Wong, Hung and Kwok, and thus reimbursement by way of management fees paid by P2, were services rendered exclusively for the business of Hui Guang for which P2 had to pay for.

(4)  The defendants fail to prove that the sum of HK$16,000 paid by P2 and the total sum of HK$240,000 paid by D3 to D1 were pursuant to any agreement by the shareholders (legal or beneficial) of P2 to pay consultancy fee or director’s remuneration, and that the disputed arrangement mentioned above was known to and approved by the shareholders (legal or beneficial) of P2 for which P2 had to pay for.

H.      TRANSPORTATION EXPENSES PAID TO D2

H1.    The issue

148.  According to Table 3 in Lees’ Report (which set out the findings in the Yeung 1^st Report), a sum of HK$719,158 was found to have been settled by P2 as transportation cost invoiced to and settled by D2 between 2005 and 2008.  P2 claims there is a lack of information regarding how it came to have paid such expenses for D2.  The ultimate question is whether this item is justifiable.  Though the parties differ slightly in respect of the premise for this question, they are ad idem that it depends on all the circumstances of the case.

149.  The case of the defendants, and the evidence of their witnesses including Tam, was that such transportation expenses formed part of the invoiced price that Hui Guang had charged D2 for material processing work.  Hui Guang would pay the transportation company directly for deliveries to Hui Guang in the Mainland.  However, for those return deliveries to D2 in Hong Kong, the transportation companies would instead invoice D2 upon delivery, and D2 would then settle the invoices.  D1 would then cause P2 to reimburse D2 the transportation cost that Hui Guang should have paid.

150.  Yeung observed what he considered to be a roundabout way of charging transportation cost adopted by Hui Guang.  I agree with Mr Ng that such observation perhaps straddled across expert and personal opinion as to manner of conducting business, and such opinion is neither here nor there.  However, Lees was unable, for the lack of working papers of the auditor, to comment if the auditor of P2 has sought sufficient and appropriate audit evidence of the transportation expenses so paid for a related third party, ie D2.  No further light may be cast, when Jacky Liu was not a witness.  In his further report in 2018, Lees was able to match 49 cash memo/vouchers with 55 delivery notes, representing a total sum of HK$146,615.00.

151.  During the trial, reference was made to invoices of Hui Guang which did not charge the customers transportation cost.  Tam explained that where goods were delivered by way of effectively hitch-hiking on the delivery of another batch of goods for which transportation cost was charged, transportation cost will not be further charged on the goods.  I was impressed that Tam was generally credible in respect of her evidence concerning the stationing of staff at Hui Guang mentioned above.  However, she somehow failed herself when it came to actual accounting. Mistake in her entries was pointed out.  Whilst Tam suggested that there should be records of the actual transportation charge arrangement, such records were never disclosed.  Nor were all the relevant delivery notes.  The existence and the extent of such practice could not be verified either as a general or specific justification for the transportation expenses in question.  I am not surprised by the query raised on behalf of P2 as to whether it has been caused to pay what was said to be transportation cost for Hui Guang when it in fact fell into the category of those entailing no such cost.  After all, Lees only managed to verify just a quarter of the amount of this item.

152.  Consistently, Mr Ng submits that at the end of the day, D1 caused P2 to settle the transportation fees only on behalf of Hui Guang.  Such payment, entered as receivables from Hui Guang in the balance sheet section of the general ledgers of P2, would have been reimbursed by the sales income collected by P2 for and on behalf of Hui Guang.  Any wrong and complaint should have to do with Hui Guang, not P2.  As mentioned, this will be the common theme in the argument on behalf of D1 in respect of the other items of complaint as well.

153.  The notion of incidence of loss and its relevance will be further discussed below. However, I do not agree that this is the answer to D1’s duty to account to P2 in respect of what he caused P2 to pay, when the documents do not add up for the necessary verification.

H2.    Finding

154.  There is a balance of the transportation expenses in the sum of HK$572,543 (HK$719,158 - HK$146,615) that could not be verified.

I.       SUBCONTRACTING FEES PAID TO D2

155.  This item is both problematic, and significant both in terms of amount and its bearing on the true financial picture of P2.

156.  The vouchers of P2 revealed that subcontracting fees were paid by Hui Guang to D2 in the total sum of HK$7,319,715.62, of which HK$2,305,477.37 (or HK$2,290,160.14 according to the defendants) were settled by P2 for and on behalf of Hui Guang during the period between 2004 and 2008.  Worth noting from the outset is the admitted fact that the subcontracting fees came about as a pure invention for accounting purpose.  Such fees paid to D2 were not consideration for work contracted by D2 from Hui Guang (or P2), but so paid pursuant to the Disputed Arrangement already mentioned in the discussion in respect of the management fees.

I1.    The Disputed Arrangement

157.  How did the Disputed Arrangement surface?  In the course of preparing Yeung 1^st Report (2010) and Yeung 2^nd Report (2012) based on the Accounting Documents, Yeung discovered that D2 charged the total sum of HK$2,305,477.37 mentioned above against Hui Guang for subcontracting fees.  P2 settled this amount on behalf of Hui Guang.  However, there was no supporting documentation of such subcontracting by Hui Guang to D2 or record in the financial statements of P2.  This was significant, as the subcontracting fees so paid to D2 was a major component of the direct cost in the financial balance of Hui Guang.  According to the Yeung 2^nd Report, the joint business of P2 and Hui Guang already deteriorated since 2005 and came to a loss in 2006, which was attributable to the significant subcontracting fees paid by P2 to D2.  In any event, such fees paid by Hui Guang (partly through P2) to D2 were related party transactions which ought to have been disclosed to and approved by the shareholders of P2, P1 contends.

158.  This caused the plaintiffs to seek discovery of the financial statements of D2, which were subsequently produced not without argument.  Those further financial statements were studied in Yeung’s expert report in 2016.  Both the expert and the plaintiffs found the charging of subcontracting fees by D2 against Hui Guang differed from the understanding behind the joint venture that Hui Guang would perform sub-contracting work for customers, including D2, and for that Hui Guang would be paid. It was finally revealed in Lees’ expert report in 2016 the letters from Messr Ng To and Tse, CPA (“NTT”) dated 27 April 2016 setting out the Disputed Arrangement as the plaintiffs are given to understand currently.  Such cases were also added to the parties’ pleadings as they are now.

159.  D1 apparently had customers in Guangdong which required what are known as unified invoices (廣東省商品銷售統一發票).  D2, a foreign entity, was not in a position to issue such invoices.  Hui Guang however was.  Therefore, in fulfilment of the contracts between D2 and its Mainland customers, goods under those contracts would be delivered by Hui Guang, after the sub-processing part done by it, to these Mainland customers.  Hui Guang would then issue the unified invoices for D2’s contract price to the Mainland customers.  Hui Guang would collect the payments from these Mainland customers.  D2 would retrieve the bulk part of such contract price from Hui Guang by way of the charge of subcontracting fees payable by Hui Guang.  As such, D1 also caused P2 to pay such amount on behalf of Hui Guang.  As mentioned, the total sum of such payments to D2 from 2005 to 2008 was HK$7,319,715.62, of which HK$2,305,477,37 (as Yeung managed to verify) were paid by P2 on its behalf.

160.  The NTT letter also explained that from the perspective of the sales income of Hui Guang being overstated in the statutory account to the extent of the entire price of the contracts between D2 and its Mainland customers, the repayment had been included in the profit and loss account of Hui Guang in such form of subcontracting fee in order to mitigate the effect of making such entries in the accounts of Hui Guang.

161.  Apparently, the plaintiffs are prepared to accept the explanation for what happened at the time.  That said, they consider that that still distorted the true financial picture of P2 and not without prejudice to P2.  Mr Chiu also expressed reservation about the alleged fact that the entire sum of HK$HK$7,319,715.62 had booked as sales income in the statutory account of Hui Guang and thus wholly accounted for.  The reservation, if indeed exists, would add to such prejudice to P2 in real terms.

I2.     Conflict of interest

162.  It is readily apparent that the predominant purpose of the entire design was to facilitate D2’s own business with its Mainland customers which required the issuance of the unified invoices.  D2 effectively borrowed Hui Guang’s legal capability to issue unified invoices.  This differed from D2 introducing its Mainland customers to become Hui Guang’s customers or D2 subcontracting material processing work to Hui Guang.  As mentioned in the discussion in respect of the management fees, this also involved the defendants’ utilisation of the resources of Hui Guang primarily for D2’s business, notwithstanding the existence of some benefit to Hui Guang in the form of income from the material processing part.  The sales income from these contracts so booked in the (statutory) account of Hui Guang attracted tax liability in the Mainland, which would be for P2 to defray pursuant to the JV Agreement.

163.  As mentioned, the plaintiffs dispute whether the entire sum of HK$7,319,715.62 from those sales contracts between D2 and its Mainland customers was in fact booked as sales income in the statutory account of Hui Guang.  Either way would have bearing on P2.  If it was not fully entered, that on the one hand would mitigate the tax implication on Hui Guang, and thus responsibility of P2 to foot that; on the other hand, that would mean reduced net profits to Hui Guang and impact on the remaining profits to P2 distributable amongst its shareholders.

164.  I do not agree with Mr Ng that the conflict of position was not real.

I3.     Disclosure

165.  The defendants contend that the arrangement was known to the shareholders of P2. As to the alleged knowledge on the part of the shareholders, the pleaded case of the defendants is not readily understood, as this court pointed out during the trial.  The reason is that the context of what it literally says differ from the understanding of the directions of business flows among the entities so far.  Literally, it says that in 2004, P1 suggested that Hui Guang might replace Everbest as the subcontractor of material processing work from D2.  The suggestion is that D2 used to subcontract material processing works to Everbest too, and now P1 suggested that D2 should subcontract the material processing works to Hui Guang instead.

166.  In response, P1 could only relate what D1 suggested during their discussion over some social occasions in 2005 instead of 2004 about D2 also placing processing orders to Hui Guang.  In that context, P1 described the alleged replacement of Everbest by D2 as the business source of Hui Guang to be suicidal.  P1 addressed this allegation of D1 to the extent he understood what it might mean, which impresses me as not precisely what D1 appeared to try to assert in this respect.  Notwithstanding P1’s evidence, D1 did not explain this direction of business flow or episode of the alleged suggestion by P1 in either of his two subsequent witness statements.  His evidence under cross examination in this respect did not serve any purpose conducive to establishing D1’s assertion in this respect, especially when the same was not put to P1 at the trial.

I4.     Whether the entire sum of HK$7,319,715.62 was in fact booked as sales income in the statutory account of Hui Guang

167.  This is the reservation Mr Chiu has about the explanation contained in the NTT Letter mentioned above. To recapitulate, the explanation was that HK$7,319,715.62 were booked as income in the statutory account of Hui Guang as a result of the Disputed Arrangement. Such sum represented the total sales income received from D2’s contracts with its own Mainland customers.

168.  As I understand it, this is how Mr Chiu came to have his reservation about the truth of such booking of the sum into the statutory accounts of Hui Guang, to begin with.  The statutory accounts of Hui Guang referred to, which were audited financial statements, were produced in 2016 upon demand of the plaintiffs to the defendants.  Based on them, Yeung did his analysis in his expert report (2016).  The total sales (in RMB) in the profit and loss account of Hui Guang consisted of 內銷業務收入，外銷業務收 and 其他收入 but did not include incomes collected in Hong Kong on Hui Guang’s behalf.  In respect of each year, there was a breakdown of the sources of such income amongst “Everbest”, “Others” and “Best Tri 合同數” (or D2 contract sum) (except for 2004 when Everbest was literally the only source of business and income).  For each year, there was a corresponding consolidated account prepared by the defendants showing on the top the accounts of P2 (in English) and the accounts of Hui Guang (in Chinese) with the moneys all converted from RMB to HKD.  Yeung put together the yearly consolidated accounts and produced Appendix 3 to Yeung 2^nd Report on the basis of these figures.  Yeung in Table 4 set out the breakdown of the incomes he found in the profit and loss accounts of Hui Guang, and checked them against the total incomes in the audited financial statements of Hui Guang for the years 2005 to 2009 and found the figures for 2005 to 2007 tallied with each other.  Table 4 set out the total RMB income under “Everbest”, “Others” and “Best Tri 合同數” to be RMB5,131,178.54, RMB4,597,831.75, and RMB2,313,6.1527 respectively.

169.  In the breakdowns contained in the profit and loss accounts of Hui Guang, the “Best Tri 合同數” was added and then reversed, and was entered as a reverse entry under the income section.  This reversal converted into HKD was also set out in the income section in the corresponding consolidated account for each year (except 2004 for the reason mentioned above).  The total reversal occasioned by “Best Tri 合同數” was HK$2,291,882.10.  Tse in the NTT Letter referred to this sum of HK$2,291,882.10 as “reversal of sales” to D2.  Its nature was money remitted by D2 to Hui Guang which was booked as “extra sales” into Hui Guang.  It was so booked to circumvent the exchange control in the Mainland China which would have caught such remittances by D2 in Hong Kong to Hui Guang.  As a result, the profit of the group was overstated.  In order not to allow this consequential distortion of the financial position, the reversal was carried out in the management accounts of the group by making a debit entry against the sales income.

170.  In other words, the sum of HK$2,291,882 was not real sale but money remitted by D2 to Hui Guang disguised as sales.  It follows that the “Best Tri 合同數” from which this sum of HK$2,291,882 came from were not part of the income of Hui Guang.  It also follows that such sum was not the sales income from D2’s contracts with its Mainland customers, which Hui Guang collected and booked into its statutory accounts as its income mentioned above. So understood, the “Best Tri 合同數” would have to be excluded together with the income from Everbest.  The remaining sum of RMB5,497,831.75 or HK$5,552,935.67 would be the sales income collected by Hui Guang in the Mainland and booked into its account.

171.  That was still overstatement, as the NTT Letter explained, which necessitated the adjustment by way of “subcontracting fees” payable by Hui Guang to D2.  But the amount was not quite HK$7,319,715.62.  Even assuming that the sum of HK$5,552,935.67 represented part of that HK$7,319,715.62 from the Mainland customers of D2, there would still be the issue of the difference of nearly HK$1.8 million.  On this basis, Mr Chiu submits that reversal by the “subcontracting fees” still distorted the financial picture of the group account to the prejudice of P2 being the parties booked to have paid that sum.

172.  Insofar as P2 intends to take this issue further into formulating claim for such sum of HK$7,319,715.62, this court indicated during the trial the pleading constraint sets P2’s claim under this item squarely within that for the sum of HK$2,305,477.37 paid by P2 on behalf of Hui Guang as subcontracting fees to D2.

I5.     The legality of the issuance of the unified invoices by Hui Guang

173.  The Disputed Arrangement also gives rise to the issue of legality of the issuance of the unified invoices by Hui Guang in the circumstances.  This is raised as an additional dimension of considering the bona fide of D1 in causing P2 to facilitate such arrangement and in so doing, whether D1 could be said to be acting in the best interest of P2.

174.  Both P1 and D1, from their experience, and the experts understood that goods shipped to the Mainland for processing with a view to their return as processed goods to Hong Kong (the so-called “來料加工”) would enjoy duty concessions, and therefore under close supervision by the Mainland authority.  The experts, Ni and Zhang, also agreed that it would be illegal for D2 (or any foreign party) to issue unified invoices to its Mainland customers.  They also agreed that the unified invoices issued by Hui Guang in the present case were all ordinary as opposed to special VAT unified invoices (the latter would be subject to more stringent regulations).

175.  Ni produced his expert report first, which essentially advised that absence of a sale contract between Hui Guang and D2’s Mainland customers meant the absence of a real or actual transaction between them to support the issuance of the invoice by Hui Guang to that customer.  It would have been different, had Hui Guang actually sold the products covered by the invoice to the customer.

176.  Zhang in his expert report advised that the practice of Hui Guang in the present case might not be violation if the whole order price was truly reflected in the invoice from the Mainland customers’ perspective.  From Hui Guang’s perspective, all the payments received from D2’s Mainland customers were recorded in the invoice as Hui Guang’s income and subject to the Mainland business income tax.

177.  When the experts put together their joint report, Ni raised the additional concept of legal ownership in connection with a real or actual transaction that he mentioned in his first report.  He opined that a real transaction generally means sale of goods or services; and that sale of goods means the transfer of ownership for a consideration.  This, according to Ni, did not exist as a matter between the invoice issuing body, Hui Guang, and D2’s Mainland customers, as the legal ownership of the goods being sold remained with D2.  The concept and the provisions relied on however were somehow not mentioned in Ni’s first report.

178.  In the joint report, Zhang explained that the concept of legal ownership, as opposed to property ownership, was not clearly defined in Mainland.  In his report, Ni did not actually define real transaction by reference to the concept of legal ownership of goods.  They were indeed not the same.  There was actual and real transaction in terms of goods and money changing hands between Hui Guang and D2’s Mainland customers.  Zhang also explained the three kinds of situation where issuing the invoices would offend the law, namely where there was no real transaction or the invoice did not truly reflect the sum of the transactions or despite a real transaction, asking another party to issue invoice on the seller’s behalf with the intention of evading tax.  Insofar as ownership was concerned, Zhang added his observation that dispute between D2 and Hui Guang in this respect was unrealistic.

179.  When it came to his supplemental report after the joint report, Zhang added that Hui Guang was entitled to and should issue its own invoice to the Mainland customers for its own processing work because Hui Guang was an independent tax payer in connection with part of the total payment collected.  If Hui Guang bought the materials from D2 and did its processing work and sold the final products to the Mainland customers, the sale price of D2 could be included in Hui Guang’s sale price as its cost.  He opined that Hui Guang collected the whole payment owed by the Mainland customers to both Hui Guang and D2, and there was nothing unlawful in it as long as Hui Guang correctly recorded the whole sum collected from the Mainland customer.

180.  I am not entirely impressed by the necessity for the analysis with reference to legal ownership of the goods in question or its passing in the present context as advanced by Ni, both in terms of how he brought up this concept and substance.  As to the opinion of Zhang, his focus was on the correct reflection of the goods and their value in the invoice issued by Hui Guang, which it was in a position to issue because it did processing work to the goods.  However, the last supplementary explanation of Zhang suggested that this was apparently premised on two scenarios: Hui Guang did processing work on the materials from D2 and issue its own invoices in respect of such work in its capacity as an independent tax payer or alternatively Hui Guang bought the materials from D2 for processing and sold the final products to the Mainland customers, in which case Hui Guang could issue invoices covering both the price charged by D2 as its cost and the processing costs.   I therefore see the basis for Mr Chiu to question the lack of evidence in support of such dealing between D2 and Hui Guang in respect of the orders by D2’s Mainland customers.

181.  D1 confirmed in court that most of the goods were shipped to Hui Guang on the basis of “來料加工”.  There was no documentary evidence of one way or the other, namely, sale contracts between D2 and Hui Guang or payment of duties in respect of their import into the Mainland.  There was also no documentary evidence of approval for the goods imported on the basis of “來料加工” but to be sold in Mainland China.

182.  The reality is that nothing has happened insofar as the legality of the arrangement in the Mainland is concerned.  That of course is not to be taken as verification of the legality of the arrangement.  But the highest that could be pitched in the circumstances would be a risk.  That said, one needs to return to consider the relevance of this issue of legality.  In my judgment, a view formed as to the risk of illegality or actual illegality of the arrangement, without more, does not lead to the finding of lack of bona fide of D1 in discharge of his duties as director of P2.

I6.     The amount

183.  P2 raises an issue in relation to the Disputed Arrangement, namely, if the Disputed Arrangement was true, whether the financial position of P2 was prejudiced so that D1, D2 and/or D3 should be held accountable to P2 for the whole sum of HK$7,319,75.62 paid by Hui Guang to D2 under the arrangement instead of just the part in the sum of HK$2,305,477.37 (or according to the defendants, HK$2,290,160.14) that was paid through P2.  Mr Ng’s objection is essentially that this goes beyond P2’s pleaded case, which unequivocally confines this item of claim to the sum of HK$2,305,477.37.

184.  I agree with Mr Ng.  As there was also no application by P2 to amend the pleading, however slightly, to expand the claim in this manner, the question of prejudice to the defendants arising out of entertaining such claim of P2 does not set in.

I7.     Findings

185.  I make the following findings:

(1)  The explanation for the subcontracting fees by reference to the Disputed Arrangement, as the plaintiffs are also ready to do so, is accepted as fact.

(2)  The total sum derived from the income of the Mainland customers of D2 and collected through Hui Guang was HK$7,319,715.62.

(3)  Unlike the case of orders from D2 or Mainland customers introduced by D2 to Hui Guang, the utilisation of Hui Guang to facilitate these contracts between D2 and its own Mainland customers primarily for D2’s own interest in the circumstances put D1 in a position of conflict in discharge of his fiduciary duty to P2 (which became involved in terms of liability to pay the subcontracting fees).  By causing the resources of Hui Guang, including those that P2 had to pay for such as the management fees discussed above, to perform the operation primarily for D2’s own interest also put D1 in such conflict.

(4)  There was no informed approval of the Disputed Arrangement by the shareholders of P2.

(5)  There may be a risk of illegality on the part of Hui Guang to issue unified invoices to the Mainland customers of D2 in the absence of sale between D2 and Hui Guang under the Mainland law.  However, that, without more, does not suffice for finding a lack of bona fide on the part of D1 as director of P2 in the circumstances of the case.

I8.     Material processing fees

186.  This part of the claim arose out of the latest amendment of the claim in December 2016.  It was put forward on the basis that the defendants’ case in respect of the subcontracting fees is proven.  P2 says that in such event, there should be an outstanding amount of material processing fees receivable by Hui Guang for D2’s contracts with its Mainland customers.

187.  Essentially, it is contended that (i) there was missing record of invoice value in the sum of HK$1,308,180.90 in the trade debtor account of Hui Guang’s ledgers for 2007; and (ii) there was still a sum of HK$3,664,319.63 collectable by P2 and remain unpaid.  The total amounted to HK$4,972,500.53.  Both were findings of Yeung, but the defendants did not seek to adduce further expert evidence to address this part of the plaintiffs’ latest case.

188.  Mr Chiu tabulated the figures in the appendix to his written submissions, which shows:

(1)  The total of invoices due from 2004 to 2006 should be HK$3,853,265.26, not HK$3,850,516.05 as pleaded by D1 and mentioned below.

(2)  The invoices for 2004 to 2005 were fully settled.  In respect of the invoices receivable in 2006 to 2008 (until 31^st March 2008), there were only 2 payments made.

(3)  The total amount of invoices receivable from 2004 to 31 March 2008 was HK$HK$5,690,025.63.  The total payments for the same period was HK$2,028,706.00.  This leaves a balance of HK$3,664,319.63 which according to the general ledger is still outstanding from D2.

189.  The defendants deny that, and contend that the material processing fees HK$3,850,516.05 (as mentioned above) invoiced by Hui Guang to D2 had been paid by D2 to P2 on behalf of Hui Guang.  Not much light on this contention was cast when D1 gave evidence.

190.  On the one hand, P2 claims on the basis that it was the authorised collection agent of Hui Guang for the outstanding subcontracting fees.  Mr Ng objects to that, on the basis that such cause of action, if at all, should belong to the disclosed principal, namely Hui Guang.  On the other hand, Mr Chiu makes clear that this part of the claim differs not from the rest of this action against D1 for an account on the basis of his duty to provide a proper, complete and accurate account

I9.     Findings

191.  I find that D1 has failed to discharge his duty to account for the discrepancy of HK$1,308,180.90 for the year 2006/2007 in the debtors ledger of FGPP, and failed to account as to why the receivables from Best Tri in the sum of HK$3,664,319.63 from 2004 to 31^st March 2008 in the general ledger remain unpaid.

J.       THE SUPPLIERS INVOICE

192.  There are suppliers’ invoices for the total sum of HK$4,174,751.98 issued to Hui Guang between 2004 and 2008 which P2 has settled for Hui Huang.  P2 says there was no supporting document of the orders and delivery of materials, and the audit evidence also falls short of what is proper, according to Yeung 1^st Report.  Lees in his expert report managed to verify deliveries of materials accounting for HK$815,770.48.  In his supplemental expert report, Lees, with 29 vouchers and supporting documents, was able to verify 4 more delivery notes accounting for an additional sum of HK$60,130.20.  Apart from that, neither accounting expert managed to verify the balance of HK$3,298,851.30.

193.  D1’s case is that there was a running account between Hui Guang and P2, and that the reimbursement by Hui Guang of P2 for what P2 had settled for it would have set off any balance of this item.  There is therefore no good reason to order for an account, even in view of the lack of full record and documentation explaining the balance – again the “no loss” argument.

194.  As seen, the situation was not that there was no document, but lack of full and complete account. There is per se question as to whether D1 has failed his duty to keep proper book and records of P2, and thus satisfaction of his fiduciary of account to P2.  The contention that so long as the total balance shows no loss to P2, there would be no cause for ordering an account, is in my view putting the cart before the horse.

195.  D1 has failed to discharge his duty to account for the sum of HK$3,358,981.50 said to be payment for the Suppliers Invoices.

K.      CASH WITHDRAWALS

196.  22 cash withdrawals from P2 in the total sum of HK$800,000 between 20 June 2005 and 30 January 2008 said to be paid over to Hui Guang were identified in the Yeung 1^st Report.  There was admittedly no record of acknowledgment of receipt of such alleged cash payments by Hui Guang.

197.  D1’s case is that the cash was withdrawn and brought across the border for the purpose of paying the salaries and expenses of Hui Guang at the instruction of P1 on the ground of saving of exchange cost.  P1 denied such allegation.

198.  The accounting experts were alert as to difficulty in audit of cash transactions.  Yeung took the view that the documents in support in respect of these cash withdrawals fell far below the normal auditing standard. Lees felt unable to comment if the normal auditing procedure of verification was followed, but he managed to match 17 of the withdrawals with the general ledgers of Hui Guang in the total sum of HK$680,000.    Lees in his supplemental report managed to identify 7 vouchers that could correspond with documents relating to salaries and other expenses/payments of Hui Guang.  The amounts were oddly entered in Hui Guang’s general ledgers as amounts payable to D2.  D1 explained that the description of entries was an accounting mistake of his staff. Tam corroborated that in her evidence.

199.  It remains that the accounting experts were unable to verify from Hui Guang’s ledgers that the entries were recorded as salaries paid to the Mainland staff as D1 said.  It requires some stretching of reasoning before one draws inference from the few documents that Lees managed to locate in favour of D1’s answer as a complete one in respect of all the withdrawals in question.  From the perspective of the duty to render full and true account in fulfilment of the fiduciary duty to account for withdrawals from P2, this or reference to the overall balance of account, as Mr Ng repeats, does not suffice.

200.  D1 has failed to give a satisfactory account in respect of the 22 withdrawals of the cash in the total sum of HK$800,000.

L.      THE 2 CHEQUES

201.  The Accounting Documents revealed two cheque payments by P2.

202.  The first cheque was dated 13 October 2004 for HK$232,960, of which HK$222,759 was debited to P2’s current account with P1, which P1 now accepts was payment for his purpose.  The balance of HK$10,201 was debited to P2’s current account with D2, which P1 still takes issue about.  D1’s case that the sum of HK$10,210 was used to offset the subcontracting fees owed by P2 to D2.  Yet nothing much was said in evidence about this.

203.  The second cheque was dated 14 August 2006 for HK$100,000 drawn by P2 in favour of D2, which was debited to P2’s current account with Hui Guang.  D1’s case is that upon receipt of the cheque, payment of the sum was made by D2 to Hui Guang.  The reason for the arrangement was that D2, but not P2, had the capacity, pursuant to a business contract with Hui Guang, to remit foreign currency to Hui Guang.  D2 therefore acted on behalf of P2 on this occasion.  It appears that P2’s complaint is not whether or not the amount was indeed received by Hui Guang, but what for.

204.  I find that:

(1)     D1 has failed to give a satisfactory account in respect of the HK$10,210, being part proceeds of the cheque no 399614 drawn against P2, and paid to D2 on 13^th October 2004.

(2)     D1 has failed to give a satisfactory account in respect of the HK$100,000, being part proceeds of the cheque no 399614 drawn against P2 and paid to D2 on 14^th August 2006.

M.     THE JOURNAL ENTRIES

205.  Originally 6 journal entries in the current account of P2 with D2 and Hui Guang were questioned in Yeung’s 1^st Report for the lack of accounting documents in explanation.  After considering the explanation by the NTT Letter, P2 now decides to pursue only 2 of them.  They are entries numbered JV0308005 (for HK$352,885.46) and JV0308004 (HK$691,739.96), which were recorded as bad debts.

206.  The defendants pleaded no case in respect of this item.  No further explanation was tendered, including by Tse, during the trial of these 2 items.

207.  In the circumstances, I have no basis for accepting that satisfactory account has been provided in respect of these 2 journal entries.

N.      STATUTORY RELIEF

208.  In respect of the Items, D1 seeks to run an alternative case in the event he is found to be in breach of his duty to P2 in respect of any or all of the Items.  This is his reliance on section 358(1) of the CO[1], which reads:

“If in any proceeding for negligence, default, breach of duty, or breach of trust against a person to whom this section applies it appears to the court hearing the case that that person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that, having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, that court may relieve him, either wholly or partly, from his liability on such terms as the court may think fit.”

209.  The person to whom section 358 applies includes officers of a company, and hence D1 in the claim by P2 in the present case.

210.  Application for relief under section 358 was not pleaded in the defence.  Mr Ng argues that this is pure issue of law, which requires no pleading.  I hesitate about the correctness of such contention, in view of the express wordings of the section.  The court is expected to have regard to all the circumstances of the case in order to come to a view as to whether or not the director has acted honestly and reasonably.  It is for the director being impeached to put forward the circumstances that he intends to rely on so that the company is in a position to deal with them.

211.  Mr Ng relies on Re Kirbys Coaches Ltd [1991] BCLC 414.  There section 727 of the Companies Act 1985, which was equivalent in terms to section 358 here, was actually pleaded in defence.  In question was whether or not further and better particulars should be ordered in respect of such plea.  Hoffmann J apparently had similar hesitation as this court does, but in view of another binding authority on the point, his Lordship decided that if such reliance on statutory relief did not need to be pleaded in the first place, its actual pleading would not have entitled the opponent to request for particulars of the facts and circumstances relied on for seeking such relief.

212.  I am not bound to follow Re Kirbys Coaches Ltd, particularly in view of what drove the court there to come to his conclusion.  However, if I follow Re Kirbys Coaches Ltd, it does not follow that D1 will have the liberty to proceed on the basis of any circumstances or evidence other than what has already been revealed and adduced for the purpose of the parties’ pleaded cases.  There is no question of consideration of extra fact for the purpose gauging the honesty and reasonableness of D1’s conduct.  This leads to the following observation of Mr Chiu.

213.  Mr Chiu argues that in respect of items which infringed the conflict rule (ie the management fees and the subcontracting fees arrangement), there is no room for any relief or else the strictness of the conflict rule will be seriously watered down.  In respect of the items which D1 is liable because he was unable to discharge his burden of giving an account, it is, Mr Chiu argues, difficult to see how such ground is made out for discretionary relief be granted.  It is not that the court finds that there was any reasonable ground given for the non-production of the supporting documents or account such as causes beyond his control or genuine mistaken belief.

214.  The manner of D1 in producing documents, Mr Chiu argues, is evident.  D1 had waited after mid-2016 before producing a large quantity of documents of Hui Guang and the NTT Letters in an attempt to explain the accounts, but still failed to produce at least 6 schedules which were attached to those letters, as Tse confirmed in her evidence.  Important witnesses such as Jacky Liu and Jacky Chan, who are expected to be able to explain the accounting arrangements and circumstances, were not called, while D1 was admittedly unable to explain the treatment of the accounts.  It was during closing submission that Mr Ng suggested for the first time that Jacky Chan had passed away.  To, auditor for D2 and D3 at the material times was called, but his evidence concerned a specific scope.

215.  As the authorities suggest, insofar as P2’s entitlement to an account is concerned, it is not here to prove breach and loss that would entitle it to damages.  Rather, once it is found that the accounts are doubtful, it will be for D1 to make good his explanation and justification for the items complained about.  All circumstances considered, I agree with Mr Chiu that this is not an appropriate case to grant the statutory relief.

O.      THE QUESTION OF RELIEF

O1.    No loss

216.  As mentioned, Mr Ng emphasizes that no loss was suffered by P2, if one refers to the accounting treatment in its financial statements and the general ledgers.  Except for the management fees, which were P2’s own expenses, the other items of complaint share what Mr Ng describes as a common thread, namely they were accounted for by corresponding entries in Hui Guang.  Further, a table was prepared to show that the income collected by P2 on behalf of Hui Guang, ie what P2 owed to Hui Guang, exceeded the expenses it paid on behalf of Hui Guang, ie what Hui Guang owed to P2.  The net result was no loss to P2.

217.  As to that, Mr Chiu submits that the alleged no real loss is not an answer to the discharge of the duty in the circumstances of this case.  In principle, loss is not the basis of equitable relief.  The relevant equity is primarily to ensure an agent or trustee would observe his fiduciary duties instead of recouping the loss for the beneficiaries as can be proved.  In reality, reference is made to the need to scrutinise the very basis of the accounting treatment in the present case which, as mentioned, was geared in accordance with the understanding of D1 (who was in sole control of the business) which differed from that of P1.  The results as the accounts apparently showed will have to be viewed in this light. I tend to agree.

218.  As far as the figures set out in the defendants’ table, Mr Chiu also points out discrepancies between those figures according to the general ledgers and the figures set out in the Yeung 2^nd Report (which came from the figures in the consolidated accounts of P2 and Hui Guang, and were confirmed by Tse) throughout 2005 to 2008.  Unless these can be satisfactorily explained, reliance on those documents now in support the defendants case is put on an uncertain footing.

O2.    Account and equitable compensation

219.  Mr Ng submits that the taking of an account and an award of equitable compensation are inconsistent remedies requiring and entitling P2 to make an election between the two.  As to that, both counsel refer to the following explanation by Millet NPJ in Libertarian Investment Ltd v Hall (2013) 15 HKCFA 681:

“166.  There are traces in the arguments both here and below of the proposition that account and equitable compensation are alternative and inconsistent remedies and that a plaintiff must elect between them. It is only right to say at once that this is not the ground on which either court below ordered an account when the plaintiff asked for equitable compensation; but since the proposition is advanced from time to time it is appropriate to explain why it is mistaken.

167.   It is often said that the primary remedy for breach of trust or fiduciary duty is an order for an account, but this is an abbreviated and potentially misleading statement of the true position. In the first place an account is not a remedy for wrong. Trustees and most fiduciaries are accounting parties, and their beneficiaries or principals do not have to prove that there has been a breach of trust or fiduciary duty in order to obtain an order for account. Once the trust or fiduciary relationship is established or conceded the beneficiary or principal is entitled to an account as of right. Although like all equitable remedies an order for an account is discretionary, in making the order the court is not granting a remedy for wrong but enforcing performance of an obligation.

168.   In the second place an order for an account does not in itself provide the plaintiff with a remedy; it is merely the first step in a process which enables him to identify and quantify any deficit in the trust fund and seek the appropriate means by which it may be made good. Once the plaintiff has been provided with an account he can falsify and surcharge it. If the account discloses an unauthorised disbursement the plaintiff may falsify it, that is to say ask for the disbursement to be disallowed. This will produce a deficit which the defendant must make good, either in specie or in money. Where the defendant is ordered to make good the deficit by the payment of money, the award is sometimes described as the payment of equitable compensation; but it is not compensation for loss but restitutionary or restorative. The amount of the award is measured by the objective value of the property lost determined at the date when the account is taken and with the full benefit of hindsight.

169.   But the plaintiff is not bound to ask for the disbursement to be disallowed. He is entitled to ask for an inquiry to discover what the defendant did with the trust money which he misappropriated and whether he dissipated it or invested it, and if he invested it whether he did so at a profit or a loss. If he dissipated it or invested it at a loss, the plaintiff will naturally have the disbursement disallowed and disclaim any interest in the property in which it was invested by treating it as bought with the defendant’s own money. If, however, the defendant invested the money at a profit, the plaintiff is not bound to ask for the disbursement to be disallowed. He can treat it as an authorised disbursement, treat the property in which it has been invested as acquired with trust money, and follow or trace the property and demand that it or its traceable proceeds be restored to the trust in specie.

170.   If on the other hand the account is shown to be defective because it does not include property which the defendant in breach of his duty failed to obtain for the benefit of the trust, the plaintiff can surcharge the account by asking for it to be taken on the basis of “wilful default”, that is to say on the basis that the property should be treated as if the defendant had performed his duty and obtained it for the benefit of the trust. Since ex hypothesi the property has not been acquired, the defendant will be ordered to make good the deficiency by the payment of money, and in this case the payment of “equitable compensation” is akin to the payment of damages as compensation for loss.

171.   In an appropriate case the defendant will be charged, not merely with the value of the property at the date when it ought to have been acquired or at the date when the account is taken, but at its highest intermediate value. This is on the footing either that the defendant was a trustee with power to sell the property or that he was a fiduciary who ought to have kept his principal informed and sought his instructions.

172.   At every stage the plaintiff can elect whether or not to seek a further account or inquiry.  The amount of any unauthorised disbursement is often established by evidence at the trial, so that the plaintiff does not need an account but can ask for an award of the appropriate amount of compensation.  Or he may be content with a monetary award rather than attempt to follow or trace the money, in which case he will not ask for an inquiry as to what has become of the trust property.  In short, he may elect not to call for an account or further inquiry if it is unnecessary or unlikely to be fruitful, though the court will always have the last word.”

220.  The question is never one of inconsistency per se between a claim for an account and equitable compensation.

O3.    Relief sought in respect of the Items

221.  Whether or not order an account and enquiry is made is a matter of discretion.  A central theme of the defendants is that it would not be beneficial to order an account on the basis of the “no loss” argument, except in respect of the management fees.  The contrary view, as discussed above, refers.  P2 has established its entitlement to account and enquiry.  Whilst Mr Chiu submits that the consequence of equitable compensation in the amount of most of the items should follow, he acknowledges the complication such as the uncertainty of element of equitable allowance, which may entail further enquiries.  He therefore suggests further direction to be given in respect of submission on the relief on the basis of the findings made in this trial.

P.       THE COUNTERLCLAIMS

222.  The pleaded case is that D1 paid a sum of HK$1,149,798.64 with a view to salvaging Hui Guang, which was spent pursuant to an alleged oral agreement between D1 and P1 over the telephone in October or November 2007.  Under the alleged oral agreement, P1 is said to have agreed to pay D1 back 60% of such expenses.  This is denied by P1.

223.  The evidence of D1 as per his witness statement was but a verbatim repetition of his pleaded case mentioned above.  No explanation was given during the trial as to how the sum was arrived at, and what documentary evidence, if any, made up such sum.  No further light was cast during the trial.

224.  The other counterclaim is for HK$637,360.63 being alleged outstanding management fees payable by P2 to D3.  In view of the above discussion of the management fees, the validity of the basis for the claim is questionable.  The documentary support of this item of counterclaim came from an audit confirmation of P2 which was signed by D1 on 10 February 2010 on the eve of his being ousted as a director and some account ledger report of D3.  It is said that the sum represented the amount paid as salaries to D1 and Kwok.  However, in the trial D1 did not adduce evidence as to how the sum was calculated.

225.  All considered, I am not satisfied that the counterclaim is proved, and would therefore dismiss it.

Q.      ORDER

226.  In respect of P1’s claim against D1 and D3 for declaration and transfer of shares, I give an order in terms as claimed in the plaintiffs’ pleading.

227.  In respect of P2’s claim against the defendants, the parties shall submit within 14 days joint written proposed directions for the purpose of further submissions on the relief on the basis of the findings in this judgment, including whether or not this should be disposed of on paper only or by way of oral hearing.

228.  The counterclaims of D1 and D3 are dismissed.

229.  I also make a nisi order that the plaintiffs should have their costs of this action (including any costs reserved).  Such costs shall be taxed, if not agreed.

MR SIMON CHIU, INSTRUCTED BY KAM & FAN, FOR THE PLAINTIFFS

MR NG MAN SANG ALAN, MS JANE HO, INSTRUCTED BY PHILIP TAM & CO, FOR THE DEFENDANTS

HCA 1439/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1439 OF 2012

_____________

D E C I S I O N
_____________

THE APPLICATIONS

1. The plaintiffs have taken out two summonses, one for leave to adduce expert evidence, the other for amending the summons for expert evidence.

2. The defendants have no objection to the summons for amending the expert evidence summons.  An order in terms will be granted, with costs of the application to the defendants to be assessed at the end of this hearing.

3. The remaining summons on expert evidence is contested.

4. The parties are legally represented.[1]

5. The factual background has been set out in my Decision delivered on 4 March 2016 in respect of other interlocutory applications between the parties.  For brevity of this Decision, I shall not repeat it here.

THE PROPOSED ISSUES IN DISPUTE

6. In the Re-Amended summons, the plaintiffs have suggested two broad issues on which expert evidence should be adduced at trial.  They are categorized as paragraph 1(a) and (b) respectively.

7. The defendants have no objection that expert evidence should be adduced at trial.  They also have no dispute on paragraph 1(a). They only dispute the proposed paragraph 1(b).

8. Paragraph 1(a) as agreed is as follows:

“(a) In connection with the 2^nd Plaintiff’s claims against the 1^st Defendant (who was the director of the 2^nd Plaintiff at the material time) for an account of the 2^nd Plaintiff and for breach of director’s duty, and on the basis of the “Accounting Documents” being documents so far obtained by the Plaintiffs in respect of the financial affairs of the 2^nd Plaintiff and Guangzhou City Hui Guang Packaging Materials Company Limited, to express a view on the following:-

(i) Why are various accounting items, namely management fees, transportation expenses, sub-contracting fee, supplier invoices, cash withdrawal, cheque payments to the 2^nd Defendant and certain journal entries irregular and/or baseless according to the professional accountancy practice and/or standard?

(ii) In the light of the professional accountancy practice and/or standard, the Defendants’ version and/or justification of the state of account of the 2^nd Plaintiff over the aforesaid accounting items as pleaded in the Defendants’ Re-Amended Defence and Counterclaim filed on 28 October 2015 and their Answers to the Plaintiffs’ Request for Further & Better Particulars of their Defence and Counterclaim filed on 12 November 2012.

(iii) How did the aforesaid accounting item of sub-contracting fee adversely affect the financial interest of the 2^nd Plaintiff in the period when the 1^st Defendant was the director of the 2^nd Plaintiff?”[2]

9. The discussion today will focus on the disputed paragraph 1(b) only.

10. The plaintiffs’ proposal is:

“In connection with the allegations of the 1^st Defendant (raised in support of the 1^st Defendant’s case that there was an agreement in October 2003 of an option to the 1^st Plaintiff to purchase 40% of the shares of the 2^nd Defendant by paying the 1^st Defendant a sum of HK$520,000) that the 1^st Defendant and/or the 3^rd Defendant had incurred HK$2.8 million to acquire two machines from Fine Arts Offset Printing Co. Ltd. (indirectly through the previous shareholders of the 2^nd Defendant to whom Fine Arts allegedly assigned those 2 machines) at the same time as the acquisition of the entire shares of the 2^nd Defendant through the 3^rd Defendant (with alleged breakdown of the sources of funds), and later assigned the two sets of machines to the use of the 2^nd Defendant, whether the relevant accounting documents produced by the Defendants (including the sale and purchase agreement, invoices, receipts and a loan agreement generated in the purchase of the 2 machines and the 2^nd Defendant, and the audited accounts of the 2^nd Defendant and/or the 3^rd Defendants for the financial years 2003 to 2007) are, on their proper accounting interpretation based on professional accountancy practice, supportive or inconsistent with that allegation.”[3]

11. The defendants’ proposal is:

“In connection with the case of the 1^st Defendant (raised in support of the 1^st Defendant’s case that there was an agreement in October 2003 of an option to the 1^st Plaintiff to purchase 40% of the shares of the 2^nd Defendant by paying the 1^st Defendant a sum of HK$520,000.00) that the 1^st Defendant paid HK$2.8 million to purchase via the 3^rd Defendant 21,000 shares of the 2^nd Defendant from Madam Fung and Mr. Tang (both were then the shareholders of the 2^nd Defendant) together with some printing machines (including Two colour offset對開雙色RZF 3B 1929OB/646 and Four-Colour 對開4色 R604 3BD 23173B/656) assigned by Madam Fung and Mr. Tang to the 3^rd Defendant, and later by the 3^rd Defendant to the 2^nd Defendant for the latter’s use, whether the printing machines acquired should, as a matter of proper auditing practice, have been recorded in the audited financial statements of the 2^nd and 3^rd Defendants for the financial year ended 31^st March 2004 or their subsequent financial statements because the printing machines being newly acquired by the 1^st Defendant (via the 3^rd Defendant) were eligible for capital depreciation allowance.”

DISCUSSION

The live issues for the expert evidence

12. The expert evidence, as according to the plaintiffs, will serve the purposes of showing that the money paid by the 1^st plaintiff to the 1^st defendant of HK$400,000 was not for the purpose of investment in the acquisition of the shares in the 2^nd defendant.  As such, the 1^st plaintiff was not the business partner with the 1^st defendant in the acquisition of the 2^nd defendant’s shares.  The 1^st defendant received the money from the 1^st plaintiff and held the position of a trustee of the 1^st plaintiff.  The 1^st defendant was not honest in the handling of the accounts by not entering the value of the two off-set printing machines into the financial statements of the 2^nd and 3^rd defendants and the 1^st defendant, being the sole director of Hui Guang, had been in breach of trust as a director of the Hui Guang. If the court accepts the plaintiffs’ allegations above, the court will find that the 1^st defendant is the trustee, holding 40% of the 2^nd defendant’s shares for the 1^st plaintiff.  The 1^st plaintiff therefore requires the 1^st defendant to hold such shares in the 2^nd defendant to his order. In a nutshell, the plaintiffs rely upon the expert evidence to establish the fact that the 1^st defendant is the 1^st plaintiff’s trustee holding the 2^nd defendant’s shares on trust for him.

13. According to the 1^st defendant, he admits that the value of the two off-set printing machines was not entered in the financial accounts of the 2^nd and 3^rd defendants.  He has Mr. To, his auditor responsible for entering the financial entries for the 2^nd and 3^rd defendants to explain the reasons why such value of the two off-set printing machines should not be entered according to the accounting practice.

14. The main purposes of the defendants for the expert evidence are to explain Mr. To’s treatment of the financial accounts of the 2^nd and 3^rd defendants; that the 1^st defendant had not been in breach of his duty as director of the 2^nd plaintiff and that the 1^st plaintiff was his business partner in the acquisition of the 2^nd defendant’s shares and therefore the 1^st plaintiff was only entitled to exercise his right under an option agreement to pay for the 40% shareholding of the 2^nd defendant.

The relevant legal principles

15. It is important to note the function of expert evidence for the trial.  The evidence is relevant if it is helpful to the court in arriving at its decision on one or more of the issues to be resolved.  Wong Hoi Fung v American International Assurance Company (Bermuda) Limited & Shrila Chan [2002] 3 HKLRD 507.

16. However, evidence meeting the test could still be excluded if the court took the view that calling it would not be helpful to the court in resolving any issue in the case justly.  The ultimate decision must be for the court to determine whether the evidence can be of assistance for the trial. Barings plc (in liquidation) and another v Coopers & Lybrand (a firm) and Others v Mattar and Others [2001] All ER (D) 110 by Evans-Lombe J.  See also §8 of Li Xiao Yun & Another v China Gas Holdings Ltd (unrep. HCCL 18/2011, M Chan J, 8 March 2013), which emphasized that the court has complete control in determining whether and what expert evidence should be adduced at the trial.

17. Expert evidence must be confined to the live issues of dispute between the parties, which must be sought from the pleadings China Gold Finance Limited v CIL Holdings Limited & Ors (unreported, HCA 2900/2001, 25 September 2012, at paras. 17-18).  See also §21 of the Court of Final Appeal’s Decision in Kwok Chin Wing v 21 Holdings Ltd (formerly known as GFT Holdings Ltd, Capital Prosper Ltd and Rockapetta Holdings Ltd and Another) (2013) 16 HKCFAR 663, per the CJ.

18. It will be helpful to bear in mind the factors of real issues of dispute between the parties; the burden of proof; fair trial and proportionality for the determination of the scope of expert evidence.  See paragraph 10 of Pak Ko Batteries Factory Ltd & Others v New Leader Battery Industry Ltd (unreported, HCA1139/2007, 14 January 2014).

19. Having identified the live issues of dispute between the parties, it will be quite clear that their disputes over paragraph 1(b) of the Re-Amended summons can be resolved quite easily.

20. The fundamental principle for the court to exercise its discretion as the Court of Final Appeal in Poon Hau Kei v Hsin Chong Construction Co Ltd Taylor Woodrow International Ltd Joint Venture (2004) 7 HKCFAR 148 at §21, citing Bank of America v Chai Yen [1980] 1 WLR 350 at p353 D, Lord Lane, delivering the advice of the Privy Council: “ ‘the essence of any rule of procedure must be fairness’.  The same is true of any rule of practice.”

Procedural fairness

21. This morning, there has been a meaningful discussion over the difference between the plaintiffs’ proposed instructions and those of the defendants’ for expert evidence.  The difference between these versions is really small.  This may be viewed differently by the experts.  However, the instructions must be fair to all parties at the trial.

22. In this matter, fairness means that each party should be given the opportunity of advancing his case or defeating the other’s case.

23. In the circumstances, both versions of the plaintiffs’ and of the defendants’ should be set out in the instructions to the experts.  Bearing in mind the purposes of the expert evidence in this matter, the burden is on the plaintiffs to prove their case against the defendants.  The plaintiffs should be given the first opportunity of adducing their expert evidence.  Those two sets of issues mentioned above should be given to the plaintiffs’ expert to give his expert opinion.  The defendants will be given the liberty to produce expert evidence in response to the plaintiffs’ expert evidence.  Finally, the plaintiffs will have the last chance to reply to the defendants’ expert evidence, if so advised.  The court will be in a position to understand the expert evidence and may be able to come to the finding of the facts at the end of the trial.

24. As to the costs of this application, including the hearing today, I agree with the defendants that the costs for the preparation of the affidavits should be disallowed, following the decision of Madam Registrar Au-Yeung ( as she then was) in Kam Hing Trading (HK) Ltd v The People’s Insurance Company of China (HK) Ltd & Another [2009] 4 HKC 531. Yesterday afternoon, the plaintiffs’ solicitors sent me two missing pages of counsel’s written submissions, in which counsel submits that the Fan’s 3^rd affirmation had explained the reasons for the inference that he had drawn of the defendants’ case from the pleadings.  This, however, will not assist the plaintiffs as they had not obtained leave from the court for adopting affidavit evidence for the application as provided under the said Decision.  This set of costs is disallowed.

25. The parties have been trying to agree the expert evidence, which they were unable to do so by way of consent summons.  Master Ho had made comments that the proposed terms were too general and that the trial judge should not have to make cross references to the pleadings.  Because of the master’s comments, the parties reviewed their agreed instructions to the expert and they had created wider gap between themselves.  Since this is a case management conference hearing and neither party has won the argument, the costs of the application, including the costs of this hearing (with counsel’s certificates) should be in the cause.  As I have heard the argument and seen the preparation for the hearing today, I am in a better position to assess the amount of costs myself here.  In order to save the costs for taxation, I shall assess the costs summarily under O.62 r.9A. I have had the benefit of considering the costs schedules of both parties before me today.  I shall assess the costs of this application to be $ 140,000, to which the successful party of the trial will be entitled.

26. This Court should make some remarks on the written submissions of the defendants where counsel submits that the defendants are entitled to put the dispute over paragraph 1(b) discussed today to the trial judge at the pre-trial review.[4]  This is wrong as pointed out by Lam J. (as he then was) in Chok Yick Interior Design & Engineering Co Ltd v Lai Chi Lun t/a Chi Hung Construction Eng Co (unreported, HCA 1480/2008, 5 May 2010).  The learned judge had said that before the expert evidence had been decided, the matter should not be given leave to set down for trial.

ORDER

27. I shall make an order in terms as follows:

(a) By consent, an order in terms as per paragraph 8 above;

(b) Paragraph 1(b) of the Re-Amended summons be as per paragraph 23, supra;

(c) The plaintiffs’ expert shall within 42 days from the date hereof serve upon the defendants the expert report in accordance with the directions of this Order;

(d) The defendants be at liberty to serve their expert reports in response to the plaintiffs’ expert report within 42 days thereafter;

(e) The plaintiffs be at liberty to serve upon the defendants the expert report in reply within 42 days thereafter;

(f) Costs of this application, including the costs reserved and the costs for today’s hearing as assessed in paragraphs 24 and 25 supra be in the cause.

CASE MANAGEMENT DIRECTIONS

28. The matter is adjourned to 11:30 am on 5 October 2016 for the Case Management Conference.

29. The parties shall file and serve the Listing Questionnaires to inform this Court whether they are ready for trial.

30. The costs of this Case Management Conference be in the cause (15 minutes).

HCA 1439/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1439 OF 2012

_____________

D E C I S I O N
_____________

The Applications

1. There are two summonses of the plaintiffs before the Court.  The first one (“1^st Summons”) dated 21^st December 2015 is to seek an order that the witness statement of To Wai Chung filed on 14^th December 2015 be inadmissible in the trial on the basis that it is in substance an expert opinion evidence without leave first being obtained and the relevant provisions of the RHC have not been complied with.

2. The second one dated 22^nd December 2015 (“2^nd Summons”) is for leave to extend time for the plaintiffs to adduce Notice of Non-admission under Order 27 rule 4 (1)(b) of the RHC.  The order sought would be that “leave be given to the Plaintiffs to file and serve the Notice of Non-admission in respect of the authenticity of a document listed as item 36 in the List of Documents of the Defendants filed on 2^nd July 2013.”

The Brief Facts

3. The facts pleaded by the plaintiffs are complicated and convoluted.  Briefly, the 1^st plaintiff had a family business in the mainland.  He and the 1^st defendant had made an agreement to make use of a company called Hui Guang as a vehicle to take orders from his family business for supplying carton boxes for the family business, making profit from his family business.  But he did not want this to be known to his family members.  Therefore, he allowed another company called Kid Art controlled by the 1^st defendant and his wife to hold Hui Guang’s shares.  Kid Art held Hui Guang’s shares as to 60% on trust for the 1^st plaintiff, the other 40% on trust for the 1^st defendant.  The 1^st plaintiff and the 1^st defendant further agreed that the income of Hui Guang was to be collected and costs paid by a new company, the 2^nd plaintiff  (“Fine Group”) managed entirely by the 1^st defendant as its director.

4. The 1^st defendant had acquired the business of Best Tri, the 2^nd defendant, a printing business.  The 1^st plaintiff alleges that the 1^st defendant agreed to hold 40% of the shareholding of Best Tri on trust for the 1^st plaintiff.  There was a dispute between the 1^st plaintiff and the 1^st defendant over the accounts of Hui Guang and the 1^st defendant had allegedly been in breach of fiduciary duty in the running of the business of the 2^nd plaintiff.  The 1^st plaintiff demanded the 1^st defendant to transfer 40% of Best Tri’s shares to his son.  The 1^st defendant refused.

5. The 1^st plaintiff claims against the 1^st defendant and the 3^rd defendant for a declaration that the 1^st defendant through the 3^rd defendant, or alternatively the 3^rd defendant, is the trustee holding 40% of the issued shares of Best Tri in favour of the 1^st plaintiff and for an order that the 1^st defendant shall cause the 3^rd defendant and the 3^rd defendant shall transfer 40% of the shareholdings of Best Tri to the 1^st plaintiff or his nominee.  The 2^nd plaintiff claims against the 1^st defendant for damages for breach of fiduciary duty.

The 1^st Summons

6. The 1^st plaintiff contests Mr. To Wai Chung’s witness statement.  Mr. To is an auditor and a witness for the 2^nd and the 3^rd defendants.  The 1^st plaintiff agrees that paragraphs 1-5 of Mr. To’s witness statement refer to the facts of the case.  However, the 1^st plaintiff says that paragraph 6 of his witness statement is his expert evidence as an accountant.  The expert evidence is to account for the non-entering into the financial statement of the Best Tri in respect of two off-set printing machines, which is an issue of dispute between the parties.  The 1^st plaintiff submits ‘paragraph 6 of the witness statement is clearly opinion evidence purporting to explain why To Wai Chung, as a professional accountant, accepted that no value were assigned to the two machines (hence inferentially justified their non-appearance in the relevant financial statements of D2).  What is more the grounds he gave were studded with opinions. Examples of phrases indicative of his opinion can be seen in (a) “...would be highly subjective...”, (b) “.....prudence concept dictates...”, (c) “...to me it is clearly not the original contemplation of the vendors...” and (d) “....No value should be assigned...” What is more, much of what he said are not common knowledge but within the expertise of the accounting profession.’[1]

7. The plaintiffs submit that in the absence of expert evidence direction and compliance with the provisions of the RHC relating to experts, the witness statement is inadmissible as evidence in the trial.[2]

8. The defendants argue that Mr. To’s witness statement is to explain the plaintiffs’ allegation that Mr. To as the auditor had failed to put the proper entries into the financial statements of the 2^nd defendant and the 3^rd defendant. According to the defendants, the plaintiffs’ pleaded case is “the alleged purchase of the printing machines by D1 (through D3) by purchasing the shares in D2 and the printing machines, and the subsequent dealing with the printing machines are inconsistent with the audited financial statements of D2 and D3 in that no printing machines appeared to have been injected into either D2 or D3 for the financial year for the period of March 2003 to April 2004, or subsequently in that any injection of assets into the companies must as a matter of auditing practice be recorded in the financial statements since those printing machines, being newly acquired by D1 (through D3) as alleged, were eligible for capital depreciation allowance which the auditor preparing the relevant financial statements for Ds knew or ought to have known.”[3]  It is therefore apparent that Mr. To should “explain why he did not record the printing machines into the relevant audited financial statements of D3 and D2 for claiming capital depreciation allowance.”[4]

9. In relation to paragraph 6 of Mr. To’s witness statement, the defendants say “In the 6^th para. of his Witness Statement, he states from his own personal knowledge the reasons he had in mind during the auditing of the accounts of D2 and D3 why he, being the auditor of D2 and D3, accepted that no separate value should be assigned to the printing machines / assets acquired in the accounts of D2 and D3 as per the 8/12/03 Agreement.”[5] 

10. The real issue between the parties is whether paragraph 6 of Mr. To’s witness statement, in which he explained why he did not record the printing machines into the relevant audited financial statements of the 2^nd and the 3^rd defendants is expert opinion.  The defendants rely upon the authority of Koninklijke Philips Electronics N. V. (Formerly known as N. V. Philips Gloeilampenfabrieken and Philips Electronics N. V.) v Wealthful Technology Ltd [2002] HKEC 740 at § 16 as adopted by Kwan J. (as she then was) in In the matter of Jinro (HK) International Ltd (unreported, HCCW 1352/2001, 26 July 2002 at §22).  The courts held:

“The mere [fact] that factual evidence is given by someone with expertise in a particular discipline does not transform that evidence into expert or opinion evidence although sometimes the line between factual and opinion evidence may not be immediately apparent. For example, an explanation as to how a computer works may be purely descriptive and factual although it may require some expert training on the part of the person giving that explanation. On the other hand, evidence as to the quality of the work of a computer may be a matter of expert opinion.”

11. The defendants also rely upon the rule that an expert who is giving factual expert opinion may also proffer (a) statements of opinion which are reasonably related to the facts within his knowledge and (b) relevant comments based on his own experience.  As long as the principal purpose of the evidence is factual, the evidence should go in as a witness statement (not a report).  Another way of testing this is to consider (a) whether the witness has any direct knowledge of the factual matters about which he testifies since, in general, the true expert’s knowledge of the facts will usually be based on hearsay and (b) whether the opinion is about what a hypothetical person would have done or advised in the situation (rather than what he himself would have done or advised).[6]

12. Section 58 of the Evidence Ordinance (Cap. 8) provides that :

(1) Subject to any rules, where a person is called as a witness in any civil proceedings, his opinion on any relevant matter on which he is qualified to give expert evidence shall be admissible in evidence.”

13. Mr. To, an auditor of the 2^nd and 3^rd defendants, does not dispute that he had not entered the entries of the value of the off-set printing machines in the financial reports of the 2^nd defendant and the 3^rd defendant. He becomes a factual witness in relation to the entries of accounting records in question.  It is only fair that he should be given the opportunity of explaining to the court at trial why he had not made the financial entries as alleged.  As the plaintiffs submit, his evidence will shed light on whether the 1^st defendant was honest in the transactions between him and the 1^st plaintiff.  His explanation will, no doubt, involve his expertise as an auditor.  The purpose of his evidence will be for the court to determine whether the plaintiffs’ assertions are valid, which will be a matter of the fact to be found by the court.  The purpose of the evidence will determine the nature of his evidence.  His evidence is not to be used as an opinion on the relevant matter, but rather as evidence for the determination of the truth of the facts.  Therefore, his opinion as an auditor when he decided not to make entry of the off-set printing machines in the financial statements of the respective companies will be considered whether he had good explanation for the acts that he had done, a factor to determine what he will be telling the court is the truth.  It is on this understanding that factual evidence given by someone with expertise in a particular discipline does not transform that evidence into expert or opinion evidence.

14. Accordingly, I find that paragraph 6 of Mr. To’s witness statement is not expert evidence.

15. Of course, if the plaintiffs consider that Mr. To’s evidence cannot be understood by the court without the assistance of expert evidence or the plaintiffs may wish to have expert evidence to assist cross-examination of Mr. To, the plaintiffs may be at liberty to take out the application for leave to adduce expert evidence on the defendants’ pleaded case, reference being made to Mr. To’s witness statement.

The 2^nd Summons

16. As to the second summons for time extension to file and serve the Notice of Non-admission, the plaintiffs admit “Granted that under the Order 27 rule 4(2) the Plaintiffs should have filed the notice of non-admission within 21 days of the expiration for the date of inspection, it is submitted that there is no prejudice to the Defendants for the late filing of the notice of non-admission and there is no ground to require the Plaintiffs to bear the costs of the Defendants if they should want to file a supplemental witness statement (which they have yet to apply and no draft has been supplied).”[7]

17. The plaintiffs submit that this piece of evidence, viz. the Copy Deposit Form of $400,000 into The Hong Kong Bank, with handwritings to the effect that the money was received for the investment in Best Tri is a very important piece of evidence for the plaintiffs because the main argument between the plaintiffs and defendants is whether the sum of $400,000 was paid by the 1^st plaintiff for the investment in Best Tri, which the plaintiffs deny.  The evidence boils down to the issue whether the 1^st defendant was holding the position of being a trustee as asserted by the plaintiffs, or as partners in the investment in Best Tri, the defendants’ case.  The defendants say that there was an option agreement between the 1^st plaintiff and the 1^st defendant, which the 1^st plaintiff did not exercise for the 40% shares in Best Tri.

18. The defendants are quite right to say that the plaintiffs have not filed any affidavit in support of their application stating the explanation for the delay of more than two years.  The plaintiffs argue that it is not necessary to do so as the fact is clear and the 1^st defendant’s witness statement has not explained fully the Copy Deposit Form.  That may be the case.  But it does not alter the requirement as set out by the court in Gotland Enterprises Ltd v Kwok Chi Yau (No.2) [2013] 3 HKLRD 490 at §§6-7, in which the learned judge had held that without explanation, the court might refuse the application as the court would not be able to consider the applicant’s application whether it should exercise its discretion.

19. Despite the defendants’ objection to the application, the defendants do not dispute that at one stage the defendants agreed to allow the extension of time subject to the plaintiffs bearing their costs for the defendants’ supplemental witness statement to deal with the provenance of the Copy Deposit Form and the circumstances in which the 1^st defendant wrote on the Copy Deposit Form.[8]  The defendants have not been able to say what prejudice the defendants would suffer apart from costs in support of their argument that the plaintiffs’ application should be rejected.

20. Therefore, it is clearly an issue of costs for the plaintiffs’ application for extension of time.  This is agreed by the defendants today appearing before me.

21. Order 62, r.3(4), RHC provides:

(4) The costs of and occasioned by any application to extend the time fixed by these rules, or any direction or order thereunder, for serving or filing any document or the doing of any other act (including the costs of any order made on the application) shall be borne by the party making the application, unless the Court otherwise orders.

22. The only reason given by the plaintiffs in the written submissions is that there is no prejudice to the defendants for such extension of time for them to file and serve the Notice of Non-admission under O.27, r.4(2).  This morning, the plaintiffs further submit that the 1^st defendant should have elaborated the Copy Deposit Form in his witness statement and he should not be awarded the costs occasioned by his own failure.  In my view, these reasons do not exempt the plaintiffs’ liability to pay the costs to the defendants for this application under O.62, r. 3(4) RHC.

23. The plaintiffs have to pay the costs of and occasioned by the extension of time as requested.

Costs and Order

24. As to the costs of these applications, the plaintiffs agree that the costs of today’s hearing in respect of the two summonses should follow the event and be ordered in favour of the defendants.  The costs of today’s hearing are therefore awarded to the defendants, with certificate for counsel.  They are assessed under O.62, r. 9A at $90,000 to be paid by the plaintiffs to the defendants within 28 days from the date hereof.

25. This Court now makes an order in terms as follows:

a. The plaintiffs’ 1^st summons be dismissed;

b. Time be extended to the plaintiffs to file and serve the Notice of Non-admission under Order 27, r.4(2) RHC within 7 days from the date hereof and the defendants be at liberty to apply for leave to serve supplemental witness statement to explain the provenance of the Copy Deposit Form within 14 day thereafter;

c. The costs of and occasioned by the plaintiffs’ application for the extension of time under b. above shall be to the defendants in any event, to be taxed if not agreed.

HCA 1439/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1439 OF 2012

____________

__________________

D E C I S I O N

__________________

I. INTRODUCTION

1. The 1^st and 2^nd plaintiffs (“P1” and “P2”, collectively “Ps”) claimed that P1 used to own/control a Hong Kong company called Everbest Printing Company Limited (“Everbest”) which carried on business of printing and packing, but it was sold to a third party in 2005 with P1 remaining as its consultant until June 2006. 

2. There was no dispute that:

(a) in/about 1992/1993, P1 became acquainted with the 1^st defendant (“D1”);

(b) in/about 1995, P1 and D1 invested in equal shares in 2 shops in Sin Tat Plaza, Mongkok (“Mongkok Shops”) held via Kid Art Limited (“Kid Art”).[1]

(c) D1 and his wife owned/controlled Kid Art;[2]

(d) P2 was acquired for the purpose of giving effect to the business cooperation between P1 and D1;

(e) D1 via the 3^rd defendant (“D3”) acquired the 2^nd defendant (“D2”) to engage in the business of printing and supply of packing materials,[3] and D3 and D1 respectively held 20,999 shares and 1 share in D2;

(f) D1 and his wife respectively held 6 shares and 4 shares[4] in D3, and they were the directors of D2 and D3;

(g) at all material times, D1 exercised/exercises de facto control over D2 (since its acquisition) and D3;

(h) Kid Art, P2, D2 and D3 were Hong Kong companies.

3. The Ps and D1/D2/D3 (collectively, “Ds”) disagreed over the basis upon which D1 exercised de facto control over D2.  Ps’ pleadings averred that at the end 2003, P1 (who reposed substantial trust and confidence in D1) discussed with D1 about a possible business joint venture, and as a result they reached an oral agreement in the following terms:

(a) P1 and D1 would set up a new company in Mainland China (“Proposed Company”) to engage in the business of production and supply of carton boxes and packaging materials;

(b) D1 would be responsible for the daily management and running of the Proposed Company;

(c) P1 would be responsible for the bulk of the initial capital required for setting up the Proposed Company to enable it to reach a state of substantive operation;

(d) P1 would direct sub-contracting business from Everbest to the Proposed Company to ensure its initial profitability as a going concern;

(e) P1 and D1 would respectively own 60% and 40% of the shareholding in the Proposed Company, and be entitled to its profits proportionate to their respective shareholding;

(f) P1 did not wish his share in the Proposed Company to become known to others, so his 60% shareholding would be held indirectly by another company or by D1 in trust for him;

(g) in consideration of D1 being given 40% shareholding in the Proposed Company and sharing 40% of its profits, D1 would hold 40% of D2’s issued shares (or cause the same to be so held) in trust for P1 (“Trust forD2 Shares”).

4. The Ps denied any option to purchase 40% shareholding in D2 was raised or discussed between P1 and D1 as alleged by the Ds in the paragraph below or at all since P1 had already acquired 40% interest in D2 pursuant to the Trust for D2 Shares under the aforesaid agreement.  The Ps also denied P1 ever agreed to invest or at any time invested HK$400,000 in D1 by paying a cheque in the sum of HK$400,000 as alleged by the Ds in the paragraph below or at all.  The Ps averred that on/about 24 November 2003 he gave a cheque in the sum of HK$400,000 in favour of Kid Art drawn on Dao Heng Bank Limited (“Cheque”) for the express purpose of setting up the Proposed Company and not for any other purpose.

5. On the other hand, the Ds pleaded that D1 acquired D2 (and hence its business) for the purchase price of HK$2,800,000 (“D2 Price”), and also acquired D3 to hold all of D2’s assets and to pay salaries to D2’s management staff.  The D2 Price comprised HK$1,900,000 invested by D1 (“D1 Investment”), HK$400,000 invested by P1 (“P1 Investment”) and HK$500,000 financed by Kid Art via a loan from Pacific Finance (Hong Kong) Limited (“Lender”) (“KA Investment”).[5] The Ds averred that P1 effected the P1 Investment by giving the Cheque in the sum of HK$400,000, and in late November 2003 at Everbest’s office in Nansha, Mainland China (“Everbest Office”) P1 handed over to D1 a copy deposit slip evidencing the deposit of the Cheque and D1 acknowledged receipt by signing on such copy deposit slip.[6]

6. The Ds went on to plead that in October 2003 at the Everbest Office, P1 and D1 orally agreed that P1 would have an option to acquire 40% shareholding in D2 if he would pay D1 HK$520,000 (ie 40% of the HK$1,300,000 invested by D1) within 3 years from November 2003 (“Option”), but if P1 did not exercise the Option, the sum he had invested in acquiring D2 would be regarded as a loan of such sum to D2.  On 15 November 2003, D1 started to run/operate D2’s business of printing and supply of packing materials.  P1 did not pay D1 the sum of HK$520,000 within the 3 years’ option period, and on various occasions in 2006-2007 he intimated to D1 he did not want to exercise the Option and would opt for treating the sum(s) he invested as monies he lent to D2.

7. The Ds further averred that in late 2003 P1 and D1 discussed a possible business joint venture and reached an oral agreement on the terms set out in paragraph 3(a)-(b) and (d)-(f) above.  The Ds claimed (but the Ps denied)[7] it was further agreed that D1 would direct sub‑contracting business from D2 to the Proposed Company. The Ds denied the existence and/or eventual breach of the Trust for D2 Shares or the existence of any trust in respect of D2’s shares as alleged or at all.

8. There was no dispute that:

(a) on/about 16 June 2004 D1 obtained formal approval from the PRC government to establish a wholly owned foreign enterprise company 廣州市匯光包裝材料有限公司 (“Hui Guang”) that engaged in the business of production/supply of carton boxes and packaging materials;

(b) D1 was appointed the legal representative and director of Hui Guang with complete control over the accounts and management of the company;

(c) P1 and D1 agreed that Kid Art (then still wholly owned/ controlled by D1 and his wife) would be used as the nominal sole corporate shareholder/investor of Hui Guang even though the initial capital all came from P1;

(d) on various occasions in 2004, P1 further injected a total sum of RMB810,000 (or about US$98,780 at the then exchange rate) into Hui Guang for its initial expenses of setting up an operational factory (including employment of staff and purchase of machines), and Hui Guang’s remaining capital would be met by initial income received from orders placed by Everbest;[8]

(e) on/after 29 June 2004 when Hui Guang received the business permit, P1 procured Everbest to place orders with Hui Guang, thus ensuring a steady source of income for the company;

(f) P1 and D1 agreed Kid Art would hold 60% and 40% of the shares in Hui Guang respectively in trust for P1 and D1 even though Kid Art was then wholly owned/controlled by D1 and his wife.

9. In respect of paragraph 8(c) above, the Ds pleaded that P2 was acquired for implementation of the agreement pleaded by them and to receive payment from the customers of the Proposed Company including Everbest.  Initially, it was intended that P2 would be the corporate owner/investor of the Proposed Company, but upon discovery that PRC law did not permit a newly formed company with no prior business dealings to become the owner/investor of the Proposed Company, P1 and D1 agreed that Kid Art would be the nominal sole corporate owner/investor of the Proposed Company.  The Ds further averred that (a) a service agreement was entered into between P2 and Hui Guang whereby Hui Guang would pay P2 service fee based on 11% of the monthly net sales figures for banking/financial services that P2 rendered to Hui Guang, and (b) on various occasions between March and August 2004 D1 injected a total sum of RMB373,850 (equivalent to HK$351,658.76) into Hui Guang.

10. The Ps accepted D1 did make an indirect contribution to the setting up of Hui Guang by paying HK$100,000 for the share capital of P2 which was set up for the purpose of receiving income from Hui Guang.  Such capital contribution of HK$100,000 by D1 for the share capital of P2 was initially effected by D1 making a short term loan of about HK$300,000 to P2, which short term loan was repaid to D1 by P2 by way of (a) payment of a sum of HK$36,600 on one occasion and (b) 2 subsequent payments in the form of dividends (with adjustments), leaving an outstanding balance of HK$100,000 that was treated as D1’s contribution to P2’s share capital.

11. The Ps pleaded that D1 paid the purchase price for D2 in a sum unknown to P1.  In/about late 2003 or early 2004, P1 and D1 jointly raised a second mortgage with the Lender on the Mongkok Shops via Kid Art for a loan of HK$500,000 (“KA Loan”) in aid of setting up the business of D2.  But given his 40% interest in D2 under the Trust for D2 Shares, P1 was only liable to contribute HK$200,000 out of the KA Loan and was entitled to withdraw HK$50,000 out of such loan for his own use.  But D1 asked P1 to lend such sum of HK$50,000 to D2 for use for the time being, and D1 (to assure P1) on his own volition wrote an unsigned cheque of D2 for HK$50,000 in favour of North Pine Ltd (wholly owned by P1) and issued a note dated 25 February 2004 in his own handwriting/signature with D2’s chop to expressly acknowledge that P1 was owed HK$50,000 out of the KA Loan from the Lender in accordance with the respective shares of D1 (60%) and P1 (40%) as to D2’s share capital. 

12. There was no dispute that Kid Art maintained an account with The Hongkong and Shanghai Banking Corporation Ltd (“HSBC Account”)[9] and another one with DBS Bank Ltd (“DBS Account”).  The Ds claimed that the DBS Account was under P1’s control, but the Ps denied this, claiming that both P1 and D1 were signatories of the DBS Account, and that for business purpose P1 (who never withdrew money from the DBS Account) entrusted the operation/management of the DBS Account to D1.

13. The Ps averred that on/about 16 March 2006 D1 caused the transfer of a sum of HK$200,000 from the HSBC Account to the DBS Account (but in 2008 P1 discovered from certain accounting documents of Hui Guang and P2 he obtained and he believed that the HSBC Account was operated solely by D1 for his own purpose, that it was already closed down after Hui Guang became fully operational, and that D1 surreptiously used such account to receive funds from D2).[10] In June 2006, D1 caused D2 to declare a dividend of HK$200,000 out of the monies in the DBS Account, and P1’s share under the Trust for D2 Shares was HK$80,000.  After deducting P1’s share in respect of Kid Art’s tax liability of HK$25,000, D1 gave P1 a personal cheque dated 6 June 2006 drawn on Bank of East Asia Ltd (“BEA”) for HK$55,000 as P1’s entitlement to the dividend declared by D2, and D1 was believed to have paid himself the sum of HK$55,000 from monies in the DBS Account.

14. On the other hand, the Ds claimed Kid Art borrowed the KA Loan of HK$500,000 from the Lender to finance D1’s purchase of D2 and D3.  Each of P1 and D1 was entitled to HK$250,000 of the KA Loan, but P1 only lent HK$200,000 to D2, so D1 wrote an unsigned cheque of D2 in the sum of HK$200,000 in favour of North Pine Ltd (wholly owned by P1).  Such unsigned cheque was later signed with amendment of the name of the payee to P1.  In January/February 2006, P1 was in need of money for his real property investment in Beijing, and he requested D2 by telephone to repay the sum of HK$200,000 lent as aforesaid.  On 16 March 2006, D1 issued a cheque of Kid Art to transfer HK$200,000 from the HSBC Account to the DBS Account for repayment to P1.[11] D1 issued a personal cheque dated 6 June 2006 payable to P1 drawn on the BEA in the sum of HK$55,000. Ds denied Ps’ allegations including the averment that D1 had withdrawn HK$200,000 from the DBS Account or at all.

15. The Ps claimed (but the Ds did not admit) that D1 provided P1 with D2’s Report and Financial Statement for the year ended 31 March 2005 (“D2 04/05 Report”) to P1 on the basis that P1 was 40% beneficial owner of D2.

16. P1 claimed against D1 and/or D3 inter alia for (a) a declaration that D1 through D3, or alternatively D3, was the trustee under the Trust for D2 Shares holding 40% of all the issued shares of D2 in favour of P1, and (b) an order that D1 do forthwith cause D3 to transfer and D3 do transfer 40% of all the issued shares of D2 to P1 or his nominee(s) at the cost of D1 and/or D3.  The Ps also claimed against each of the Ds for all further proper accounts, inquiries and tracing remedies.  The Ds denied these claims for relief.

17. There are other pleas and averments in the parties’ pleadings, but Mr Chiu, counsel for the Ps, and Mr Ng, counsel for the Ds, assured this court that the above were the key pleas and averments relevant to the present appeal.  The crux of the relevant dispute was whether the Trust for D2 Shares was part of the joint venture or cooperation agreement between P1 and D1 as the Ps alleged in paragraphs 3-4 above (“Ps’ Agreement”) or whether the Option was part of the joint venture or cooperation agreement between P1 and D1 as the Ds alleged in paragraphs 5-7 above (“Ds’ Agreement”).

II.  PROCEEDINGS

18. By a summons filed on 22 May 2014 (“Summons”) pursuant to Order 24 rule 7 of the Rules of the High Court (“RHC”), the Ps applied for an order that D2 do within 14 days from the date of such order make and serve on the Ps a further and better list of documents which are or have been in its possession, custody or power relating to any matter in question in this action, namely, audited accountant reports and financial statements of D2 for the year ended 31 March 2004 (“Subject Document”). 

19. By a summons filed on 10 June 2014 (“Amendment Summons”), the Ps applied for leave to amend the Summons to refer to Order 24 rule 3 rather than Order 24 rule 7 of the RHC.

20. The Ps relied on the 1^st, 2^nd and 3^rd affidavits of their solicitor Fan Man Chong Clement (“Fan”) filed on 13 and 22 May and 6 June 2014 for the purpose of the Summons (“Fan 1^st, 2^nd and 3^rd Affs”).  D2 filed D1’s affidavit in opposition on 20 May 2014 (“D1 Aff”).

21. On 26 January 2015 (“Master Hearing”), Master J Wong granted inter alia the following orders (“Master Order”):

(a) there be no order as to costs of the Amendment Summons;

(b) D2 do within 14 days from the date of such order make and serve on the Ps a further and better list of documents that are or have been in its possession, custody or power relating to any matter in question in this action, ie the Subject Document;

(c) D2 do pay the costs of the Summons to the Ps including costs reserved with certificate for counsel for the Master Hearing assessed at HK$107,900 and payable within 28 days from the date thereof.

22. Mr Ng confirmed D2 did not make any application for extension of time to comply with or for stay of execution of the Master Order.  On 9 February 2015, D2 complied with the Master Order by filing/serving a Further and Better List of Documents (“Further List”) disclosing the Subject Document.  Pursuant to inspection by the Ps, D2 provided a copy of the Subject Document to the Ps.

23. On the same day, D2 filed Notice of Appeal against the Master Order in paragraph 21(b)-(c) above (“Appeal”), and asked for (a) an order that the Summons be dismissed, (b) costs of and occasioned by the Summons (including all costs reserved and costs of the hearing before the Master Hearing) to be D2, and (c) costs of and occasioned by the Appeal be to D2.  The hearing of the Appeal came before me on 17 June 2015 (“Hearing”).

24. At the Hearing, Mr Ng explained that D2 still maintained that the Subject Document was not relevant and/or necessary, but since D2 did not mind disclosing such document, D2 filed the Further List pursuant to the Master Order without prejudice to the Appeal.  Since the Ps now have a copy of the Subject Document pursuant to their inspection of the Further List, Mr Ng confirmed D2 had no objection if the Ps were to make discovery of and use such document now in the Ps’ possession, custody or control for the purpose of the present action (subject to eventual argument as to admissibility and/or relevance at trial).  So in practical terms, the Ps achieved their purpose of getting hold of and utilising the Subject Document, and D2’s pursuit of the Appeal was essentially for costs.

25. On 15 May 2015, the Ps filed a summons (“Leave Summons”) for leave to rely on the affirmation by a certified public accountant Yeung Kwok Keen (“Yeung”) filed on 10 April 2015 (“Yeung Aff”) for the purpose of the Appeal.  Such affirmation set out Yeung’s observations on the Subject Document, and exhibited the Subject Document as exhibit “YKK-1”.  At the Hearing, Mr Ng and Mr Chiu agreed that this court could sight the Subject Document for considering its relevance and/or necessity for the purpose of the Appeal, and on such basis Mr Chiu confirmed that the Ps would not rely on the rest of the Yeung Aff.

26. In the circumstances,  at the Hearing I granted the following orders in respect of the Leave Summons:

(a) subject to (b) below, retrospective leave be granted for the Ps to file and serve the Yeung Aff;

(b) no leave was granted for the Ps to adduce and/or rely on paragraphs 3-13 and exhibit “YKK-2” of the Yeung Aff which parts shall not stand as evidence for the purpose of D2’s Appeal.

I reserved the question of costs of the Leave Summons to be dealt with in this Decision. 

III.  LEGAL PRINCIPLES 

27. It is trite that an appeal from the master to judge in chambers is dealt with by an actual rehearing of the application which led to the order under appeal, and the judge treats the matter as though it came before him for the first time.  The judge will give the weight it deserves to the previous decision of the master; but he is in no way bound by it.[12]

28. There is no essential dispute between Mr Ng and Mr Chiu over the legal principles as to discovery as set out in my decisions in Lee Sai Nam v Li Shu Chung & anor[13] and UOB Kay Hian Futures (Hong Kong) Limited v Lai, Lawrence & anor,[14] which I adopt without repeating them in this Decision.

IV.  DISCUSSION

29. Even though the Ds regarded D2’s audited financial reports from 1 April 2004 to 31 March 2008[15] to be irrelevant, D2 agreed to provide copies to the Ps for the purpose of saving time and costs, but D2 refused to discover the Subject Document (which did exist) on the basis that it was not relevant and/or necessary. 

30. Mr Ng complained that the solicitors’ correspondence and the Fan 1^st, 2^nd and 3^rd Affs revealed that the Ps had shifted their grounds for seeking discovery of the Subject Document. Mr Ng submitted this clearly exposed the irrelevance of the Subject Document.  But in my view, the essential issue was whether the Subject Document was properly discoverable.  If it was, then quite irrespective whether it took the Ps a while to put their finger on the true ground of relevance/necessity, D2 on its own still had an obligation to make discovery of documents in its possession, custody or power that were relevant in the Peruvian Guano sense, and it was no answer for the Ds to defer disclosure of a properly discoverable document until such time as the other party stumbled upon the true ground of relevance/necessity.  Anyway, by the time the Fan 1^st Aff was filed, the Ps already asserted that the Subject Document was relevant to the dispute over the existence or otherwise of the Trust for D2 Shares and/or the Option.

31. But notwithstanding the Summons and the Fan 1^st Aff, the D1 Aff still denied the Subject Document was relevant for proving or disproving the existence of the Trust for D2 Shares, and insisted Ds’ discovery should not extend to such document created outside the period of alleged wrongdoings as pleaded in paragraph 27 of the Re‑Re‑Amended Statement of Claim because:

(a) The mere fact the Ds pleaded in the Amended Defence and Counterclaim that D2’s business started in the year 2003 would not render the Subject Document relevant to issue of whether the Trust for D2 Shares existed or not.

(b) Since the Ps averred that (i) the Trust for D2 Shares was created in consideration of a percentage of the shareholding in the Proposed Company received by D1, (ii) the activities of the Proposed Company only started in June 2004, and (iii) D1 provided the D2 04/05 Report to P1 on the basis that he was a beneficial owner of 40% shareholding in D2, the Subject Document was plainly not relevant to the question of existence or non-existence of the Trust for D2 Shares otherwise P1 would have asked for it when the D2 04/05 Report was given to him or at some earlier time.

32. There was no dispute that D1 acquired/purchased D2 from a third party for the purpose of engaging in the business of printing and supply of packaging materials, and D1 (and not P1) handled such acquisition/purchase.  But there was substantial dispute as to whether the joint venture or cooperation arrangement between P1 and D1 was upon terms as alleged by the Ps (ie the Ps’ Agreement) or whether it was upon terms as alleged by the Ds (ie the Ds’ Agreement).  Since the Trust for D2 Shares was one of the essential terms and an integral part of the Ps’ Agreement and the Option was one of the essential terms and an integral part of the Ds’ Agreement, the existence or otherwise of the Trust for D2 Shares and/or the Option would very much turn on the overall vitality of the Ps’ Agreement or the Ds’ Agreement. 

33. But the vitality of either the Ps’ Agreement or the Ds’ Agreement would turn on a number of other disputes, not least of which was how the acquisition/purchase of D2 was financed.  Under the Ds’ Agreement, it was alleged that D1 via D3 purchased D2 for the D2 Price funded by the D1 Investment (HK$1,900,000), the P1 Investment (being the Cheque in the sum of HK$400,000 in favour of Kid Art, which gave rise to the Option) and the KA Investment (being the KA Loan of HK$500,000 in favour of Kid Art).  The Ps denied such allegations, and claimed the Cheque was for setting up the Proposed Company and not for investing in D2, and there was no Option at all because by virtue of the Trust for D2 Shares under the Ps’ Agreement P1 had already acquired 40% beneficial shareholding in D2.  In my view, it is plain that (a) the contest between the terms of the Ps’ Agreement and the Ds’ Agreement, (b) the contest between the allegations by the Ps and the Ds as to how the acquisition/purchase of D2 was financed, (c) the disputes over the purpose/destination of the Cheque, the KA Loan and the D3 Loan,[16] and (d) the contest between the Trust for D2 Shares and the Option were all

interwined issues that would impact on one another. 

34. Hence, a real subject of controversy between the parties would be the circumstances of the acquisition/purchase of D2 and how it was financed.  This was of particular significance since it was D1 (and not P1) who handled such acquisition/purchase.  Indeed, the Ps pleaded in paragraph 2 of the Reply and Defence to Counterclaim filed on 19 March 2013 that they had no idea of the amount of the purchase price for D2 at all.  Hence, Mr Chiu submitted that in order to properly understand, assess and weigh the parties’ respective case on the matters referred to above, it would be necessary for D2 to discover relevant documents that would shed light on D3’s manner of acquisition/purchase of D2 with corresponding paper trail of the sources and payments of the D2 Price.

35. The Fan 3^rd Aff contended that the relevance of the Subject Document to the dispute over the existence or otherwise of the Trust for D2 Shares was highlighted by 3 documents already discovered by the Ds (“Ds’ Documents”):

(a) copy sales contract dated 1 December 2003 between Fine Arts Offset Printing Company Limited (“Fine Arts”) as seller and D3 (owned/controlled by D1) as buyer of 1 unit of “used “Roland” Two Colour Offset Printing M/C” (“2-colours Machine”) and 1 unit of “used “Roland” Four Colour Offset Printing M/C” (4-colours Machine”) (collectively, “Machines”) for the price of HK$2,800,00 (“2003 Sales Contract”);

(b) copy receipt dated 15 December 2003 issued by Fine Arts to D3 for the sum of HK$800,000 “for payment balance”(“2003 Receipt”);

(c) copy repayment record with a process date of 23 December 2004 in respect of a HK$2,000,000 loan from the Lender to D3 (“D3 Loan”) together with a copy letter dated 16 January 2004 from the Lender to D3 noting that D3 had entered into a loan agreement with the Lender in relation to the Machines on the same date (“D3 LoanDocuments”).

Further, D2’s annual return made up to 18 March 2004 (“D2 Annual Return”) showed that D2’s entire share capital was transferred to D3 on 15 December 2003[17]  although D1 claimed he had already started to run D2’s business since 15 November 2003.

36. The Fan 3^rd Aff explained that the Ps had no idea about Fine Arts since it did not feature in Ds’ pleadings at all.  Upon reading Ds’ Documents, Fan inferred that (a) the Ds must have discovered and disclosed Ds’ Documents because they were somehow connected with D1’s acquisition/purchase of D2 via D3 for the D2 Price (HK$2,800,000) since (i) the 2003 Receipt for HK$800,000 and the D3 Loan Documents for HK$2,000,000 added up to HK$2,800,000, which matched the total sale price of HK$2,800,000 for the Machines that D3 (as buyer) was liable to pay to Fine Arts (as seller) under the 2003 Sales Contract, and which further matched the D2 Price for D3’s acquisition/purchase of D2, and (ii) the Machines were so bought by D3 from Fine Arts within the same period (ie November/December 2003) as when D1 via D3 acquired/purchased D2, and (b) such Machines were somehow required for D2’s business that was just started up by D1. 

37. The Fan 3^rd Aff surmised it must have been the Ds’ case that (a) D1 via D3 purchased D2 for the D2 Price (that according to Ds’ pleadings was somehow partly paid by D1 and also partly paid by P1 by the Cheque and by the KA Loan) by purchasing the Machines (as purportedly shown in Ds’ Documents) otherwise it would have been pointless to disclose Ds’ Documents, and (b) the Machines must have close connection with D2’s business such that D2 should have claimed for depreciation allowance in respect of the newly acquired Machines to reduce its profit tax liability. 

38. The Fan 3^rd Aff directed attention to the balance sheet in the D2 04/05 Report which revealed that “[property], plant and equipment” was valued at HK$283,746 and HK$69,224 respectively for the years ended 31 March 2005 and 31 March 2004.  According to Note 9 of the D2 04/05 Report,[18] the additions of “plant and machinery” were valued at HK$43,000 and the depreciation charge for the year was HK$683, so the net book value of D2’s “plaint and machinery” as at 31 March 2005 was HK$42,317, but the cost and/or accumulated depreciation for “plant and equipment” as at 1 April 2004 was nil.  Fan claimed the D2 04/05 Report did not reveal the connection between D2’s business and the Machines, but Ds’ Documents suggested that the consideration payable by D3 for the purchase of the Machines somehow represented the D2 Price payable by D3 for the acquisition of D2 in late 2003.[19]

39. The Fan 3^rd Aff next referred to the income statement for the year ended 31 March 2005 in the D2 04/05 Report that revealed an item for “Gain on change of major shareholder” for the year ended 31 March 2005 (nil) and the year ended 31 March 2004 (HK$3,433,457), but complained that no further document was disclosed by the Ds to account for such “gain”. 

40. Fan contended that the Subject Document would be highly relevant in throwing light on (a) whether the Machines purchased in December 2003 were connected to D2’s business operation for the year ended 31 March 2004, and (b) how the “Gain on change of major shareholders” at HK$3,433,457 for the year ended 31 March 2004 was made up when it was said that D1 via D3 purchased D2 in late 2003 for the D2 Price.  Fan further contended that should the Subject Document reveal the connection between the Machines and D2’s operations prior to 31 March 2004 and/or how the “Gain on change of major shareholders” was made up, such document might well support the Ds’ Agreement that D1 did contribute to the D2 Price for acquiring D2, and might add weight to the Ds’ averments as to the Option.  But should the Subject Document reveal otherwise, it might cast doubt on the integrity of the Ds’ Agreement and consequently the Option, and thereby it might add weight to Ps’ contention as to the Trust for D2 Shares.

41. The Ds responded to this by filing their 2^nd Supplemental List of Documents on 24 September 2014 to make discovery of the following documents:

(a) D2’s profit tax computation for the year ended 31 March 2005 submitted to the Inland Revenue Department (“IRD”) for the year of assessment 2004/2005 (“D2 04/05 Computation”);

(b) D2’s Notice of Assessment and Demand for Tax – year of assessment 2004/2005;

(c) D2’s Profits Tax Return for Final Assessment 2004/2005 and Provisional Payment 2005/2006;

(d) D2’s profit tax computation for the year ended 31 March 2007 submitted to the IRD for the year of assessment 2006/2007 (“D2 06/07 Computation”);

(e) D2’s Profits Tax Return for Final Assessment 2006/2007 and Provisional Payment 2007/2008.

42. In the letter from Ds’ solicitors to Ps’ solicitors dated 23 September 2014 (ie after the Ds filed the Fan 3^rd Aff) (“D2 Letter”), the Ds noted that schedule 4 on “Disposal of Fixed Assets” of the D2 04/05 Computation for the year ended 31 March 2005 recorded that the sale proceeds (and hence profit on disposal) for the 2-colours Machine were HK$510,000, and schedule 5 on “Disposal of Fixed Assets” of the D2 06/07 Computation for the year ended 31 March 2007 recorded that the consideration (and hence profit on disposal) for the 4-colours Machine was HK$880,000.  It was further noted in both documents that the buyer of both Machines was “Grandwin Development Ltd”, and “[the] profit on disposal is capital gain as the fixed asset is purchase from previous holding company and written off at the same year.  And these asset have not put into the pool system”. 

43. The D2 Letter further claimed that (a) the “fixed asset …… purchase from previous holding company [of D2]” included the Machines, which machines were those referred to in the 2003 Sales Contract, and (b) “the previous owner of [D2] had already fully depreciated the value of the [Machines] at the year of their purchase and no more depreciation could be allowed for the same [Machines] by [D2] in the years after [D1] via [D3] purchased [D2]”, so neither the Subject Document nor the D2 04/05 Report would reveal the purchase price of the Machines, and the Subject Document would not “throw any light on whether the [Machines] purchased in December 2003 were connected with the business operation of [D2]”.

44. The D2 Letter explained that the “Gain on change of major shareholders” in the sum of HK$3,433,457 revealed in the D2 04/05 Report was irrelevant as it was “a gain realized in the book when the previous owner of [D2] agreed to write off the liability owed to them by [D2] when the ownership of [D2] was transferred to [D3]”, which had nothing to do with the Machines. 

45. As regards the Subject Document, the balance sheet showed that the value of “[fixed] assets” as at 31 March 2003 and 31 March 2004 was HK$1,400,465 and HK$69,224 respectively.  According to Note 11 on fixed assets, the net book value of HK$69,224 as at 31 March 2004 comprised the sums of HK$27,390 (furniture, fixtures and equipment) and HK$41,834 (computer equipment), ie there was nil value for plant and machinery.  Information on plant and machinery was recorded as follows:

	Plant and machinery
Cost	HK$
At 1 April 2003	4,386,006
Additions	100,100
Sold/ written off	(4,486,106)
At 31/3/2004	-
Accumulated depreciation
At 1 April 2003	4,379,405
Written back	(4,379,405)
Charge for the year	-
	-
Net book value
At 31/3/2004	-
At 31/3/2003	6,601

46. Note 8 (Gain on Change of Major Shareholders) in the Subject Document stated as follows:

	31/3/2004	31/2/2003
	HK$	HK$
Gain on amount due to net receivables written off	3,489,379	-
Gain on disposal of investment	520,000	-
(Loss) on disposal of land and building	(575,922)	-
	3,433,457	-

Pursuant to a shares sales and purchases agreement dated 8 December 2003, the former shareholders disposed of their shares to the existing shareholders, but retained the assets and liabilities of the Company as at 15 November 2003, except for certain plant and equipment as specified in the sales and purchases agreements, which gave rise to the abovementioned gain.

47. Up to this stage, there was little information in Ds’ pleadings and/or in the D1 Aff as to (a) how exactly D1 (via D3) acquired/ purchased D2, (b) who exactly was the seller of D2, (c) how exactly the D2 Price was paid to the seller, (d) how D1 contributed the D1 Investment (HK$1,900,000) and channeled such “investment” to D3 as part of D3’s funds for onward payment of the D2 Price to the seller, (e) how the alleged P1 Investment (by way of the Cheque) was channeled from Kid Art as payee of the Cheque to D3 as part of D3’s funds for onward payment of the D2 Price to the seller, (f) how the KA Loan proceeds (HK$500,000) was channeled from Kid Art (as borrower) to D3 as part of D3’s funds for onward payment of the D2 Price to the seller (especially when on the Ds’ own case P1 lent HK$200,000 to D2 which was eventually repaid).[20]

48. The D2 Annual Return showed that D2’s shares were transferred from Tang Kwok Kwong Samson and Fung Yuen Mei (former shareholders of D2, “Ex-Shareholders”) to D3 in December 2003.  There was also paucity of direct information from the Ds as to who exactly was the seller from whom D1 via D3 acquired/purchased D2’s entire share capital.  Logically, it should be the Ex-Shareholders as now borne out by Note 8 of the Subject Document which referred to a “shares sales and purchases agreement dated 8 December 2003” by which “the former shareholders disposed of their shares to the existing shareholder”.  However, the D2 Letter suggested that Fine Arts was D2’s “previous holding company”, which would lead one to wonder whether the seller of D2’s entire share capital was in fact Fine Arts with the Ex-Shareholders holding D2’s shares as nominees.  In the absence of other information on the Ds’ case, one would therefore expect D3 (on behalf of D1) to have paid the D2 Price to the Ex‑Shareholders or Fine Arts for the sale and transfer of D2’s entire share capital to D3. 

49. On such basis and given the aforesaid disputes between the parties, one would expect the Ds to have already discovered/disclosed the paper trail of documents relating to the matters in paragraph 47(c)-(f) above, which documents must be relevant and necessary in view of, say, the Ps’ dispute as to the purpose/destination of the Cheque, and the nature and amount of the D1 and KA Investments allegedly for the acquisition/purchase of D2, but I am unable to trace any such document in the Ds’ various Lists of Documents.  Apart from such paper trail, D3’s 2003/2004 audited financial statements (“D3 03/04 Report”) also appeared to be relevant pursuant to the Ds’ pleadings as one would expect the D3 03/04 Report might possibly have recorded (a) the entry of funds being the P1, D1 and KA Investments to make up the D2 Price which D3 (on behalf of D1) was liable to pay for the acquisition/purchase of D2, and (b) the acquisition of D2’s entire share capital, ie D2 becoming its wholly owned subsidiary. As will be elaborated below, the D3 03/04 Report might well also reveal accounting treatment in relation to D3’s purchase of the Machines.  However, I was told by Mr Ng at the Hearing that to date the Ds had not discovered/disclosed the D3 03/04 Report.  In my view, the absence of the D3 03/04 Report further highlights the significance and importance of the Subject Document.

50. In my view, Ds’ Documents discovered/disclosed by the Ds lead to more questions than enlightenment on matters raised in paragraphs 47-49 above.  Quite simply, Ds’ Documents did not evidence any sale and purchase of D2’sentire share capital for the D2 Price (HK$2,800,000) between D3 as buyer and the Ex-Shareholdersor Fine Artsas seller.  Rather, they revealed a sale and purchase of the Machines for a consideration of HK$2,800,000 between D3 as buyer and Fine Arts as seller without any mention about D2’s share capital. 

51. Absent any averment in Ds’ pleadings as to Ds’ Documents and the transactions revealed therein, the Ps must be forgiven for surmising it was the Ds’ case that (a) the consideration (HK$2,800,000) for the Machines payable by D3 (as buyer) to Fine Arts (as seller) under the 2003 Sales Contract comprising the sum of HK$800,000 that D3 paid to Fine Arts and the D3 Loan of HK$2,000,000 that the Lender granted to D3 (which was plainly different from the KA Loan of HK$500,000 granted by the Lender to Kid Art as pleaded by the Ds) and (b) the sale of the Machines from Fine Arts to D3 must somehow be connected to the sale of D2’s entire share capital from the Ex-Shareholders or Fine Arts to D3 given (i) the similarity in amount in respect of the consideration for purchasing the Machines and the D2 Price, (ii) the temporal proximity of the 2003 Sales Contract (1 December 2003) and the acquisition/purchase of D2 (November/December 2003), and (iii) the fact that the Ex-Shareholders transferred D2’s entire share capital to D3 on the very date of the 2003 Receipt.

52. In fact, Ps’ surmise as to such correlation was not wrong for at the Master Hearing Mr Ng confirmed (a) the Ds disclosed/discovered Ds’ Documents to show that D3 (on behalf of D1) paid the consideration for the Machines (HK$2,800,000) to obtain D2’s shares, and (b) the Machines then formed part of D2’s assets and were subsequently “written off” as shown in D2 04/05 Computation. 

53. But such submissions (not found in Ds’ pleadings and/or the D1 Aff) still did not explain how a sale and purchase of the Machines translated into a sale and purchase of D2’s share capital or vice versa.  In fact, Mr Ng’s submissions raised more questions than answers.  After all, if D3 was contractually obliged to pay the consideration of HK$2,800,000 to Fine Arts under 2003 Sales Contract to buy the Machines, one would expect Fine Arts (as seller) rather than D2 to be the legal/beneficial owner of the Machines so as to properly transfer ownership of the Machines to D3 upon such sale. Likewise, one would also expect (in line with D’s pleadings as to the P1, D1 and KA Investments) that D3’s payment of the sum of HK$2,800,000 to Fine Arts (be it consideration of the purchase of the Machines or the D2 Price) to have been sourced (a) independently of D2 (being the subject matter of the acquisition/purchase), (b) by the P1 and KA Investments as pleaded by the Ds, and (c) by the D1 Investment drawn from D1’s personal resources in order to count as his own contribution to the D2 Price.  Even if D1/D3 had to borrow in order to put up the D1 Investment of HK$1,900,000, one would expect (unless otherwise explained) D1/D3 to borrow monies on their own account and not utilise resources/collateral by D2, P1, Ex-Shareholders and/or Fine Arts. 

54. But Ds’ Documents suggested that D3 (a) agreed to “buy” the Machines for HK$2,800,000 under the 2003 Sales Contract dated 1 December 2003, (b) then used such Machines to apply for a hire purchase loan of HK$2,000,000 from the Lender which loan application was processed on 23 December 2003, and (c) when the D3 Loan of HK$2,000,000 was granted on 16 January 2004 its proceeds were used to pay Fine Arts for the Machines.  This, of course, did not sit well with Ds’ pleadings that D1 put up his own D1 Investment of HK$1,900,000.  But even if the D3 Loan of HK$2,000,000 was in fact the D1 Investment for the acquisition/purchase of D2, one would expect (unless otherwise explained) the aforesaid D3 Loan scheme to be a private funding arrangement between D3 (on behalf of D1) and Fine Arts to enable D1 via D3 to raise finance through a hire purchase loan from the Lender in favour of D3 in order to fund D1’s own D1 Investment (which together with the P1 and KA Investments would make up the D2 Price for the acquisition/purchase of D2) that should have nothing to do P1, the KA Loan and/or D2.  After all, D3 in applying for the D3 Loan must have presented itself as the true hirer/owner of the Machines. 

55. However, the D2 04/05 and 06/07 Computations clearly showed (and Mr Ng also submitted) that after their acquisition by D3 the Machines somehow formed part of D2’s assets, ie D2’s plant and machinery, which were eventually sold by D2 in the financial years ended 31 March 2005 and 31 March 2007 with capital gain and profits on disposal for D2.  Hence, the Ps could be forgiven for thinking that (a) there was somehow connection between the Machines and D2’s business, and (b) D3 must have injected the Machines into D2 after having acquired them from Fine Arts under the 2003 Sales Contract and having paid the consideration of HK$2,800,000 thereunder.  On such basis, given that the Machines were newly acquired plant and machinery injected by D3 into D2 for which D3 paid the consideration of HK$2,800,000, the Ps’ suggestion that D2 was entitled to claim and should have claimed for depreciation allowance to reduce profits tax liability was also logical.  The fact that Fine Arts had fully depreciated the value of the Machines when Fine Arts purchased them would not logically affect the right by D3 (or D2 upon injection of the Machines by D3 into D2) being a legal entity distinct from the seller Fine Arts to claim depreciation allowance for its new purchase of plant and machinery (ie the Machines) upon capital expenditure (ie the purchase price) paid up in that financial year. 

56. But according to the D2 04/05 Report, the value of plant and machinery as at 31 March 2004 was HK$69,224, which obviously did not reflect any injection of the Machines worth HK$2,800,000 into D2.  This is now also borne out by the information in the Subject Document which showed that although the cost of D2’s plant and machinery was HK$4,486,106, it was totally “sold/written off” in the year ended 31 March 2004, and the accumulated depreciation of HK$4,379,405 was entirely “written back” in the year ended 31 March 2004, leaving nil value for plant and equipment for that financial year.  This, at least on its face, suggested that the Machines were somehow not included the books of D2.

57. Such objective information when viewed against the explanations in the D2 Letter and in the D2 04/05 and 06/07 Computations as to why no more depreciation could be allowed for the Machines (ie the Machines were not put into the “pool system” because their depreciation value had already been used up by the previous owner and the Machines were written off) necessarily raised further doubt and query,[21] which logically and necessarily led to the call for the Subject Document to see how “plant and machinery” as well as “depreciation” were treated in the audited accounts in the very financial year in which the acquisition/purchase of D2 and the Machines took place.  It cannot be said that the Subject Document was irrelevant and/or unnecessary.

58. Interestingly, Mr Ng submitted at the Hearing that in fact the Machines were all along existing plant and equipment that belonged to D2 and not Fine Arts, and that D1/D3 and Fine Arts entered into the 2003 Sales Contract merely to enable or facilitate D3 to raise finance by way of a hire purchase loan of HK$2,000,000 from the Lender (ie the D3 Loan) ostensibly to pay for the purchase of the Machines but in fact was for the acquisition/purchase of D2’s entire share capital.

59. There was, of course, nothing in the Ds’ pleadings and/or the D1 Aff to such effect.  Mr Chiu complained this was the first time the Ps were told the Machines all along belonged to D2, but he was prepared to proceed with the Appeal on the basis of Ds’ assertions in the above paragraph without prejudice to Ps’ rights to put the Ds to strict proof and/or to raise positive defence against such assertions in the present action in due course.

60. Whilst the Ds’ new assertion that the Machines all along belonged to D2 might provide an explanation as to why no depreciation allowance was claimed by D2 after D3’s acquisition/purchase of the Machines (if D2 had already fully depreciated the value of the Machines – but this would only be evident from the Subject Document), a big question arises as to how Fine Arts (a separate legal entity distinct from D2) was able to “sell” the Machines that all along belonged to D2 by way of the 2003 Sales Contract to D3.  Moreover, if the Machines all along belonged to D2, there was little point in D3 purchasing the Machines.  A sale and purchase of D2’s entire share capital between the Ex-Shareholders or Fine Arts (as sellers) and D3 (as buyer) would transfer control of the Machines (which were all along D2’s assets) from the Ex-Shareholders or Fine Arts to D3.  It appeared therefore (and Mr Ng frankly accepted) this was merely a scheme by D1 via D3 to use D2’s assets (rather than his own assets/resources) to raise finance for contribution for the D2 Price.  This, in turn, raised questions as to whether, how and by whom the D3 Loan was repaid (if at all). Still further, if the Machines all along belonged to D2, D3 by applying to the Lender for the D3 Loan as hirer/owner must have presented the Machines as its own property acquired from Fine Arts under the 2003 Sales Contract.  This immediately raised questions as to the nature of the sale of the Machines between D3 and Fine Arts and whether D1’s “investment” via D3 could be regarded as his own investment. 

61. It must be remembered that D2, D3 and Fine Arts were separate legal entities.  In my view, the metamorphosis in the Ds’ explanations as to money trail of D1’s “investment” in the acquisition/purchase of D2 and the lacuna in the paper trail that tracked how the D2 Price was made up cry out for discovery/disclosure of the Subject Document which was clearly relevant and necessary to see how plant and machinery (which, according to Mr Ng’s submissions at the Hearing, included the Machines) were costed, depreciated and/or written off (if at all).  The accounting treatment of the Machines (now said to belong to D2 all along) in the Subject Document might well reflect on how they came to be assets for sale by Fine Arts,[22] how they later “returned” (or according to Mr Chiu, “injected”) to D2 for subsequent sale by D2 to Grandwin Development Ltd for merely HK$510,000 and HK$880,000 in the year ended 31 March 2005 and 31 March 2007,[23] why they were “not put into the pool system” and written off in the same year of purchase,[24] and why the D2 04/05 and 06/07 Computations referred to purchase of the Machines “from the previous holding company”. 

62. As Mr Chiu also noted, Note 8 of the Subject Document stated that “[pursuant] to a shares sales and purchases agreement dated 8 December 2003, the former shareholders disposed of their shares to the existing shareholders, but retained the assets and liabilities of [D2] as at 15 November 2003, except for certain plant and equipment as specified in the sales and purchases agreements, which gave rise to [the gain on change of major shareholders of HK$3,489,379]” (my emphasis).

63. I agree with Mr Chiu that even if the Subject Document might not provide absolute answers to the various disputes and queries discussed above, it is necessarily a key document that went to the integrity and vitality of the parties’ differing explanations as to how the acquisition/purchase of D2 was effected and how the purchase of the Machines interacted with the acquisition of D2, and it is plainly a document that might lead to a chain of inquiry on an important and relevant issue in dispute in the Peruvian Guano sense.

64. Mr Ng’s only answer to this was that D1 was the ultimate owner of D3, but in my view that is neither here nor there.  D2, D3 and Fine Arts were separate legal entities, and each company was/is required to prepare annual audited financial statements based on accepted accounting principles.  Hence, the treatment of the Machines as plant and machinery in the Subject Document in the financial year when the very sale and purchase of the Machines and the very acquisition/purchase of D2 took place clearly would shed light on the veracity of Ds’ contentions as to how the acquisition/purchase of D2 took place and/or was financed.

65. I have no doubt that the Subject Document is both relevant and necessary, and Master Order should be upheld.

V.  CONCLUSION

66. In the circumstances, the Appeal is dismissed.  There is no reason why costs should not follow event.  I grant a costs order nisi that D2 do pay the Ps’ costs of the Appeal (including all costs reserved, if any) to be taxed if not agreed.

67. As regards the Leave Summons, I order the Ps to pay costs of the Leave Summons (including all costs reserved if any) to D2 to be taxed if not agreed.  I am not persuaded it was necessary or appropriate to adduce evidence as to Yeung’s expert observations, and a simple enquiry to D2 for their agreement to refer to the Subject Document at the Hearing would have sufficed and, in my view, would have elicited a helpful answer (as evident from D2’s ready agreement at the Hearing for the court to sight the Subject Document).