EMAGIST ENTERTAINMENT LTD v. NETHER GAMES (HONG KONG) LTD AND OTHERS

HCA 1659/2012

[2023] HKCFI 2358

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1659 OF 2012

_____________

(By Original Action)

_____________

(By Counterclaim dated 3 May 2013 as amended on 14 July 2015)

_____________

(By Re-Amended Counterclaim dated 24^th December 2018)

_____________

_________________

DECISION

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1.  In this Decision, I will adopt the same abbreviations that I used in the Judgment handed down on 28 March 2022 and the Decisions on the Uplift and Release Application and Stay Application handed down on 24 February 2023 (“the Decisions”).

2.  After the trial in this action, I ruled in favour of the Emagist Parties and granted judgment in favour of them.  After the handing down of the Judgment, the Emagist Parties made the Uplift and Release Application whilst the ART Parties (which includes Simon) took out the Stay Application to stay the execution of the Judgment pending appeal.  I ruled both applications in favour of the Emagist Parties.  The ART Parties now seek leave to appeal against the Decisions on these applications.

3.  The background of this case and my reasons for the Decisions have been fully set out in the Judgment and the Decisions and I do not want to repeat the same here.

4.  There is no dispute about the legal principles governing leave to appeal as summarized by Chow J (as he then was) in Astro v First Media[1].

5.  I have considered the written submissions of Mr Chau, counsel for the ART Parties.  There is nothing in his submissions to say why the appeal against the Judgment is not a challenge against my findings of fact in the trial and what mistakes I had made in arriving in these findings.  As rightly observed by the solicitors for the Emagist Parties, I found as a matter of fact that the parties had not made the Sun Chiu Kee Agreement which is the bedrock for the ART Parties’ claim of partnership.  The authorities cited by the ART Parties are of no assistance to their challenge of the finding that there was no partnership.  There is also no submission on why I was erroneous in finding that there was no Sun Chiu Kee Agreement.  With such factual finding, the partnership claim of the ART Parties is likely to fail on appeal.

6.  It is trite law that, unless the findings on fact are plainly wrong or there is any palpable error in making these findings, the appellate court would be slow to disturb the findings of fact made by the trial court. Since the Defendants have not met the threshold of establishing some merit in the appeal, the leave application should be refused on such ground alone.

7.  For the risk about dissipation of assets, the Defendants are just repeating their allegations against Boniface made in support of the Stay Application.  I have already dealt with these arguments in the Decisions.  The ART Parties have not advanced any argument in substance as to why I was wrong in such analysis.  I agree with the observation made by the solicitors for the Emagist Parties that the Defendants are only repeating their allegations made previously in the Uplift and Release Application and the Stay Application, and all my criticisms against the case of the ART Parties “explained meticulously in the Decisions and the Judgment were simply brushed aside”.  Hence, I dismiss the application of the ART Parties for leave to appeal against the Decisions.

8.  The Emagist Parties should get the costs of this leave application.  The Emagist Parties ask for such costs to be taxed on an indemnity basis with summary assessment.  Despite the aforesaid observations, I do not find that the leave application is so unreasonable that warrants the payment of costs on a higher basis.  As the ART Parties have not been given the opportunity to reply to the Statement of Costs of the Emagist Parties and there would be a proper taxation in any event, I refuse to tax the costs on a summary basis.  Hence, I only order the costs of the leave application be to the Emagist Parties to be taxed if not agreed.

HCA 1659/2012

[2023] HKCFI 598

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1659 OF 2012

_____________

(By Original Action)

_____________

_____________

(By Re-Amended Counterclaim dated 24^th December 2018)

_____________

___________________

DECISIONS

___________________

1.  There are two paper applications before me:

(i)   the application dated 14 June 2022 by the Emagist Parties(which include Emagist, Boniface, Emagist Entertainment Limited and Emagist Group Limited) for an order that: (a) the injunction granted by DHCJ Woo on 3 January 2013 (“the Injunction”) be uplifted and the parties be released from their respective undertakings given to the court therein; and (b) the sum of US$3,232,677.28 paid into court by Emagist on 20 July 2020 (“the Fortification Sum”) pursuant to the order dated 7 July 2020 with all interest accrued thereon be paid out to Emagist through its solicitors (“the Uplift and Release Application”); and

(ii)  the application by ART and Simon (“the ART Parties”) for stay of execution of the judgment handed down by me on 28 March 2022 (“the Judgment”)^[1]pending appeal (“the Stay Application”).

2.  In the present Decisions, I will adopt the same abbreviations that I used in the Judgment.

3.  Eric has not made any submissions to this court about both applications.

4.  Both applications turn on the question as to whether this court should stay the execution of the Judgment pending appeal.

5.  There is no dispute between the parties about the principles to be applied in considering whether to grant stay of execution of a judgment pending appeal as stated in Star Play Development v Bess Fashion Management Co Ltd[2] and Great Bill Ltd v JFK Holding Co Ltd[3].

6.  I first deal with the question about the merit of the appeal.

7.  As I see it, the present case turns on the determination of various issues of facts, in particular what happened in the Sun Chiu Kee Meeting and the series of events between Boniface, the ART Parties and Eric in respect of the operation of the Game Business throughout the years.

8.  It is trite law that the appellate court would be slow to disturb the findings of fact made by the court below.[4] As I have analyzed the evidence in some details in the Judgment, it would be very difficult for the ART Parties to establish that my findings on fact are plainly wrong or there is any palpable error in making these findings.

9.  Mr Chau, counsel for the ART Parties, has relied on 4 purported errors made by me in making the various findings of fact.  I do not propose to deal with each of these allegations here, save as to say that the ART Parties are repeating some of their submissions argued before me and I have fully considered these arguments in the Judgment.  I have also made it clear in §99 of the Judgment that “subsequent conducts cannot be used as an aid to the construction of any agreement made in the Sun Chiu Kee Meeting or otherwise, but they can assist the court in deciding whether agreement on a certain point had in fact been made”.  As I see it, I was very much entitled to make the various findings of fact which form the basis of the finding of liability against the ART Parties, and there is no merit in the appeal against the Judgment I made in the present case.

10.  Mr Chau submits that the legal relationship between the parties is a matter of mixed law and fact.  I agree.  However, one must not assume that, because there is question of law involved, there is a strong ground of appeal.  As I have mentioned above, the present case turns very much on the determination of the various issues of fact.  Once these factual findings were made, it was quite clear that the Games Business was not operated in the form of partnership as contended for by the ART Parties.

11.  This would have been sufficient to dispose of the Stay Application.  But since the parties have made submissions on the question as to whether the refusal of stay would render the appeal nugatory, I will also give my ruling on such matter.

12.  The ART Parties are concerned that, if Emagist is to be allowed to enforce the Judgment, Boniface, who is now residing in Canada, would be able to misappropriate the money recovered for his own use.  They rely on the history of the operation of Emagist and the observation I made in the Judgment that Boniface was treating Emagist as his own company. Assuming that the ART Parties are to succeed in the appeal, it would be difficult for them to claim back the money.  Further, Boniface had misappropriated money from Emagist in the past.  There is a chance that the ART Parties may not be able to recover the sum misappropriated from Boniface in the future, and so Emagist should not be allowed to enforce the Judgment at this stage.

13.  As I have analysed in the Judgment, even if the Game Business was operated in the form of partnership, it would be quite impossible for the ART Parties to argue that Emagist is or was not the owner of the copyright of the Game.  No matter what was the dispute between Boniface and the ART Parties, the latter were not entitled to “migrate” the Game to their own platform.  Emagist, either as the corporate vehicle of Boniface (as contended for by him) or the “partnership” (as contended for by the ART Parties), would have an unassailable claim to the damages caused by the “migration” of the Game, and so there is no reason to deny Emagist of the fruit of its success.

14.  One must bear in mind that only Emagist (and not Boniface) is allowed to enforce the Judgment.  Though Boniface is the majority shareholder of Emagist Cayman which directly owns Emagist, he is not allowed to use the money of Emagist in whatever way he likes.  There are laws to protect minority shareholders like the ART Parties.  After all, they are the shareholders of Emagist Cayman and there are also other shareholders involved.  The court should leave it to them to take appropriate steps to protect themselves rather than to deny Emagist of the fruit of its success.

15.  Further, the ART Parties are not entitled to treat the stay as an injunction to prevent possible dissipation of assets in anticipation of a yet properly instituted claim for misappropriation of company assets.  In the Judgment, I have expressed the view that there is serious confusion in the formulation of ART’s defence and counterclaim.  I cannot see why the court should grant a stay in anticipation of the alleged risk of dissipation of company’s assets, when there are ways for them to protect their interests under the company law or by way of properly instituted legal proceedings.  One must also bear in mind that no finding has been made in the Judgment as to whether Boniface had misappropriated any money of Emagist in the past.

16.  As Boniface is now residing in Canada, Mr Chau relies on authorities such as Hong Kong Civil Procedure 2023[5] and Wootton v Sievier[6] to support the proposition that execution of judgment may be stayed where the judgment is in favour of a person resident out of jurisdiction.  However, since the judgment is granted in favour of Emagist and not Boniface as a person, I agree with the solicitors for the Emagist Parties that where Boniface is currently living is quite irrelevant.

17.  For these reasons, the “nugatory” argument cannot advance the ART Parties’ case any further and the Stay Application should be dismissed.  I therefore so order.

18.  I then turn to the Uplift and Release Application.  The ART Parties take a neutral position as to whether the Injunction should be uplifted.  However, they oppose the release of Emagist’s undertaking as to damages and the release of the Fortification Sum to Emagist.

19.  As I see it, the same principles should be applied in considering the Uplift and Release Application.

20.  For the release as to the undertaking as to damages, any release should not affect the liability in respect of the undertaking given by the parties prior to the release.  Hence, even if the ART Parties were to succeed in the appeal, that should not affect the liability arising from such undertaking prior to the release.  For the possible future liability, as the Injunction is going to be uplifted, there should not be any such future liability arising from the undertaking as to damages.  Hence, I make an order uplifting the Injunction and releasing the parties from their respective undertakings.

21.  As Emagist succeeds in the trial before me, it should get back the Fortification Sum paid by it into court.  Any objection to the release is in substance a request to the court to stay the execution of the Judgment.  As I have already given my reasons above for refusing the Stay Application, the same reasons should apply for allowing the release of the Fortification Sum back to Emagist.  I therefore so order.

22.  The Emagist Parties also ask for an order that the total sum of US$455,928.39 as set out in the 2 Notices of Payment into Court under order or certificate of Ryan dated 2 and 25 January 2013 respectively together with interest accrued thereon be paid out to Emagist through its solicitors.  It follows from my decision above that such payment out order should be made.  However, since such order has not been expressly sought in the summonses and the ART Parties have not made any specific submission in this regard, I would only make an order nisi for such payment out.

23.  I also make an order nisi that the costs of both applications be paid by the ART Parties to the Emagist Parties.  Both orders nisi shall be made absolute 14 days after the date of the handing down of these Decisions.

HCA 1659/2012

[2022] HKCFI 3471

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1659 OF 2012

________________________

(By Original Action)

________________________

(By Counterclaim dated 3 May 2013 as amended on 14 July 2015)

________________________

(By Re-Amended Counterclaim dated 24^th December 2018)

________________________

___________________

DECISION ON COSTS

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1.  This is the paper application to vary the costs order nisi made by me in the Judgment handed down on 28 March 2022 (“the Judgment”)[1].

2.  The background of this case has been set out in the Judgment and I do not want to repeat the same here.  For the purpose of this Decision on Costs, I will adopt the same abbreviations that I used in the Judgment.

3.  In the Judgment, I made the following costs order nisi:

(i)  save that there be no order as to costs as between Emagist vis-à-vis Eric, Simon and Nether, the costs of the Original Claim be paid by ART to Emagist;

(ii)  in respect of the Eric Counterclaim, the costs be paid by Eric to Emagist and Boniface; and

(iii)  in respect of the ART Counterclaim, save that there be no order as to costs as between ART and Simon vis-à-vis Eric, the costs be paid by ART and Simon to Boniface, Emagist and Emagist Cayman.

4.  Boniface, Emagist and Emagist Cayman (collectively “the Emagist Parties”)  now apply to vary the costs order nisi.  They contend that:

(i)  the costs awarded to them should be taxed on an indemnity basis as: (i)  the defence and counterclaim of ART, Simon and Eric (collectively “the ARTSE Parties”)  are scandalous or vexatious; and (ii)  the Game was surreptitiously and dishonestly removed by ART from Emagist;

(ii)  in any event, the ARTSE Parties had failed to obtain a better result than the alleged sanctioned offer made by the Emagist Parties to them on 7 August 2020 (“the Emagist’s Offer”), and so the costs incurred by the Emagist Parties after 4 September 2020, which was the last day for the acceptance of the Emagist’s Offer, shall be paid on an indemnity basis; and

(iii)  the Emagist Parties also ask for certificate for 2 counsel.

The conduct of the parties

5.  In support of the first ground, solicitor for the Emagist Parties (“Emagist’s Solicitor”)  has relied on the following:

(i)  DHCJ Woo, in §13 of his judgment handed down in this case on 7 January 2013 in respect of the interlocutory injunction application[2], had expressed the view that the ARTSE Parties had taken the law into their own hands and took advantage of a situation created by their own fault or blameworthy conduct;

(ii)  there is no merit in the Licence Defence and the Partnership Asset Defence and both defences are in fact inconsistent;

(iii)  there is no merit in the misappropriation claim against Boniface, who has been dragged into the present litigation unnecessarily, causing him considerable anxiety, stress, financial pressure and inconvenience;

(iv)  this court has been critical on the ARTSE Parties in how they formulated their defence and counterclaim;

(v)  the Eric Counterclaim is full of contradictions, and he had grudges against Boniface causing him to stand on the side of ART and Simon;

(vi)  as such, both the defence and counterclaim of the ARTSE Parties are dishonest, vexatious, scandalous and disgraceful.

6.  I disagree.  The main reason as to why the ARTSE Parties failed in the trial was because the court rejected their evidence on the Sun Chiu Kee Agreement on the balance of probabilities.  Furthermore, the relationship between the parties is a question of mixed law and fact, and the line between partners and employees are sometimes difficult to draw especially in a start-up operation like the present one.  Under such circumstances, I do not find that the conducts of the ARTSE Parties were dishonest or disgraceful to the extent that justifies the award of indemnity costs.

7.  In addition, the fact that the ARTSE Parties have been running inconsistent defences by itself does not make them dishonest.  As mentioned above, the legal relationship between the parties is a matter of mixed law and fact.  Both defences involve principles of law, and it is not unusual for litigants, having sought legal advice, to run different defences at different times.  After all, the legal relationship between the parties herein deserves full investigation at the trial and I find nothing improper in the conduct of the defence and counterclaim.

8.  Regarding the migration of the Game, ART wrongly believed that they were partners of the Game Business which empowered them to do such act.  Though the court eventually found against them on such issue, I do not accept that their conduct warrants the award of indemnity costs.

The Emagist’s Offer

9.  I then turn to the Emagist’s Offer.

10.  There was correspondence between the parties in early August 2020 (about 2 months before the trial)  with a view to settle the case.  The Emagist’s Offer was the final offer made by the Emagist Parties to the ARTSE Parties on 7 August 2020 which contained the following main points:

(i)  the ARTSE Parties were to issue a statement confirming that: (a)  Emagist is the copyright owner of the Game; (b)  ART and Simon were not partners with Boniface in the operation of the Game Business; and (c)  they would forfeit all claims and would not initiate any future claims against the Emagist Parties arising from the issues in dispute as described in this action (whether presently envisaged as issues in dispute for trial, or matters arising from the factual matrix described and alleged therein by the parties);

(ii)  the sum of US$43,232,677.28 paid by Emagist into court pursuant to my order dated 7 July 2020 (with interest thereon)  shall be released to Emagist;

(iii)  the payments made by Ryan into court (US$369,871.98 on 2 January 2013 and US$86,056.41 on 25 January 2013)  pursuant to the order of DHCJ Woo dated 2 January 2013 (including interest thereon)  shall be released to Emagist; and

(iv)  costs of the action shall be paid by the ARTSE Parties.

11.  After trial, I held that:

(i)  ART and Simon were not partners of the Game Business;

(ii)  Emagist owns the copyright of the Game;

(iii)  the quantum of damages suffered by Emagist caused by the “migration” of the Game was the same as the payments made by Ryan into court;

(iv)  no ruling was made in respect of the propriety of Boniface’s withdrawals, and the counterclaim for the alleged misappropriations of the fund of Emagist was dismissed solely on the ground that Emagist should be the only party to sue for such losses and no proper derivative action has been commenced in the present case; and

(v)  there was considerable confusion in conduct of the Cherubic Transaction but ART and Simon did not have the locus to challenge the allotment of shares made by Boniface.

12.  On the face of it, it seems that the Emagist Parties are doing better than the terms in the Emagist’s Offer.  However, I take the view that the ARTSE Parties should not have been asked to waive any future claims against the Emagist Parties arising from the issues in dispute as described in this action.  Despite the fact that the Game Business was not operated in the manner as alleged by the ARTSE Parties, they are still shareholders of the Game Business: Eric is a partner proper and ART and Simons are shareholders by reason of the shares allotted to them.  They may still have a claim against Boniface for alleged misappropriation of funds and wrongful allotment of shares, provided that the proceedings are instituted by proper plaintiff and all the relevant parties are joined in the proceedings.  Despite that the Emagist Parties succeed in the first stage of the litigation, the Judgment has left open some of the issues that may be followed-up by the parties in the future.  I therefore take the view that, despite losing in the issues adjudicated at the trial, it was proper for the ARTSE Parties not to have accepted the Emagist’s Offer in particular the waiving of their rights of pursuing future claims.

13.  For these reasons, I refuse to award indemnity costs to the Emagist Parties for the period after the making of the Emagist’s Offer.

Certificate for 2 counsel

14.  I also reject the request of the Emagist Parties for certificate for 2 counsel.  Some of the written submissions lodged with the court are unnecessarily lengthy, but this does not in any way show that this case involves difficult or complicated issues of law or fact which justifies the engagement of 2 counsel.  I therefore refuse such request.

15.  For these reasons, the order nisi is made absolute.  All the costs will be taxed on a party-to-party basis with no certificate for 2 counsel.

16.  As the Emagist Parties fail in this paper application, the costs of such application is awarded to the ARTSE Parties.

Or & Lau for the Plaintiff by Original Action, the 1^st and 2^nd Defendants by Counterclaim dated 3 May 2013 as amended on 14 July 2015 and the 1^st, 3^rd and 4^th Defendants by Re-Amended Counterclaim dated 24 December 2018

Mr Ian Chau, instructed by Wong Hui & Co, for the 1^st to 3^rd, 5^th to 6^th Defendants by Original Action and the Plaintiffs by Re-Amended Counterclaim dated 24 December 2018

No submission by the 4^th Defendant by Original Action, the Plaintiff by Counterclaim dated 3 May 2013 as amended on 14 July 2015 and the 2^nd Defendant by Re-Amended Counterclaim dated 24 December 2018

HCA 1659/2012

[2022] HKCFI 899

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1659 OF 2012

_____________

(By Original Action)

_____________

(By Counterclaim dated 3 May 2013 as amended on 14 July 2015)

_____________

(By Re-Amended Counterclaim dated 24^th December 2018)

_____________

___________________

JUDGMENT

___________________

1.  This is a case where a start-up business became the victim of its own success. A few young men were involved in the development of a profitable online role playing game (“RPG”) called “Ninja Saga”, with 3 versions to be played on different platforms including Facebook, iOS and Android (“the Game”). Unfortunately, these young men had not given a lot of thought as to the structure of the business and their positions in the business venture. When the Game became successful, disputes developed between the parties which results in the present litigation.

BACKGROUND

(i)      The parties

2.  The background of the disputes has been set out in §§2-13 of the judgment of DHCJ Woo handed down on 7 January 2013 in this case.[1] Unless otherwise indicated, reference to the Plaintiffs and Defendants in this Judgment means the Plaintiffs and Defendants in the original action and not the counterclaims.  Further, all the moneys referred to in this Judgment are in Hong Kong dollars unless otherwise stated.

3.  Mr Boniface Lee Shiu Yin (“Boniface”) of the Plaintiff Emagist Entertainment Limited (“Emagist”), Mr Alvin Law Chi Man (“Alvin”) the 2^nd Defendant, Mr Ryan Ip Chi Yung (“Ryan”) the 3^rd Defendant and Mr Terry Man Chi Wai (“Terry”) the 5^th Defendant were the four persons who were involved one way or another in conceiving, creating and developing the Game.

4.  I shall refer Alvin, Ryan and Terry collectively as “ART” as they adopt the same position in this litigation.

5.  Mr Eric Cheng Tak Kwong (“Eric”) the 4^th Defendant was invited by Boniface to join Emagist for introducing capital investment or funding, and Mr Simon Lo Kwong Man (“Simon”) the 6^th Defendant also joined Emagist at the invitation of Boniface to be an administrator who was, inter alia, responsible for human resources, accounts and administration of Emagist. At all material times before the activities of the Defendants complained of and more specifically described below, Eric and Simon, together with Boniface, were the only 3 directors of Emagist.

6.  Emagist was incorporated on 25 March 2009 under a different name and it changed into the present name on 19 May 2009.  It has been running a business of developing and publishing online games, social games on the web and mobile platforms.  The Game to be run on Facebook (“the Facebook Game”) was officially released in July 2009.  “Ninja Saga” on App Store under the iOS system (“the iOS Game”) as well as on Google Play under the Android system (“the Android Game”) were also launched by Emagist as separate and distinct games respectively in May 2011 and around April 2012.  Emagist had also in a joint venture with Mr Dary Lee, its Chief Technology Officer (“Dary”), developed a multiplayer war game under the title of “Age of Heroes” (“AOH”), although the game had not yet been published.

(ii)     The Plaintiff’s original claim (“the Original Claim”)

7.  The Facebook Game became a success bringing huge profit to Emagist. While Boniface was on a business trip to Germany from 8 August 2012, planning to return on 22 August 2012, it is alleged that ART and Eric removed the source codes of the Game from the workstations in the office of Emagist and “migrated” them to the office of the 1^st Defendant Nether Games (Hong Kong) Limited (“Nether”) which was incorporated at their behest only a short time before on 10 August 2012.  Boniface received an email on 19 August 2012 from a staff of Emagist which informed him that there was an unscheduled shutdown of the Game.  This shutdown was unusual and the informer was unable to find out the reason.  Boniface cut short his trip and returned to Hong Kong, arriving at Emagist’s office at about 8 am on 20 August 2012.  There, he saw Alvin, Ryan and a staff Gary Leung working on something.  He also noticed that there was an external disk connected to a notebook.  When he enquired, they did not tell him what they were doing.  When Boniface was not paying attention to them, they left.  Simon and separately Eric with a solicitor also showed up for a time. Then Boniface saw Ryan and Alvin packing up their personal belongings and left.  Ryan removed the said external disk earlier seen to be connected to a notebook before leaving.  All data in this notebook were later found to be deleted.

8.  After initial checking by Dary, it was discovered that:

(i)     The running of the Facebook Game and its database, used to be stored in the local SVN server within Emagist and in Softlayer, which contained all the source codes and graphic artworks (graphic source files) had been taken over by a different server and was no longer under the administrative control of Emagist.  It was considered that the source codes and the Game’s seven associated databases (storing the character’s profile, accessories, inventories, transactions and balance of virtual currencies of each and every player of the Game) must have been copied to this new server and were not controlled by Emagist, or otherwise the Game could not be run.

(ii)    Two of the seven databases stored in Softlayer had been removed. These two databases were for capturing and storing the features of the players, ie, their outfit and appearance and the transactions in and balance of tokens of players.  Without these two databases, the source codes did not know how a player was supposed to look like and how much tokens he was supposed to have.

(iii)   All the source codes in the SVN server for the Facebook Game, the iOS Game and the Android Game in Emagist’s office had been removed.

(iv)   The source codes and graphic files of AOH stored on “github.com” in the account of Emagist were also deleted.

9.  After leaving Emagist’s office, ART, Eric and Simon met with a number of Emagist’s employees or ex-employees at Nether’s office, informing them that Emagist would not be able to pay their wages while they were welcome to join Nether.

10.  In the following days, Boniface claims that some of Emagist’s documents, such as the company kits of Funracing Investment Limited (a company wholly owned by Boniface)(“Funracing”), the employment contracts and non-disclosure agreements (“NDAs”) of Ryan, Alvin and some other employees of Emagist, were missing.  These documents were locked in cabinets to which only Simon had a key.  The remaining company documents were all mixed up making it very difficult to trace documents such as the employment contracts and NDAs with employees.

11.  Upon further checking, it was found that:

(i)     The server settings to the Facebook Game had been modified so that the Game was run from another server “amazonaws.com” (“the Amazon Server”) not under the administrative control of Emagist.

(ii)    The Game’s seven databases were also transferred to the Amazon Server for its maintenance outside the reach of Emagist.

(iii)   Two of the seven databases with Softlayer, CharacterDB and AccountDB, had been deleted.  The SlaveDB, MapDB and LogDB were transferred to a server at the Amazon Server.  An external USB device had been plugged into the SVN server, and the files and backup files in the SVN server were deleted and the structure of the SVN server destroyed.

(iv)   The source codes in the SVN server for the Facebook Game, the iOS Game and the Android Game including their backups were deleted.

(v)    The source codes stored in ten of the workstations were deleted.

(vi)   The contents of the said ten workstations were completely deleted, including the accounting ledgers of Emagist.

(vii)  The master passwords had been changed so that there could be no access to the ten workstations.

12.  In the Original Claim, Emagist claims to be the copyright owner of the Game and complains that ART, Eric and Simon, in the period between 4 and 20 August 2012, committed, inter alia, torts of infringement of copyright, trespass to chattels, conversion, detinue, breach of employment contracts, breach of confidentiality, breach of fiduciary duty and acts injurious to Emagist.  Nether was also added as a defendant in the Original Claim.

13.  Emagist applied successfully before DHCJ Woo for an interlocutory injunction to restrain the Defendants from continuing the alleged wrongful acts. In the judgment handed down on 7 January 2013,  the judge made some serious criticisms against the Defendants, in particular ART, for taking the law into their own hands and taking advantage of a situation created by their own fault or blameworthy conduct.^[2]

14.  It is common ground that because of the dispute between the parties and the interruption caused by the “migration” of the sources codes, the Game lost its popularity amongst its users.  Emagist estimates its loss of revenue to be about $3.8 million in the period between 15 August 2012 and 9 January 2013.

(ii)     The defence to the Original Claim and the Defendants’ case about the operation of the game business

15.  The Defendants, in particular ART, do not dispute that they had copied (not removed) the source codes of the Game and associated databases but claim that they were entitled to do so.  According to them, the game business running under Emagist (“the Game Business”) was actually operated by all of them in the form of partnership.  The copyright associated with the Game belonged to the partnership.  Due to Boniface’s alleged wrongful conducts, including misappropriating the funds of Emagist and excluding them from the management of the Game Business, ART, Eric and Simon, being partners of the Game Business, were entitled to take steps to protect the partnership assets by “migrating” the source codes and databases to Nether.  I refer this as “the Partnership Asset Defence”.

16.  As an alternative plea, ART and Simon claim that ART were the co-authors of these works.  It was they who licensed Emagist to publish the Game.  However, Boniface did not keep his promise of giving them the “agreed shares” in Emagist, and so they terminated the licence of allowing Emagist to operate the Game.  They say that Emagist had repudiated the licence agreement and they merely took steps in the way they did to terminate the licence in August 2012. I refer this as “the Licence Defence”.

17.  According to the case as pleaded by ART and Simon, the partnership agreement to develop the Game Business was made orally between ART and Boniface in a meeting in early February 2009 at the Sun Chiu Kee Restaurant in North Point (“the Sun Chiu Kee Meeting”).   Under the agreement (“the Sun Chiu Kee Agreement”):

(i)     ART would use their own resources and computer equipment to develop the Game.

(ii)    Until profits were made, none of them would be required to contribute any cash towards the capital of the Game Business or be paid for their contribution and services.

(iii)   When the Game was launched, a corporate vehicle would be set up to run the Game Business.

(iv)   Four of them were the founding members of the partnership and entitled to have shares allotted to them in the corporate vehicle.

(v)    ART would be responsible for developing the Game and Boniface would be responsible for the overall coordination of the game development work and business development.

18.  According to their case:

(i)     Emagist was the cooperate vehicle acquired in May 2009 for the partnership.

(ii)    Since about mid-2009, Boniface had wrongfully misappropriated for his own use substantial funds held by Emagist as part of the partnership assets.  According to the particulars provided in the pleading of ART and Simon, the total sum misappropriated was $4,707,869.13.

(iii)   Upon learning the said misappropriation of funds, ART and Simon took steps to protect the assets and revenue of Emagist which were the partnership assets.  Alvin and Ryan shut down the Softlayer and Rackspace Servers from which the Facebook Game was operated and copied the source codes, graphics and databases associated with the Facebook Game to the Amazon Server.

19.  Relying on the Partnership Asset Defence and the Licence Defence, the Defendants deny that Emagist is entitled to bring the Original Claim against them.

(iii)    The counterclaim brought by ART and Simon

20.  There are two counterclaims in the present case.  The first one is brought by ART and Simon against Boniface, Eric, Emagist and Emagist Group Limited which is a Cayman Islands company (“Emagist Cayman”).  For easy reference, I just refer this as “the ART Counterclaim” though Simon is also a plaintiff in this counterclaim.

21.  The ART Counterclaim is made on the basis that the Game Business was operated by the relevant parties in the form of partnership and ART and Simon were all partners of the Game Business.

22.  According to the ART Counterclaim:

(i)     ART and Boniface were the founding partners of the Game Business.

(ii)    The partnership agreement was made orally in the Sun Chiu Kee Meeting as mentioned above.

(iii)   Simon was admitted into the partnership in about April 2009 to take charge of the general office administration duties on the condition that he would pay out of his own pocket immediate expenses incurred by the Game Business as his capital contribution to the partnership.  The total amount he paid for such purposes between April and October 2009 was $99,154.10.

(iv)   Eric was admitted into the partnership in early May 2009 to take charge of business development and raising funds from investors.

(v)    Emagist was the cooperate vehicle of the partnership business, but without the consent of ART, Boniface, Eric and Simon became the shareholders and directors of Emagist.[3]  When ART subsequently knew about this, they did not object on the understanding that these were interim measures and that the shares would be held by Boniface, Eric and Simon on trust for all the partners.

23.  The Game Business was operated initially in the temporary office at North Point, and ART worked on developing the source codes of the Game.  Emagist later moved its office to Cyberport (“the Cyberport Office”).

24.  Since about late May 2009, Eric assumed the de facto role of the chief executive officer of Emagist.  Eric purchased and paid by himself a computer server for use by ART at the Cyberport office in the development of the Game.  The source codes and server application of the Game set up by Ryan in his home computer were moved to such new server after moving into the Cyberport Office.

25.  The Facebook Game was launched in July 2009. The Game became a success starting from the end of 2009 to early 2010.

26.  In early 2011, Eric introduced a Taiwanese company Cherubic Ventures Partners, Inc (“Cherubic”) and its owner Mr Matt Cheng (“Matt”) to Emagist who expressed an interest in investing in Emagist and the Games Business.  After some discussions, Matt indicated that he wished to invest in Emagist’s business.  Boniface and Eric eventually agreed to sell 2.5% interest of Emagist’s business in the sum of US$1 million to Cherubic (“the Cherubic Transaction”).

27.  The Cherubic Transaction was effected in the following way.  Instead of obtaining 2.5% shares in Emagist, Cherubic would acquire the shares of a Cayman Islands company which would in turn own Emagist.  Emagist Cayman was such Cayman Islands company.  In May 2011:

(i)     Boniface and Eric allotted 6,000 shares in Emagist Cayman (representing 20% of all issued share capital) to Eric.

(ii)    Out of 6,000 shares to be allotted to Eric, he would sell 750 shares (2.5%) to a company controlled by Boniface, Funracing, at US$500,000;

(iii)   Boniface, through Funracing, in turn sold the said 750 sharres to Cherubic.

(iv)   The consideration of US$1 million received from Cherubic was to be shared equally between Boniface and Eric each in the sum of US$500,000.

(v)    Boniface, in his dual capacity as a director on behalf of Emagist Cayman and as shareholder of Funracing, entered into a share purchase agreement with Cherubic (the “1^st Cherubic Agreement”), which provided that Cherubic subscribed and agreed to purchase 750 ordinary shares with per value of US$1 per share, representing 2.5% of Emagist Cayman’s issued share capital at a consideration of US$1 million.

28.  According to the ART Counterclaim, the 1^st Cherubic Agreement executed in May 2011 could not be valid because Emagist Cayman was only incorporated on 1 June 2011 and the purchase price was not paid to Emagist as a private placement to increase capital but to Boniface and Eric.  In order to rectify the 1^st Cherubic Agreement and to serve as a record of the purported sale of 750 shares in Emagist Cayman from Eric to Funracing, Boniface as sole director of Emagist Cayman and as a shareholder of Funracing as purchaser, signed the 2^nd sale and purchase agreement dated 11 October 2011 with Eric as seller (“the 2^nd Cherubic Agreement”) which provided that: (i) Funracing agreed to purchase from Eric 750 ordinary shares of Emagist Cayman at the price of US$500,000; (ii) all parties confirmed that Funracing had paid the purchase price in full and it had been registered in the Registrar of Member of Emagist Cayman as a shareholder holding 750 shares out of 30,000 issued shares.

29.  In conducting the Cherubic Transaction, ART and Simon claim that there was unauthorised seizure of partnership assets on the part of Boniface:

(i)     On 1 June 2011, Boniface, without obtaining the consent of all the other partners, caused:

(a)  the incorporation of Emagist Cayman with him as the sole director;

(b)  the transfer of 1 subscriber share in Emagist Cayman to Furracing;

(c)  the following allotment of 29,999 shares in Emagist Group to be made, with the result Emagist Cayman was owned by the following shareholders: Boniface (through Funracing) 20807 shares (69.3%), Cherubic 750 shares (2.5%), Eric 5,250 shares (17.5%), Ryan 897 shares (3%), Alvin 1,707 shares (5.7%), Terry 108 shares (0.4%) and Simon 480 shares (1.6%).

(ii)    On a date unknown to ART and Simon, Boniface signed a document purporting to certify that a resolution in writing dated 25 June 2011 had been signed by all members of Emagist resolving that 9,800 Emagist’s shares be allotted to Emagist Cayman, whereas Simon and Eric (being the other shareholders of Emagist) had never agreed to such allotment.

(iii)   Later, Boniface wrongfully caused the transfers of the remaining shares in Emagist held by Simon (50 shares), Eric (50 shares) and him (100 shares) to Emagist Cayman.

(iv)   The effect of these transactions was that Emagist Cayman became the sole shareholder of Emagist.

30.  As the shares transferred to Cherubic were partnership assets, ART and Simon claim that Boniface and Eric had wrongfully shared the sale proceeds of the Cherubic Transaction, which should have been part of the partnership assets.

31.  They also claim that the purported allotment of the 9,800 Emagist’s shares to Emagist Cayman was void or invalid because:

(i)     the allotment was made for the personal benefits of Boniface and Eric without the consent of all the partners;

(ii)    Emagist has had no director since 24 September 2010 to authorise the said share allotment or to approve the share transfers, as Emagist had not held any annual general meeting in accordance with Reg 7 of the Articles of Association of Emagist.

32.  ART and Simon also claim that: (i) Boniface had wrongfully misappropriated funds in the total sum of $4,707,869.13 held by Emagist as part of the partnership’s assets;[4] and (ii) Boniface had wrongfully excluded the other partners from running the partnership business, i.e. the Game Business.

33.  ART and Simon therefore seek, inter alia, the following relief in the ART Counterclaim:

(i)     a declaration that the copyright in the Game belongs to ART as joint or co-authors or to the partnership (i.e. the Game Business);

(ii)    a declaration that ART and Simon are and were partners, together with Boniface and Eric, in equal shares in the partnership operating the Game Business;

(iii)   a declaration that the 200 Emagist’s shares transferred to Boniface, Simon and Eric are and were held by them on trust for the benefit of all the partners of the partnership;

(iv)   an order that the partnership be dissolved and accounts be taken in respect of the partnership;

(v)    the allotment of the Emagist’s 9,800 shares to Emagist Cayman and the transfers of the 200 Emagist’s shares from Boniface, Eric and Simon to Emagist Group be set aside; and

(vi)   a receiver and manager be appointed to wind up the business of Emagist as the corporate vehicle and operating arm of the partnership.

(ii)     The counterclaim brought by Eric

34.  The second counterclaim is one brought by Eric against Emagist and Boniface (“the Eric Counterclaim”).

35.  According to Eric, Boniface introduced him to join the Game Business in May 2009.  Eric would contribute his know-how in the IT business mainly on matters relating to raising capital, contacting fund managers and preparing business proposals.  Boniface had agreed with Eric that he would receive a 20% shareholding in the Games Business and 20% of its profits.

36.  According to Eric, Emagist was a shelf company purchased by Simon in May 2009.  By that time, Simon and Eric each held 50 shares of Emagist. Eric claims that they both were holding the shares on trust for the partners of the Game Business including Boniface, ART, Eric and Simon.  In May 2010, Emagist allotted 100 shares to Boniface, but the shareholders were still holding the shares on trust for the said parties.

37.  Regarding the discussions leading to the Cherubic Transaction, Matt by that time indicated that he wished to invest US$1 million to buy 2.5% interest of Emagist’s business.  Boniface asked Eric if he wished to sell his 2.5% shareholding in the business to Cherubic for US$1 million.  Eric agreed.  Subsequently, Boniface changed his mind, saying that he wanted to get 50% of the money from Matt but he did not want to sell any of his own shares.  After further discussions, Boniface and Eric orally agreed that:

(i)     Eric would transfer his 2.5% shareholding in the business (being shareholding in Emagist) to Cherubic;

(ii)    out of the sale proceeds of US$1 million from Cherubic, Boniface and Eric would each get US$500,000; and

(iii)   Emagist would pay Eric salary of US$10,000 a month for a period of 12 months, making a total of US$120,000.

38.  According to Eric, Boniface paid him the US$500,000 in 3 instalments but not the agreed salary.

39.  On 25 June 2011, Boniface, without informing others, caused Emagist to issue 9,800 shares to one Emagist Cayman, with the result that the shareholdings of Emagist were as follows: Emagist Cayman (9,800 shares), Boniface (100 shares), Eric (50 shares) and Simon (50 shares).

40.  On 3 October 2011, Boniface and Simon transferred their shares in Emagist to Emagist Cayman.  There was a purported transfer of Eric’s shares in Emagaist to Emagist Cayman, but Eric disputes the authenticity of the relevant sold note and instrument of transfer dated 3 October 2011.

41.  Eric also complains that Boniface had misused or misappropriated the funds of Emagist, including the payment of his own personal expenses, the making of unauthorised cash withdrawals and payment of substantial director’s fee.

42.  So far as the Original Claim is concerned, Eric alleges that Emagist is not the owner of the copyright associated with the Game. ART were the authors of the copyright works and they were not working as employees for Emagist.

43.  Despite the making of all these allegations, the Eric Counterclaim is narrowed down to one breach of contract claim the substance of which can be found in §119 of his pleading:

“119. By Bonifice’s failure to distribute to Eric his 17.5% share of [Emagist’s] profits, Bonfice has fundamentally breached his agreement with Eric who has thereby suffered loss and damage.”

44.  In the prayer, Eric claims for damages for breach of contract.  The only agreement pleaded in the Eric Counterclaim is the agreement made in May 2009 when he joined the Game Business, under which he would receive 20% shareholding in the Games Business and 20% of its profits. Eric now claims for 17.5% of the profits apparently because he had sold 2.5% shares to Cherubic.

45.  Looking at the formulation of the Eric Counterclaim, Eric is not seeking to challenge the allotment of the Emagist’s 9,800 shares to Emagist Cayman and the transfers of the 200 Emagist’s shares from Boniface, Eric and Simon to Emagist Cayman.  In other words, Eric is acknowledging the propriety of these transactions.   Obviously, Eric was more involved in the Cherubic Transaction than ART and Simon, and so it is difficult for him to challenge the allotment and transfers of shares. After all, these allotment and transfers were made to effect the Cherubic Transaction to which he agreed in substance, i.e. the sale of his 2.5% interest to Cherubic with the retainment of the 17.5% interest in the Game Business (in term of his shares in Emagist Cayman which now wholly owns Emagist).

46.  Eric’s position in this litigation is far from clear.  On the one hand, he seems to support the case of ART and Simon by saying that he was holding his shares in Emagist on trust for the other partners of the Game Business, yet it is difficult to understand why: (i) Eric was able to agree with Boniface alone that he would obtain 20% interest in the Game Business; and (ii) Boniface and Eric could conduct the Cherubic Transaction by themselves as if they were the only beneficial owners of the shares of the Game Business.  In my judgment, the Eric Counterclaim is full of contradictions.

47.  I also do not quite understand what Eric is actually claiming for in the present case.  According to the pleading, he is claiming against Boniface for failure to distribute his 17.5% share of Emagist’s profits?  But what are these profits?  Eric is not claiming for an account of the Game Business, and so how can he know that there are profits to be distributed?  Unless there is an order for split trial, assessment of damages (unlike the order for an account of the partnership business) would also be conducted at the main trial, and yet the court is not able to know what damages Eric is actually claiming for.  Furthermore, assuming that the Game Business was operated by way of partnership, Cherubic is now a partner of such business.  How can the court order for an account when one of the partners is not a party to the proceedings?  In my judgment, all these problems are sufficient for the court to dismiss the Eric Counterclaim.  In any event, even if the court has to go into the merits, I will demonstrate in the latter part of this Judgment that the Eric Counterclaim has no merit at all.

48.  Based on the pleadings, the parties have agreed that there are 5 main issues which require the adjudication of the court. Before addressing these issues, I will first deal with the evidence presented at the trial.

WITNESSES AT THE TRIAL

49.  At the trial, Boniface, Dary and one Mr Hong Chen (“Hong”) give evidence in support of the case of Boniface and Emagist.  Simon and ART give evidence for their case, together with Ms Tesla Tsang Man Wai (“Tesla”) who was at one stage the company secretary of Emagist.  Eric also testifies at the trial.

(i)      The evidence of Boniface, Dary and Hong Chen

50.  Boniface is obviously the most important witness in support of his case and that of Emagist.  He provides the court with his background in the IT industry and how he became involved in the business of creation, design, development, marketing, operation and publication of online games, in particular RPGs.  According to him, he was the one who conceived the idea of “Ninja Saga” themed RPG, and he also provides the court with his account about the events leading to the development and the launch of the Game.

51.  Originally, Boniface used his two companies, Keyvalue Business Limited (“Keyvalue”) and Puffin Hong Kong Limited (“Puffin”) to run his business together with his business associate Mr Anthony Ip (“Anthony”).  He employed ART to work on the online games through Keyvalue.  Sometime in 2009, he explained to ART the concept of “Ninja Saga” and asked them to develop the game as a RPG for Facebook.  In November and December 2008, Boniface, through Puffin, commissioned a team of Filipino illustrators to design and produce concept designs and digital graphics for the Ninja Saga characters. He also registered the domain name “www.ninjasaga.com” through “godaddy.com” in his personal name on 1 December 2008.  The background music for Ninja Saga was commissioned from Infinity Sound Production who acknowledged that Emagist is the owner of the copyright of the music.

52.  Anthony decided to withdraw from the online game business, and so Emagist was acquired to continue the operation of the Game Business.  ART were formerly working as employees for Keyvalue.  As Keyvalue was going to cease operation, sometime in late 2008, Boniface told ART that he intended to incorporate a company to develop a series of RPGs with the completed work of the Game as the pioneer project.  He said he would employ them in that corporate vehicle with plans to expand the workforce to speed up the development of the Facebook Game.  He said he would give them an equity interest in the company at an appropriate time “as a reward for their contribution”, but he never agreed what those proportions would be.

53.  According to Boniface, ART became employees of Emagist in about late March 2009.  As he was busy running the Game Business by that time, he did not pay attention to formalities such as the signing of employment contracts and NDAs with ART.

54.  Before March 2009, Keyvalue had already started the preparation work for the Game.  After the acquisition of the new company (i.e. Emagist), Boniface transferred the whole Game Business to Emagist.

55.  In March 2009, he told ART that they would be paid about $5,000 per month until the launch of the Facebook Game.  Due to the tight cash flow, their salary payments from March 2009 to February 2010 were irregular, and the first salary payments were only made in June 2009.  Eventually they were paid at their market level by March 2010, i.e. $30,000 for Alvin, $20,000 for Ryan, and $15,000 for Terry.  By January 2011, they were paid the wage differences owed to them for the period between June 2009 and March 2010, i.e. using the annual wage of $150,000 (as reported to the Inland Revenue Department) as the baseline.

56.  Boniface gives evidence on the operation of the Game on the different platforms and how the source codes were stored in the computer servers.  He also explains how the Game generated profits for the Game Business, and how the Game became successful.

57.  According to Boniface:

(i)     Terry was employed by Keyvalue and then Emagist as an animator.  There was a written employment contract between Keyvalue and Terry dated 27 June 2008.

(ii)    Ryan was employed by Keyvalue and then Emagist as director of development.  He was responsible for the front-end source codes, the game rules and also the backend database.  There were written employment contract and NDA between Emagist and Ryan but Boniface cannot locate the documents.

(iii)   Alvin was employed by Keyvalue and then Emagist as technical director who was responsible for writing source codes for the backend database and setting up and maintaining the servers and computer system. There were written employment contract and NDA between Emagist and Ryan but Boniface cannot locate the documents.

(iv)   Both Alvin and Ryan were trusted senior technical employees and held the passwords to the workstations and the servers.  They were also the administrators of the Game fan page on Facebook.

58.  Before profits could be generated from the Game, Boniface paid the operational expenses of the Game Business.  ART did not make any financial contribution to the Game Business.  According to Boniface, ART were not required to work from home or purchase their own equipment other than for their own convenience.  In fact, Boniface and Emagist bought laptop computers for their use from time to time.

59.  Boniface denies that the Sun Chui Kee Meeting had ever taken place.  ART were only the employees of Emagist, but he promised them and Simon (who was in full-time employment unrelated to Emagist and had paid about $99,000 for expenses of Emagist at the early stage of the development) to give them shares in the company at appropriate time as a discretionary reward for their contributions.  In fact, they got other discretionary rewards such as the use of company cars, housing allowances and year-end bonuses.

60.  In support of his case that ART were Emagist’s employees, Boniface produces the employer’s tax returns, ART’s MPF documents, auto-pay documents and Emagist’s general account ledgers to show that they were employees who received salaries from Emagist from time to time.

61.  On the other hand, Simon and Eric were not Emagist’s employees. Simon was Boniface’s friend and he assisted Boniface in dealing with some of the administrative matters of Emagist.  He also agreed to be a nominal shareholder and director for Boniface from May 2009 onwards.  In July 2012, Boniface offered him a job in Emagist with a monthly salary of $20,000.  Boniface also knew Eric.  He agreed to help Boniface to move his business operation to the Cyberport Office to enjoy rent-free premises as part of its incubation programme.  He also agreed with Boniface to raise capital for the Game Business in return for 20% interest in the Game Business.

62.  Boniface also testifies on the following matters:

(i)     the “unlawful migration” of the source codes and databases of the Game by ART, Simon and Eric to “Nether Games”;

(ii)    the damages caused to Emagist by such “unlawful migration”; and

(iii)   the petition lodged by Eric to wind-up Emagist and the dismissal of such petition by the court.

63.  In response to the allegation of misappropriation of funds, Boniface claims since he was the substantial owner of Emagist, he had the power to use the funds of Emagist for his personal purposes.  In any event, most of the “misappropriations” complained of by ART, Simon and Eric were actually proper business expenses of Emagist and repayments of the loans he previously advanced to Emagist.

64.  Boniface also gives his version about the Cherubic Transaction.  According to him, it was Matt who suggested that a Cayman Islands company should be acquired to hold the Game Business, both for reducing tax liability and facilitating the possible listing of the Game Business.

65.  Boniface is a person with some sophistication, and he has had considerable experience in the computer gaming industry.  He knows how to make a computer game attractive to the users, how to manage a team to develop a computer game and how to attract investors to invest in such kind of business.  The fact that he could persuade Cherubic to invest US$1 million for just 2.5% interest in the Game Business speaks for itself.

66.  Though one may take the view that he was not rewarding ART well enough, given the efforts made by them in developing the Game and their sacrifice in not able to obtain their “monthly payments” regularly in the early stage of the Game Business, I accept that Boniface genuinely believed that the Games Business was his own business and he therefore ran the business as the only “boss”.  In fact, Boniface was prepared to honour his promises to his other business associates.  Even though there was no written supporting document, Boniface was prepared to accept that Eric had 20% interest in the Game Business.  For the Cherubic Transaction, he gave Eric a substantial sum of US$500,000 for the sale of his 2.5% interest to Cherubic, and he allotted the remaining 17.5% shares of Emagist Group to Eric upon the completion of the Cherubic Transaction.  At least Boniface honoured his promise to Eric, though there is a dispute as to whether Boniface had also promised to give him the agreed salary of US$120,000.

67.  There are some attacks on the credibility of Boniface’s evidence:

(i)     Boniface appears to have given inconsistent accounts about whether Emagist had been paying salaries to ART from March 2008 to 2009 on a regular basis;

(ii)    Boniface appears to have exaggerated his interests in Keyvalue;

(iii)   there appears to be some confusion as to when ART actually ceased to be employees of Keyvalue and started to work for Emagist; and

(iv)   Boniface’s insistence that there were written employment contracts signed with ART cannot be true.

68.  I do not accept that these challenges undermine the credibility of Boniface’s evidence.  At the trial, Boniface frankly admits that ART were not receiving their wages on a regular basis at the early stage of the business.  Further, whether Boniface was the sole owner of Keyvalue is quite irrelevant, as there is no serious dispute that ART were the employees of Keyvalue at the time and Boniface was the “boss” to them when they were working in Keyvalue.  Given that there would be a lot of works for ceasing an operation and starting a new one, the actual timing as to when ART officially started to work for the new business is not a material consideration here.  As to whether there were employment contracts and NDAs signed between Emagist and ART, it is again not a main consideration as the court has to look at the substance and not the form of the relationship.

69.  Boniface disputes that the Sun Chiu Kee Meeting had ever taken place.  According to him, he only talked about ART’s positions in the new business in the end of 2008 and March 2009, and not February 2009 as alleged by ART.  I will resolve this important factual dispute in the latter part of this Judgment when I address the question as to whether the Game Business was a partnership business.

70.  Dary and Hong also testify in support of the case of Boniface and Emagist.  They testify on matters relating to the operation of the Game Business and the duties and the works of all those involved in Emagist.  They confirm that Boniface was the “boss” running the business of Emagist.   Since they were not privy to the discussions between Boniface, ART and Simon, their evidence cannot offer direct assistance to the court in deciding the true relationship between the said parties.

(ii)     The evidence of ART, Simon and Tesla

71.  I would deal with the evidence of ART together, as they adopt the same position in this litigation and their evidence is more or less the same.  The main part of their evidence is about the Sun Chiu Kee Meeting.

72.  According to them, in that meeting:

(i)     Boniface told ART that he had an argument with Anthony, “KC” and “Kevin” of Keyvalue and could no longer work together with them.  As a result, Boniface withdrew from Keyvalue and invited ART to leave with him.

(ii)    Boniface further said that he had no money to hire ART, but asked them if they were interested in setting up a new company to develop another new “Ninja Saga” themed RPG.

73.  After some discussions, Boniface and ART agreed on the following:

(i)     As from February 2009, ART and Boniface would together develop and market the Game as a business (i.e. the partnership).

(ii)    Until profit could be generated from the Game Business, none of them would be required to contribute any cash towards the capital of the partnership, or would be paid for their contributions or services in developing or marketing the Game, or would obtain any share in the income of the Game Business.

(iii)   A new company would be formed or acquired to run the business as the corporate arm of the partnership.

(iv)   ART and Boniface were entitled to have shares allotted to them in the corporate vehicle. The actual quantity or percentage of shares was not discussed, let alone agreed upon; but all understood that it would be discussed at a later stage.

(v)    ART would focus on the development of the Game while Boniface would be the chairman and managing director taking care of the business operation of the corporate vehicle.

74.  There is a dispute as to whether ART did make any subsequent enquiries with Boniface relating to the share distribution of the partnership.  According to them, Boniface had spoken to them (and later even to Simon) individually on different occasions on matters such as the valuation of the Game Business and the possible distribution of shares or share certificates to them.  Valuation of the Games Business in the sum of US$50 million was mentioned, and Boniface also told Ryan and Terry that they would be given about US$5 million and US$3 million worth of shares respectively.  After learning that Boniface, Eric and Simon were the directors and shareholders of Emagist, they did not object.  They consider it an interim measure and the shareholders of Emagist were holding the shares on trust for all the partners including themselves.

75.  ART later learned about the possible investment by Cherubic in the Game Business.  However, there is no evidence to suggest that ART and Simon had taken any active or serious steps to find out more information about the Cherubic Transaction.

76.  Being persons who are more interested in computer codes than business operation, it seems quite clear to me that ART (and indeed Simon though he was not involved in developing the Game) had not given much thought about their positions in case that the Game Business became a success.  As to whether ART had made the Sun Chiu Kee Agreement with Boniface, I will deal with such issue in the latter part of this Judgment when I address the question as to whether the Game Business was operated in the form of partnership.

77.  However, I must say here that, with all the sympathy I have with these young men, the problem with their case is that they were quite contended for Boniface and Emagist to run the whole Game Business without their involvement.  More importantly, they were quite happy for Boniface to decide what they were entitled to in term of remunerations or rewards for their work. This was the case even when there was investor joining the Game Business after the Game became successful.  Their conducts throughout the years have seriously cast doubt on their evidence as to whether the Sun Chiu Kee Meeting did in fact take place, or if there were indeed such meeting, whether the terms of the Sun Chiu Kee Agreement were the ones as alleged by them.  The objective facts of this case are certainly more compatible with Boniface’s case that the Game Business was his own business, with promises given to these young men that rewards (including shares of the Game Business) would be given to them in the case that the business was successful.  The facts do not support that the Games Business was a joint enterprise involving these young men as partners.

78.  Tesla also testifies in support of the case of ART and Simon.  She knew Boniface for quite some time.  She operated an accounting business.  In about May 2010, Boniface invited her to assist Emagist in the filing of statutory documents with the Companies Registry.  She only worked with Boniface and not the others, and she had reminded Boniface about the requirement of holding AGM for Emagist.  Boniface subsequently invited her to be a consultant checking and advising him on the books and accounting records of Emagist.  In March 2011, she was formally appointed as the company secretary of Emagist.

79.  Tesla testifies on the accounting records of Emagist in particular the funds allegedly misappropriated by Boniface.  She had not seen any board resolution authorising these payments.  She also tells the court the works she did in the Cherubic Transaction, including assisting Boniface in setting up Emagist Cayman and preparing the relevant documents for execution by the parties.  In March 2012, she ceased to be the company secretary of Emagist.  She was not happy with the way that Boniface conducted the business operation of Emagist, treating the company as his own without bothering to consult the other shareholders or directors.

80.  When arrangements were made for the setting up of Emagist Cayman, she heard Boniface mentioning something like he, ART and Simon were cooperating together to make a game, and to create or run a company (“搞一間公司”); and that he used the word “partner”.

81.  Tesla is a more independent witness.  I accept her evidence that Bonfire had run the Game Business as if it was his own business and that he did not pay attention to some of the formal requirements for the operation of Emagist which is a limited company.  However, since she was not privy to the discussions between the relevant parties, her evidence is of limited assistance.  Further, one may use the term “partner” loosely without having much thought about its legal meaning, and so one cannot just rely on the label used by the parties to determine the legal relationship between them. After all, the court looks at the substance rather than the form.

(iii)    The evidence of Eric

82.  Eric is a strange witness.  In fact, I am not clear about his stance in the whole case.  On the one hand, he stands on the side of ART and Simon and agrees that: (i) the Game Business was operated in the form of partnership; and (ii) ART, Boniface, Simon and Eric were all the partners of the Game Business.  On the other hand, he dealt with the Games Business as if he and Boniface were the only owners.  According to his evidence, Boniface agreed to give him 20% interest in the Game Business.  Yet, he did not bother to check whether the other “partners” agreed to such arrangement.  What alarms me is that he and Boniface just negotiated the whole Cherubic Transaction without consulting ART and Simon and pocketed the proceeds of sale of his 2.5% interest in the Game Business to Cherubic.  Further, if that was a sale of only his 2.5% interest to Cherubic, why was Boniface entitled to half of the proceeds?  Even if Boniface were entitled to half of the proceeds, why didn’t he and Boniface account to the other “partners” for the proceeds?

83.  The whole Cherubic Transaction was conducted with the eyes open on the part of Eric, and he cannot provide any satisfactory explanations to all these questions.  I therefore have serious reservation about the truth of his evidence.  It is clear that he has grudges against Boniface and that is why he is prepared to stand on the side of ART and Simon, whereas in fact he conducted the Game Business and the Cherubic Transaction as if he and Boniface were the only owners of the Game Business.

(iv)     The unexplained features of the Cherubic Transaction

84.  There are also many doubts about the Cherubic Transaction itself.  Cherubic was investing a substantial sum of US$1 million in order to obtain a tiny share (2.5%) of the Game Business.  Based on such purchase price, the valuation of the whole Game Business should have been US$40 million at the time of the transaction.  Yet, there is nothing to indicate or support such substantial valuation at the time of the transaction. Furthermore, for an investment of such scale, there should have been due diligence carried out to investigate the value of the Game Business.  The most important asset of the Game Business was obviously the Game itself, and yet there was nothing done to ensure that Emagist was the proper owner of the copyright of the Game.  In fact, the investor should have demanded written documents, such as agreements between Emagist and the original authors of computer codes, music and other drawings associated with the Game, to confirm that Emagist was the owner of the copyright of the Game, which was the most important asset of the Game Business at the time.  At the trial, even Boniface and Eric cannot provide a satisfactory explanation as to why they were able to persuade Cherubic to invest such a huge sum of money without the supply of these basic documents. Imagine that Cherubic were to demand for the proper due diligence documents, which should have been the case, the differences between the parties might have been resolved much earlier without resulting in legal proceedings.

85.  Having addressed the evidence at the trial, I now deal with the 5 agreed issues which require the determination by the court.

ISSUE 1: RELATIONSHIP BETWEEN THE PARTIES AND THE FORM OF BUSINESS ENTITY OPERATING THE GAME BUSINESS

86.  Obviously, the first and indeed the most important issue to be determined is the legal relationship between the parties and whether the Game Business was operated in the form of partnership.  All the other issues depend on the finding in this first issue.

87.  Under s 3(1) of the Partnership Ordinance (Cap 38), a partnership is the relation which subsists between persons carrying on a business in common with a view of profit.

88.  In the case of partnership:[5]

(i)     each partner carries on business both as principal and as agent for each other, binding the firm and their partners in all matters within their authority;

(ii)    every partner is liable jointly with the other partners for all the debts and other obligations of the firm; and

(iii)   the partners own the business, having a beneficial interest in the form of an undivided share in the partnership assets, including any profits of the business.

89.  Subject to any contrary agreement, s 26 of the Partnership Ordinance provides some rules governing the interests and duties of partners.  For our present purposes, the relevant ones are:

(i)     all partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm;^[6]

(ii)    no person may be introduced as a partner without the consent of all existing partners;^[7] and

(iii)   any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners.^[8]

90.  The evidence of Boniface, ART, Simon, Eric and other related persons has been summarised above.

91.  Obviously, different persons may have different perceptions about their business relationships with others.  But in considering this particular question, the court has to look at all the circumstances of the case, in particular the objective conducts of the parties, in deciding whether the business in question is operated by the relevant parties in the form of partnership.

92.  In answering the question in the present case, I do not consider that the employer’s tax return, the MPF documents, the auto-pay documents or the account ledgers are of much relevance here.  The court will look at the substance and not the form of the relationship.  As I see it, these documents were executed and prepared by the parties (or the supporting staff) without giving much thought to the exact legal relationship between them.  After all, a partner can be both a partner and employee at the same time, and so I do not find that these documents can shed much light on the true legal relationship between the parties.

93.  Neither would I attach much weight on the documents relied on by ART and Simon such as the application form and press release for the IncuTrain Programme.  Given the purpose of these documents (i.e. made for the purpose of applying for rent-free premises in Cyberport), there might be exaggeration in the description of the roles of ART in the Game Business. 

94.  I also would not place too much weight on the following matters: (i) Boniface was the one who was in control of the bank accounts; or (ii) Boniface made most of the business decisions relating to the daily operation of the Game Business.  As shown in the facts of Purdon v Muller[9] and Chahal v Mahal[10], it is quite possible for some younger and less experienced partners to rely on the skill and experience of other partners in running the partnership business and making most of the business decisions.  These factors alone are not determinative of the true relationship between the parties in the operation of the business.

95.  Since there were documents to support the payments of regular salaries to ART from Keyvalue and there was at least contract of employment between Keyvalue and Terry, there is no serious dispute that ART were working as employees for Keyvalue before joining Emagist.  In fact, it would be quite impossible for ART to argue that they were running the business operated by Keyvalue together with Anthony and Boniface as partners.  If the parties were to continue the same relationships after the transfer of the game business to Emagist, then they were employees of Emagist.

96.  According to the ART, the relationship between the parties changed after the making of the Sun Chiu Kee Agreement.  Hence, the first question I have to decide is whether the parties had made the Sun Chiu Kee Agreement.  On the balance of probabilities, I have to find that the parties had made no such agreement.  The reasons for me in saying so are as follows.

97.  First, if one is to join a business as a partner, I would imagine that, even for a lay person, the first thing that person would ask is the percentage of shares they would get in the partnership or the joint venture business.  According to ART, they would not get anything until profit was generated from the business.  Under such circumstances, one of their main concerns should have been the shares they would get in the business.  This would have been a very relevant factor for them to decide whether it was worth for them to work without remuneration making their contributions to the business.  Further, given that Boniface was their former “boss” and “employer” and his experience in running online game business, they would not have seriously expected that they would be equal partners with Boniface all obtaining the same shares.  This was highly unlikely given the particular circumstances facing the parties by that time, and so it made it more important for them to have ascertained their shares before deciding whether to join such business venture.  One cannot simply justify ART’s behaviour by putting forward a lame excuse that they are simple and naïve young men.  The fact that they had not done so certainly supports Boniface’s case that the rewarding of shares would only be part of the employees’ incentive scheme which was to be made at the sole discretion of their employer.

98.  According to ART, they could discuss this matter later when they had a clearer picture about the prospect of the business.  Further, ART and Boniface were friends and so they trusted that Boniface would allot shares to them in due course.  Alvin and Ryan were also the administrators in the Game’s Facebook account, and so they had something to hold on to if Boniface were to refuse to discuss the matter with them.  In any event, further discussions would have to be carried out when there were investors joining the partnership at a later time.

99.  However, even this cannot explain why ART did not bother to find out more about the shareholding of the partnership when Simon and Eric later joined the Game Business.  It is even more absurd when ART and Simon did not take any serious or positive steps to find out more about the shareholding of the alleged partnership when a substantial investor, Cherubic, joined the Game Business.  ART may be naïve and simple persons and they might not be interested in the daily operation of the Game Business, yet it cannot explain why they did nothing and just allowed Boniface to run the Game Business as if it was his own business and to make all the commercial decisions relating to the new investment which would have a significant impact on their alleged interests in the business venture.  In particular, Simon was partly responsible for taking care of the administrative matters in the office.  It is trite law that these subsequent conducts cannot be used as an aid to the construction of any agreement made in the Sun Chiu Kee Meeting or otherwise, but they can assist the court in deciding whether agreement on a certain point had in fact been made.

100.  Ryan says in his testimony that Boniface made a promise to him sometime in May 2010 that he would receive 9% shareholding in Emagist, whilst Alvin, Terry and Simon would get 14%, 7% and 5% respectively.  Alvin and Simon also confirm the making of such promise.  But if these conversations had indeed taken place (which I do not accept), why were they prepared to accept such allotment suggested by Boniface without any question?  It is as if Boniface was the only person who could decide such issue.  Such arrangement is certainly consistent with Boniface’s case that the allotment of shares he promised to ART was only discretionary and was part of the work incentive scheme.

101.  Second, if ART had made the Sun Chiu Kee Agreement with Boniface, it is hard to explain why they had not pressed Boniface for distribution of profits from time to time after the Game became successful.

102.  Though it is faintly mentioned in the supplemental witness statement of Alvin that they did raise such matter with Boniface[11], the fact shows that they did not take any active steps to pursue the matter for quite a period of time and all they got were some “monthly payments”.  Even if these “monthly payments” were not made on a regular basis at the early stage of the Game Business, Boniface increased the “monthly payments” to ART after the Game became successful and paid back all the outstanding “monthly payments” to them.  Boniface also provided them with some additional bonuses and fringe benefits, such as the use of company cars and the provision of housing allowances, when the Game became more successful.

103.  Some observations can be made about these arrangements:

(i)     it was Boniface who decided all these matters without much argument or objection on the part of ART (and indeed Simon);

(ii)    all along throughout the operation of the Game Business, ART had been receiving these “monthly payments”, which to me look more like monthly salaries, and they had not pressed Boniface for any distribution of profit.

104.  The second observation is more telling when, according to ART’s case, Boniface told Ryan and Terry that the valuation of the Game Business was US$40 million, and yet the evidence shows that ART and Simon were quite contended with what they got even if there were allegedly partners of such profitable and valuable business.

105.  In my judgment, what happened between the parties support Boniface’s case that he had only promised to give ART and Simon incentive bonuses including allotment of company’s shares when they made contributions to the Game Business and the same became profitable.  There is nothing unreasonable or insensible about such kind of arrangement, in particular when there was great uncertainty about the prospect of the Game Business back in early 2009 and Boniface, as further elaborated in the latter part of this Judgment, had to bear the commercial risk of the business operation alone.

106.  There is also another inconsistency in the formation of the ART Counterclaim.  In their pleading, it is alleged that none of the co-authors of the copyright works of the Game had received any remuneration or reimbursement of expenses from any person for the creation of the Game.[12]   That may be an allegation forming part of the Licence Defence.  But if that was the case, how can one explain these “monthly payments” to ART?  If these were distributions of profit, it is difficult to see why the other partners were not involved in deciding whether these payments should be made or not.

107.  Third, though the sharing of losses is not a necessary ingredient for a partnership, it is a factor to be considered in determining whether there is indeed a partnership.

108.  It is clear that there were costs associated with the operation of the Game Business, for examples: (a) the wages of Stephanie, Leung Ting and Cheung Pok Yin, who all joined Emagist in about June or July 2009, adding up to about $26,500 a month; (b) the cost of the Filipino team adding up to about $57,000 in 2009; (c) the monthly management fee for the Cyberport Office in the sum of $2,000; and (d) the advertising costs for the Game.  One must also not forget that when the Sun Chiu Kee Agreement was allegedly made in February 2009, there was no plan, or at least no guarantee, that Emagist would be able to move into the rent-free Cyberport Office.  If not, rental expenses would be a very substantial burden on the Game Business.

109.  There is a dispute as to whether Boniface had personally paid as much as $910,885.93 for the expenses of the Game Business from March to December 2009.  I am not prepared to conduct a microscopic examination of the Emagist’s account in order to decide whether it was true or not.  For the purpose of the present case, it suffices for me to say that there was a real risk in early 2009 for the Game Business to be operated at a substantial loss.  It does not appear to me that ART and Simon, given the uncertainties and their limited financial means and experience in running business operations, were prepared to bear the financial risk of running the Game Business.  There was no guarantee that the Game would succeed.  In fact, previous experience of the parties clearly demonstrates the difficulty in establishing a successful business venture in such competitive field.

110.  Mr Chau, counsel for ART and Simon, submits that for ART, instead of making financial contribution as capital, working without remuneration was their contribution to the partnership.[13]  This is what Eric describes as the “bootstrapping” model, relying on the low operation costs to sustain the development of the Game.  In particular, there was some income from the previous game that they were working on, i.e. “鬥地主” (the Landlord Game), which might be used to support the early operation.

111.  Nevertheless, one cannot judge the situation with the benefit of hindsight.  One must have to assess the parties’ intentions given the circumstances facing them at that time.  It is also not the task of the court to revise the agreed arrangement between the parties in case that the arrangement subsequently turns out to be unfair to a particular party.  Based on the facts of the present case, it is more likely that ART and Simon were prepared to work with low and unsteady salaries at the early stage of the operation, with the expectation of getting shares in the Game Business if it turned out to be successful.  That also explains why they were so submissive to Boniface and indifferent to the arrangements for the admission of new investors.

112.  Fourth, the system of work adopted at Emagist suggests that ART were more likely working as employees rather than partners of the Game Business:

(i)     there were emails from ART showing that they had to obtain permissions from Boniface and Dary for sick leave or absence from work; and

(ii)    there were emails from Dary to ART giving directions for work.

113.  Undoubtedly, it is possible for a partner to be an employee of the partnership at the same time.  But if ART and Simon were indeed equal partners, why did they have to obtain leave from Boniface for their absence from work?   It is one thing for a junior and inexperienced partner to rely on a more experienced partner to make business decisions for the partnership, it is another for a person to work like an employee seeking permission from their employer for their absence from work and taking instructions like a staff of a company. In particular, the evidence shows that, given the nature of their works, it was not necessary for ART to work at Emagist’s office at fixed hours.  Though the court would look at the substance and not the form in determining the legal relationship between the parties, the system of work and ART’s position in Emagist’s office are more consistent with the case of Emagist and Boniface that ART were just employees with the prospect of getting bonus shares in the future.

114.  Fifth, the shifting positions of ART and Simon as shown in their pleading also undermine the credibility of their claim.

115.  Their pleading had been substantially amended in mid-2015.  Prior to the amendments, their evidence (as adduced in the earlier affirmations and their first set of witness statements) was that Boniface promised to give them the “agreed shares” in the “new company” to be formed, i.e. Emagist.[14] At best, they claimed they were “consultants” who were not paid anything (in some cases, very small sums of money) until 2010 or after; and they did not become shareholders until 2011. Their contention was that ART were the true authors of the Game and had every right to take it away from Emagist; that they were not given the “agreed shares” in the “new company” that they were promised; and that Boniface was using Emagist’s funds for his personal expenses.

116.  In the amendments made in 2015, they claimed, for the first time, that they were actually partners since at least February 2009 resulting from a discussion in the Sun Chiu Kee Meeting.  But even on their case, the terms for the establishment of the partnership are unclear.  As only ART and Boniface were at the meeting, it is also not clear how such terms of the alleged partnership agreement were conveyed to Eric or Simon.

117.  It is certainly unclear in the ART’s pre-amended case as to whether Boniface had made a promise to give them specific percentages of shares in the corporate vehicle.  At the trial, ART maintain that their respective shareholdings in the partnership had not been discussed in the Sun Chiu Kee Meeting.

118.  As I see it, the pre-amended case was formulated very much based on the Licence Defence.  ART maintained that they were only consultants.  Being the original authors of the sources codes, they were the owners of the copyright of such works.  However, it was unclear whether the Licence Agreement was made in the Sun Chiu Kee Meeting or not.  If it was indeed so made in the meeting, what was actually the relationship between Boniface and ART after the meeting? Were they partners?  Or were ART independent contractors or employees?  Or were Boniface and ART two separate group of entities engaging in a joint venture?

119.  Though the Partnership Asset Defence and the Licence Defence are alternative pleas to the Original Claim, the two defences are in substance inconsistent.  In the case that the parties had made the Sun Chiu Kee Agreement and that the Game Business was a partnership, then the copyright of the Game, being its most important asset, must belong to the partnership.  However, it is a completely different story under the Licence Defence.  As mentioned above, it is also their case that ART were the owners of the copyright of the source codes of the Game.  They granted the licence to Emagist to run the Game for free.  However, as they were not given the “agreed shares” as promised, they claim that they had the right to terminate the licence.  This is different from the contention that Boniface and ART were running the Game Business together as partners.  Furthermore, if Emagist had only a licence to operate the Game, Emagist had no valuable asset at all.  Under such circumstances, what was Emagist actually selling to Cherubic in return for US$1 million?

120.  It is legitimate for parties to plead alternative cases.  However, there are only one set of true facts.  What were actually discussed and agreed in the alleged Sun Chiu Kee Meeting?  Was the word “partnership” mentioned?  Was the term “licence agreement” used?  In my judgment, there is no detail in ART’s evidence on these issues, and such confusion and alternative pleas certainly undermine the credibility of their case.

121.  There are also uncertainties as to how Simon later joined the alleged partnership.  There is no dispute that Simon paid for some of the expenses of the Game Business in the early stage from April to August 2009 in the sum of $99,154.10, mainly for the fees paid to the Filipino team for the creation of the drawings of the characters of the Game.  It is the case of ART and Simon that there was an agreement between Boniface and Simon for the latter to join the partnership, and the expenses he paid would be his capital contribution.  That was also why Simon agreed to work part-time in Emagist taking care of some of the administrative works.  But according to Boniface, Simon only attended Emagist’s office on a part-time basis, once every two weeks, until July 2012.

122.  Despite the assertion of ART and Simon, I cannot quite understand how Simon was able to join the alleged partnership without consulting the other “partners”.  Furthermore, it is quite clear that the “contribution” of Simon was quite minimal in the term of the overall scheme. One would not have expected him to be an equal partner like Boniface, and so it begs the same question as to why he had not discussed the shareholding of the alleged partnership when he joined the Game Business.  Furthermore, in one of the emails Simon sent to the accounting staff of Emagist, Simon himself described the sums he paid as “disbursement”.  Though there is some confusion as to whether Emagist had repaid such “disbursement” to Simon, one wonders why he would have described these expenses as “disbursement” and not capital contribution.

123.  In support of the partnership plea, ART rely heavily on the effort and time they had spent in developing the Game.  Even on the Boniface’s case that they would only get $5,000 a month before the launch of the Game, such payments were not made on a regular basis.  With the terms of employment allegedly offered by Boniface, ART would not have agreed to help Emagist to develop the Game.  They would only have agreed to do so if they were partners of the Game Business.  According to Mr Chau, no fixed monthly salary is a strong indicator that the ART were partners of the Game Business.  Coupled with the fact that Boniface had little control over the actual works performed by ART, ART could not be employees of Emagist.

124.  ART and Simon also rely on some minor points:

(i)     the reference to “Dary” as a new partner in an email by Dara Cheung (a former clerk of Emagist), impliedly suggesting that there were other partners involved in the Game Business;

(ii)    the field “Capacity” being left blank in the employer’s tax return for Boniface and ART;

(iii)   some of the internal account documents suggesting that ART were “consultants”; and

(iv)   the application form and press release for the IncuTrain Programme mentioned above[15].

125.  I do not see how the contents of these documents can advance their case any further.  As I have mentioned many times before, these documents may not reflect the true relationship between the parties and the court would look at the substance and not the form in deciding the legal arrangement through which the parties operated the Game Business. Furthermore, lack of control over the works of ART is not material consideration here.  For example, someone can be working as an independent contractor for another person who has no control as to how the contractor performs their works, but that does not make that contractor a partner of a joint venture business.  Cases such as Poon Chau Nam v Yim Siu Cheung^[16]  and Ready Mixed Concrete (South East) Ltd v Minister of Pensions & National Insurance^[17] are therefore of limited assistance in this case.  In any event, I have already explained above as to why I say that the system of work and ART’s position in Emagist’s office do not support that they were partners of the Game Business.

126.  What is now left is the allegation that ART and Simon would not have made such contributions to the Game Business if there were not partners.  With all the sympathy I have with them, getting a much larger share in the Game Business (as they had already obtained some shares in Emagist Cayman which now owns the Game Business) may only be their wishful thinking.  They expected that, given their efforts made to the development of the Game, they should have obtained more shares in the Game Business.  That did not materialize and so they turned their back against Boniface and took the Game away from him.

127.  As I have mentioned before, one cannot judge the parties’ earlier intentions by reference to the results.  The Game Business was an uncertain if not risky business in the initial stage of the development in early 2009.  There was no guarantee that the Game would be a success.  In fact, most of the start-up operations may not even be able to get off the ground.  No matter how small was the initial operation costs, there would still be expenses that need to be borne by the Game Business.  Liabilities would have to be incurred.  If one were to turn the clock back to early 2009, I do not think that ART would have agreed to bear the risks and liabilities associated with the operation of the Game Business.  Hence, they agreed to accept lower salaries at the outset, perhaps even not paid punctually at the end of each month, with a view to get bonus shares in the future.  The opportunity costs to them might not be that high as suggested by Mr Chau.  They expected Boniface would have treated them better, but that may not always happen in real life.

128.  Boniface may be a very good “sweet talker”, as shown by his ability to convince Cherubic to invest such substantial sum of money in the Game Business.  He must have given some expectations to ART and Simon (whether in the casual meeting in Sun Chiu Kee Restaurant or elsewhere), but judging from the objective facts of the present case, I have to find that the promise was nothing more than one agreeing to give them discretionary bonus shares in case that the Game Business was successful.

129.  In my judgment, the Game Business was very much Boniface’s business.  He had to operate and bear all the responsibilities and liabilities associated with the Game Business.  Despite the promise to give ART and Simon discretionary bonus shares, Boniface was still the “boss”, and it was only he who could determine various important matters relating to the ownership of the Game Business, such as the allotment of discretionary shares to employees, the introduction of new investors and shareholders into the Game Business and the corporate structure for the operation of the Game Business.  That also explains why ART and Simon were so submissive to Boniface and were indifferent to the details of the Cherubic Transaction.  For all these reasons, I find that the Game Business was not operated in the form of partnership as alleged by ART and Simon and they were not partners of such business. 

130.  Shortly before the trial, there was a late application by Emagist to adduce some new documents in support of its case which was opposed by the other Defendants.  As I do not need to rely on these documents in making the above finding, the late application now becomes academic.

ISSUE 2: OWNERSHIP OF THE COPYRIGHT OF THE GAME

131.  There is no serious dispute that ART were the ones who wrote the source codes and the database materials of the Game.  Despite that, I find that the copyright of these works belongs to Emagist.

132.  First, s 14 of the Copyright Ordinance (Cap 528) provides that the employer is the first owner of any copyright in the work of its employee made in the course of the latter’s employment, subject to any agreement to the contrary.  As I find that ART were employed by Emagist when they wrote the sources codes and the database materials for the Game, it follows that such works were made by ART in the course of their employment.

133.  S 15 of the Copyright Ordinance also provides for the ownership of commissioned works.  So even if ART were working as “consultant” or independent contractor for Emagist, which I do not find it to be the case, the copyright of the source codes and database materials still belongs to Emagist because these were commissioned works.  For the copyright relating to the music and the graphic drawings of the Game, it belongs to Emagist as it was the entity which commissioned the works.  The original authors of these works also acknowledged the same.

134.  Second, ART raised no issue when the investors subsequently joined the Game Business.  The Game was the most important and valuable asset of the Game Business.  ART should have known that whoever invested in the Game Business was also purchasing the copyright of the Game, otherwise there would have been no point in making the investment.  If ART were to consider themselves the owners of the copyright of the Game, they should have demanded their participation in the transaction or requested for rewards resulting from the new capital injected by the new investors in particular Cherubic.  In my judgment, their inaction or indifference was an implied acknowledgement by them that the copyright of the Game actually belonged to Emagist.

135.  As I see it, the purported justification of ART and Simon to “migrate” the source codes and databases will still run into difficulties even if the Game Business were initially operated in the form of partnership and ART were the partners concerned.

136.  Mr Chau has referred me to the following cases with a view to establish various propositions:

(i)     Coward v Phaestos Ltd[18] and Barber v Rasco International Limited[19] showing that a partnership may still retain the ownership of the copyright or property which is a partnership asset even if the business may subsequently be transferred to be operated by a corporate entity;

(ii)    Campbell v Campbell[20] showing that partnership property may comprise of the shares of a company which, in commercial terms at least, carries on part (or even the whole) of the partnership business; and

(iii)   Barber v Rasco International Limited^[21] showing that money in the bank account of the corporate vehicle may be held by that vehicle on trust for the partnership.

137.  As I see it, there is a serious confusion in the formulation of ART’s defence and counterclaim.  On the one hand, they seem to suggest that the partnership still retains the ownership of the assets of the Game Business.  That is why they say that the copyright of the Game and the money misappropriated by Boniface from Emagist still belong to the partnership.  On the other hand, they seem to accept that the assets of the partnership have already been passed to Emagist, and that is why they claim that Boniface, Eric and Simon were holding the Emagist shares on trust for them.  Being the beneficial owners of the shares, ART and Simon claim that they have the right to ask the court to make orders relating to the internal affairs of Emagist such as the allotment of shares.

138.  Such confusion would have serious implication as to the relief which is to be granted by the court if there were indeed a partnership.  Assuming that the court were to order an account of the partnership, should the court treat the assets of the partnership such as copyright of the Game as belonging to the partnership or Emagist?  That may have a lot of implications as to issues such as: (i) whether ART and Simon would have a valid defence to the Original Claim even if there were a partnership; and (ii) whether ART and Simon would have the locus to bring a claim against Boniface for the account of Emagist’s money allegedly misappropriated by Boniface.  Unfortunately, the legal team of ART and Simon have not given a lot of thought on this particular issue.

139.  In my judgment, on the facts of the present case, it is quite impossible for ART and Simon to argue that the partnership (even there were one) still retains the ownership of the copyright or that the Game Business had not been fully transferred to Emagist.  One of the material distinctions between the facts of the present case and those in the authorities cited by Mr Chau is that there is a new investor in the Game Business.  In acquiring the interests of the Game Business, the new investor Cherubic was acquiring the shares of Emagist, though indirectly through Emagist Cayman.  Although the Cherubic Transaction was effected without much of their involvement, ART and Simon should have known that the Cherubic Transaction involved the transfer of Emagist’s shares.  Under such circumstances, how can they now say that Emagist is not the owner of the copyright of the Game?  Are they seriously suggesting that the investor was purchasing the Game Business without the copyright of the Game?  By reason of their conduct, ART and Simon must have accepted that Emagist is the copyright owner.

140.  It is therefore clear that the Partnership Asset Defence has no merit.  Since I find against the existence of partnership, Emagist is the copyright owner of the Game.  Even in the case of a partnership, the copyright of the Game must have belonged to Emagist and not the partnership.  At most, it may be argued that the shareholders of Emagist are holding the shares on trust for the partners, but it cannot provide ART with a defence to the Original Claim.

141.  In his submissions, Mr Chau further argues that there is an implied term in the partnership agreement for ART to take reasonable steps to protect the partnership assets.  Since Boniface had wrongfully excluded ART and Simon from the management of the Game Business and failed to account to them for their shares in the Game Business, they claim that there had the right to take away the partnership asset from the control of Boniface.

142.  However, even if there were a partnership agreement which I do not accept, there is simply no room for the court for implying such term.  There may be many ways (for example through instituting legal proceedings) for ART and Simon to protect their rights, and there is no business efficacy for them to do something to hurt the alleged partnership as a whole.  Further, apart from ART, Simon and Eric, Cherubic is also arguably one of the partners of the alleged partnership.  How could they do something which adversely affected the interests of Cherubic?  Hence there is no defence whatsoever to the Original Claim even if ART and Boniface had made the Sun Chiu Kee Agreement back in February 2009.

143.  Again the Licence Defence has no merit.  In the case of a partnership, the copyright of the Game must belong to the partnership.  As submitted by Mr Chau himself in his written opening submissions[22], software developed for the purposes of the partnership business is likely to be regarded as a partnership asset.  Even in such scenario, as I have explained above, the copyright must have been transferred to Emagist after it was acquired to operate the Game Business.  Indeed in the source codes prepared by ART themselves, it was expressly acknowledged that the copyright of the Game and the source codes belonged to Emagist.[23]

144.  Further, if ART were still the owner of the copyright, it begs the question as to: (i) why Terry had to sign a NDA with Emagist relating to the use of confidential information; (ii) why ART, equipping with the powerful weapon of revoking the licence at any time, had not exerted more pressure on Boniface for the allotment of shares, distribution of profits or payment of licence fees after the Game Business became profitable in the end of 2009 or early 2010.  In fact, Ryan admits in his oral testimony that there was no such licence agreement, and so the Licence Defence is doomed to fail.

145.  There is a faint suggestion that the copyright of the Game owned by Keyvalue had not been properly transferred to Emagist as there was no written assignment of copyright as required by s 101 of the Copyright Ordinance.  However, such argument would only have substance if Keyvalue at one stage owned the copyright of anything which formed part of the final version of the Game.  There is simply nothing to substantiate such speculation.  It is clear that the Game was published in July 2009 when the whole Game Business was operated by Emagist.  In fact, it is the ART’s own case that substantial parts of the work were done by them after the Sun Chiu Kee Meeting in February 2009.

146.  I have also considered the question as to whether Simon, Eric or Nether is also liable for the Original Claim, in particular in respect of tort of conspiracy to injure.  However, Simon and Eric maintain that they did not know about the “migration” of the source codes and the databases beforehand.  Further, I do not accept that the email messages or the fact that Eric was one of the founding members and directors of Nether are sufficient to show that Eric knew about or was involved in the wrongful act of the “migration” of the source codes and databases.  Without knowing how Nether was functioning and who were the directing minds behind its operation, there is also no sufficient basis for the court to find liability on the part of Nether.  Hence, only ART are liable for the wrongs complained of by Emagist in the Original Claim.

ISSUE 3: DAMAGES OF THE ORIGINAL CLAIM

147.  For the quantum of the Original Claim, Emagist claims the following:

(i)     loss of revenue caused by the “migration” of the source codes and databases in sum of $3,796,390;

(ii)    the CPMStar advertising revenue which Alvin allegedly misappropriated in the sum of US$85,445.51; and

(iii)   the Facebook revenue which was remitted to Ryan during the period between September 2012 and January 2013 in the sum of US$565,927.50.

148.  In the interlocutory injunction application before DHCJ Woo, the judge ordered Ryan to pay the sum of US$479,871.98 from the Facebook revenue account into court.  However, credit would be given to the sum of US$110,000 for the purpose of covering all the server hosting fees. Ryan therefore paid the balance in the sum of US$369,871.98 into court on 2 January 2013.  The judge also ordered Ryan to pay into court any further revenue received by him up to the time when Emagist regained full control of the Game, and so Ryan paid such sum in the amount of US$86,056.41 into court on 25 January 2013.  Hence the total amount paid by Ryan into court is US$455,928.39.

149.  In quantifying the loss of revenue, Boniface listed out the monthly revenues for the 6 months both before and after the “migration” of the source codes and databases.  The average monthly revenue for the 6 months before 15 August 2012 was $1,627,838, whilst that for the 6 months afterwards was $837,985.  Emagist therefore seeks a difference of the two figures (i.e. $789,853) on a monthly basis, and it claims for the loss of revenue for the period from 15 August 2012 up to 9 January 2013, i.e. the sum of $3,796,390.

150.  ART does not dispute the revenue paid into Ryan’s Facebook account in the period from August 2012 to January 2013.

151.  Alvin had also opened an account in his name in “CPM Star” to receive revenue from the Game.  He received the sum of US$85,445.51 in the period from July to December 2012.  According to Alvin, part of this sum was used to pay for expenses required to operate the Game and related office administration and server expenses, though the exact amount is not clear.

152.  In my judgment, Emagist cannot claim for both loss of revenue and the account of profit at the same time.  In most intellectual property infringement cases (as it is for other cases), the plaintiff has to make an election for either assessment of damages or account of profits, for the simple reason that there would be double recovery if the plaintiff can claim for both at the same time.

153.  Emagist has not made the election in the present case.  But fortunately, either option would produce more or less the same result.  For the loss of revenue claim, the quantum is $3,796,390.  However, the figures relied upon by Emagist are only the revenues.  It has not taken into account the saving of the operating costs during the period of which Emagist lost control of the Game such as the salaries of ART.  On the other hand, the quantum for the account of profit claim would be more or less the same as the revenue of the Game paid by Ryan into court, i.e. US$455,928.39. Apparently, this sum of money has not included the money sitting in the CPMStar account.  However, I accept that certain costs would have to be incurred for the operation of the Game to generate such revenue, though the court does not know the exact amount of such operating costs.

154.  As there are some unknowns in the present case, i.e. the exact amount that could be saved during the period when Emagist lost control of the Game and the costs actually incurred by ART in operating the Game during the “migration” period, I decide to adopt a broad brush approach and assess the quantum of the Emagist’s claim as the same amount that ART have paid into court.  Assessment of damages can never be an exact science, but I believe that such quantum (i.e. US$455,928.39) would more or less reflect the actual loss suffered by Emagist in the present case taking into account that some costs could have been saved during the “migration” period.  Obviously, the payments into court together with the interest accrued thereon would be paid out to Emagist to satisfy the judgment for the Original Claim.

155.  As ART and Simon felt that they had been ill-treated by Boniface, there might be a chance that they just left Emagist on a short notice even without “migrating” the source codes.  If they had done so, Mr Chau points out that Emagist would have suffered some loss of revenue in any event even if there were no wrongful acts on the part of ART.  However, since ART were Emagist’s employees, they owed a duty of fidelity to Emagist.  They had to offer the necessary cooperation for the smooth transition of the operation to the new team if they were to left.  There is no basis for the court to speculate that any new team could not have continued the operation or Emagist would suffer any loss of revenue if ART were to observe the duty of fidelity. Hence I will not reduce the quantum of the claim by reason of such speculation by Mr Chau.

156.  There is also no room for the court to award additional damages to Emagist for the breach of copyright claim.  The loss of revenue assessed above is made based on all the wrongful acts of ART as pleaded in the Original Claim, and it would be most difficult for the court to isolate the quantum for the breach of copyright claim or to say that all the loss of revenue was caused by the breach of copyright claim.  For this reason alone, I refuse to award any further additional damages to Emagist.

ISSUE 4: ALLEGED MISAPPROPRIATION OF THE FUNDS OF EMAGIST

157.  As ART and Simon were only employees and not partners of the Game Business, they have no locus to make a counterclaim in respect of the complaint of misappropriation of funds.

158.  No derivative action has been commenced in the present case.  It is clear that the funds allegedly misappropriated belonged to Emagist.  Though ART, Simon and Eric were allotted some of the shares of Emagist Group, they had no standing to sue in their own names for the loss suffered by Emagist.  Simon and Eric were at some stage shareholders of Emagist, but it is trite that such kind of reflective loss is not recoverable by the shareholders.  Furthermore, they had transferred their shares in Emagist to Emagist Group, and so they are not even existing shareholders of Emagist which entitle them to bring derivate action in the name of Emagist against Boniface.  Hence, the counterclaims for misappropriation of funds brought by ART, Simon and Eric have to be dismissed.

159.  Mr Chau has referred me to cases such as Marex Financial Ltd v Sevilleja[24] and Hamid Naghshineh & Ors v Harold Percy Chaffe & Ors[25] with a view to show that the shareholders may have a separate course of action against Boniface.  But as I have analyzed above, even if there were a partnership, the Game Business had been subsequently taken over by Emagist and hence these cases cannot assist ART and Simon in their counterclaim.

160.  Further, there is no reason for me to doubt the following:

(i)     part of the funds withdrawn by Boniface were proper business expenses as booked in the Emagist’s account ledgers; and

(ii)    for the funds withdrawn from the advertisement revenue from Google, part of them were used to pay back Boniface’s loans he previously advanced to Emagist.

161.  After all, it was Boniface who was ultimately responsible for the daily operation of Emagist at the material time.  Though he operated Emagist as if it was his own company, there is no reason for the court to doubt his explanations about the purposes for the withdrawals of the funds.

162.  I would also make the following observations about the alleged misappropriations.

163.  First, the alleged expenses and remunerations were recorded openly in the ledgers and financial statements of Emagist which were made available to at least Eric and Simon, and yet no complaint had been made by the parties throughout the years.  The delay in the making of such complaint also makes it more difficult for Boniface to provide detailed particulars about these payments.

164.  Second, Boniface was not the only person who had received remunerations or other fringe benefits from Emagist.  Eric, Ryan and Alvin had vehicles provided by Emagist for their own use and Terry had received housing allowances.  ART had also received year-end bonuses.  The point to note is that it was Boniface who decided on these discretionary remunerations and benefits, which is consistent with the fact that the Game Business was Boniface’s business with promises given to ART and Simon that they would receive discretionary bonuses and benefits if the business was successful.

165.  Nevertheless, I would not make any specific findings on the propriety of these Boniface’s withdrawals.  If ART, Simon and Eric want to pursue the matter, proper derivative action has to be commenced which is missing in the present case.  For such derivative action, another main party Cherubic has to be involved in the investigation of the account of Emagist.  Even if the court proceeds to make specific findings on the propriety of these withdrawals, there is nothing to stop Cherubic from coming back to court to start the whole process again.  Hence, there is little point for the court to conduct this exercise now, and I prefer to dismiss the misappropriation claim solely on the ground that Emagist should be the only party to sue for such losses and no proper derivative action has been commenced in the present case.

ISSUE 5: ALLEGED WRONGFUL ALLOTMENT AND TRANFERS OF SHARES OF EMAGIST

166.  The last issue relates to the complaints that Boniface had wrongfully caused the allotment of 9,800 Emagist’s shares to Emagist Group and the transfers of 200 Emagist’s shares from Boniface, Eric and Simon to Emagist Group.

167.  Based on my finding that the Game Business was not operated in the form of partnership as alleged by ART and Simon, there is very little substance left in these complaints.  Boniface was the main shareholder of Emagist which in turn owned the Game Business.  Boniface had made an agreement with Eric for him to get 20% interest in the Game Business. For that, Boniface honoured his promise by paying US$500,000 for the sale of Eric’s 2.5% interest to Cherubic and allotting 17.5% shares of Emagist Group to Eric. Furthermore, Eric had never challenged the allotment of shares in the winding-up petition he lodged against Emagist, and so it is not open for him to say now that the allotment was unlawful.  In fact, in dismissing Eric’s petition for winding-up, To J made some adverse comments against Eric saying that he all along knew about the accounts of Emagist[26] and the details of the Cherubic Transaction[27], and so there was no basis for him to complain that Boniface was doing something behind his back.  For the share transfers, both Eric and Simon signed on the share transfer documents.  Coupled with the related emails, it is quite impossible for them to say that they did not know the documents that they were signing at the time. To J also observed that there was overwhelming evidence to show that Eric knew about the share transfers.[28]  It is also worth noting that Eric is not actually challenging the allotment and his transfer of shares as he claims no related relief in his pleading.[29]  Hence, there is no substance in the wrongful allotment and transfers claims and the same have to be dismissed.

168.  Further, based on my analysis above, even if there were a partnership between Boniface and ART, the Game Business had been fully taken over by Emagist.  The most ART and Simon can say is that Boniface and perhaps Eric were holding the shares of Emagist on trust for them.  In such case, even if there were irregularities in the allotment and transfers of shares, ART have no locus to intervene in the matter. Simon was a shareholder, but I do not accept that he did not know what he was doing when he signed on the share transfer documents.  There is also doubt as to whether Simon, not being the existing shareholder of Emagist, would have the locus to challenge the allotment of shares.  But even if he has the locus and there were indeed irregularities, there is no reason for the court to set aside the allotment of shares as Simon was only holding the shares in Emagist on trust for Boniface.

169.  That again brings up the question as to why Cherubic has not been joined as a party to the present proceedings.  Cherubic certainly has a serious interest as to propriety of the allotment and transfers of shares, as these matters were done as part of the Cherubic Transaction.  In my judgment, even if the Game Business was operated in the form of partnership, the court cannot make any order relating to the allotment and transfers of shares without hearing Cherubic.

170.  Further, ART and Simon are asking the court to order Boniface to account to them for their share of the proceeds of sale of 2.5% interest to Cherubic.  In other words, their case is premised on the basis that Cherubic was a new partner of the Game Business and the Cherubic Transaction was a proper one.  The problem then arises is how can they ask Boniface to account to them for the profits arising from the transaction, whilst at the same time trying to do something which would vitiate the transaction itself?  Even worse, ART and Simon are asking the court to adjudicate on these matters without hearing Cherubic.  In my judgment, ART and Simon have not given a lot of thought to these inconsistencies and problems when formulating their counterclaim.  No matter how the court would approach the issue, the court should not grant the relief as sought by ART and Simon under Issue 5.

171.  There may be some confusion in the evidence as to why there was an allotment of 100 Emagist shares to Boniface in May 2010. However, this is certainly a non-issue in the present case, given that: (i) Boniface was the substantial beneficial owner of the Game Business (subject to the 20% interest he agreed to give it to Eric); and (ii) ART and Simon were contended for Boniface to make all the decisions relating to structure for the operation of the Game Business.

FINAL ORDER AND CONCLUDING REMARKS

172.  For the above reasons, I grant judgment in favour of Emagist in the Original Claim against only ART in the sum of US$455,928.39, or Hong Kong dollars equivalent, together with interest accrued on the payments into court.  The parties are at liberty to apply for the payment out at a later stage.  I also dismiss both the ART Counterclaim and the Eric Counterclaim.

173.  I also make the following costs order nisi which shall be made absolute 14 days after the date of the handing down of this Judgment:

(i)     save that there be no order as to costs as between Emagist vis-à-vis Eric, Simon and Nether, the costs of the Original Claim be paid by ART to Emagist;

(ii)    in respect of the Eric Counterclaim, the costs be paid by Eric to Emagist and Boniface;

(iii)   in respect of the ART Counterclaim, save that there be no order as to costs as between ART and Simon vis-à-vis Eric, the costs be paid by ART and Simon to Boniface, Emagist and Emagist Cayman.

174.  This case provides a classic lesson to all those who are enthusiastic in setting up their own start-up operations, in particular in the information and technology sector.  They may have a lot of dreams when they start to work on their project, but they may not give a lot of thought as to the structure of their operation and what happens when the business becomes a success or a failure.  Whilst I appreciate that some of the matters encountered at the outset of their journeys may be technical and costly, such as the making of the necessary applications to protect their intellectual property rights, it would not be too much of a trouble if they just sit down and discuss about their business operation and their rights and liabilities in case of success or failure.  In the absence of these discussions or confirmations, it is just part of human nature that different persons may have different expectations as to the business operation and their rewards and liabilities.  Spending sometime in the early stage to discuss and agree on these details will help to manage the expectations of the parties, which would in turn reduce the risk of having much more serious confrontations and disputes in the end.  It would be very unfortunate if a business becomes a victim of its own success.  The facts of this case speak volume of this lesson.

Mr Jimmy Ma, Mr Jacky Lam and Mr Owen Kun, instructed by Or & Lau, for the Plaintiff by Original Action, the Defendants by Counterclaim dated 3 May 2013 as amended on 14 July 2015 and the 1^st, 3^rd and 4^th Defendants by Re-Amended Counterclaim dated 24 December 2018

Mr Ian Chau, instructed by Wong, Hui & Co, for the 1^st to 3^rd, 5^th to 6^th Defendants by Original Action and the Plaintiffs by Re-Amended Counterclaim dated 24 December 2018

Ms Janine Cheung, instructed by T C Wong & Co, for the 4^th Defendant by Original Action, the Plaintiff by Counterclaim dated 3 May 2013 as amended on 14 July 2015 and the 2^nd Defendant by Re-Amended Counterclaim dated 24 December 2018

HCA 1659/2012

[2020] HKCFI 638

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1659 OF 2012

________________________

________________________

(By Original Action)

________________________

(By Counterclaim dated 3^rd May 2013 as amended on 14^th July 2015)

________________________

(By Amended Counterclaim dated 14^th July 2015)

________________________________

REASONS FOR DECISION

________________________________

Introduction and Applicable Principles

1.  On 2 January 2013, upon the application of the plaintiff (by original action), Deputy High Court Judge Woo granted interlocutory injunctions and delivery up orders (the “Injunction Order”), against the 1^st to 6^th defendants (by original action).  The plaintiff gave the usual cross-undertaking as to damages as well as, inter alia, the following undertakings as recorded in Annexure II to the Injunction Order:

“(2) The Plaintiff will on or before 3 January 2013 establish a fixed deposit for three months in the sum of US$2,950,000.00 with a licenced bank in Hong Kong and maintain the same to be renewed every three months.

  (3)   The Plaintiff will cause an affidavit/affirmation to be sworn and filed confirming the placing of such fixed deposit as fortification for the compensation mentioned in paragraph (2) above in favour of the Defendants and such fixed deposit shall not be disposed of until any further Order.”

2.  By a Summons dated 2 February 2018, the plaintiff applied for leave pursuant to paragraph (3) of Annexure II “… to release and/or dispose US$470,000.00 out of the US$2,950,000.00 fixed deposit described under paragraph (2) of the Annexure II …” (the “Fixed Deposit”).  The substantive hearing of the Summons came before me, and after hearing the parties, I dismissed the Summons with brief oral reasons.  I indicated that I would give more detailed reasons in writing in due course, which I now do.

3.  The background of the matter and the basis of the Injunction Order are set out in the detailed Reasons for Decision of the deputy judge (the “Injunction Decision”) (reported in [2013] 1 HKLRD 898).  I do not intend to repeat them here and this judgment should therefore be read in conjunction with that decision.  Further, for the remainder of this judgment, save where otherwise indicated, I respectfully adopt the abbreviations and acronyms used in the Injunction Decision. 

4.  I should mention at the outset that Emagist HK’s reason for seeking to release US$470,000 from the Fixed Deposit is to use the sum for paying its future legal costs in this action up to, and including trial, and it is willing to give an undertaking to that effect.

5.  The principles for fortification of a cross-undertaking in damages are well established.  A defendant seeking further fortification “… will usually be required to show a change in circumstances which justify further fortification” (see e.g. Sun Yan v Superb Jade & Ors (unreported) HCA 813/2014, 23 October 2015 at §12 per To J).

6.  Similar principles apply to (the relatively more unusual) application to reduce the amount of fortification.  In Edward Seky Soeryadjaya & Anor v Vickers Ballas Hong Kong Limited (unreported) 1996 No A11360, 9 December 1996, Findlay J held at 7 – 8:

“What about the situation in which a diminution of the fortification is sought? … The situation before me, as I see it, is similar to that before the English Court of Appeal in Chanel Ltd v Woolworth & Co. [1981] 1 WLR 485. There, Buckley LJ said, speaking of a consent order:

‘In my judgment, an order or an undertaking to the court expressed to be until further order by implication gives a right to the party bound by the order or undertaking to apply to the court to have the order or undertaking discharged or modified if good grounds for doing so are shown. Such an application is not an application to set aside or modify any contract implicit in the order or undertaking. It is an application in accordance with such contract, being an exercise of a right reserved by the contract to the party bound by the terms of the order or undertaking.’

Buckley LJ went on to say:

‘Even in interlocutory matters, a party cannot fight over again a batter which has already been fought unless there has been some significant change of circumstances, or the party has become aware of facts which he could not reasonably have known, or found out, in the time for the first encounter’

Here, we do not have an order by consent, but the plaintiffs consented to give the undertaking in return for the injunction. There was no statement expressly that the order was until further order, but the express provision for liberty to apply has, in my view, an identical effect. The parties agreed to this provision, and the application before me is in accordance with it, just as would have been an application by the defendants for further fortification as a condition of continuance of the injunction.

  Accordingly, I hold that I am able to vary the undertaking given by the plaintiffs if there are good grounds for doing so.  By good grounds, I mean, following Buckley LJ, some significant change of circumstances.  It is not suggested by Mr Scott that the unknown facts ground exists here …”

7.  I respectfully agree.  In the circumstances, the issue before me is whether there has been a significant change of circumstances, and if so, whether such change warrants the reduction in fortification sought by Emagist HK.

8.  Since the Injunction Order, there have been a number of procedural developments:

(1)  On 14 February 2013, Emagist HK filed its statement of claim;

(2)  On 3 May 2013, the defendants filed a joint defence and counterclaim.  In the counterclaim, Ryan, Alvin, Terry, Eric, and Simon joined Boniface as the 2^nd defendant (by counterclaim).  The grounds of the defence and counterclaim were broadly those summarised in the Injunction Decision;

(3)  On 15 September 2014, Ryan, Alvin, Terry and Simon issued HCA 1815/2014 against Boniface, Eric, Emagist HK and Emagist Cayman (the “Partnership Action”).  In short, the plaintiffs in the Partnership Action claimed the existence of an oral partnership agreement between themselves, Boniface and Eric and sought inter alia a declaration that each of them was a partner with Boniface and Eric in equal shares, an account for misappropriation of partnership funds by Boniface and damages for breach of partnership agreement;

(4)  On 30 June 2015, Deputy High Court Judge Saunders ordered, by consent, that the Partnership Action be discontinued, and leave be granted to the plaintiffs in the Partnership Action to amend their pleadings in this action to incorporate the partnership claims.  This involved a redrafting of the defence and counterclaim, a point to which I will come back later.  Eric, however, does not claim partnership but rather claims damages for breach of an agreement to share Emagist HK’s profits, and for that reason, he is separately represented from the other defendants.

9.  I should also mention that on 21 August 2012, Eric presented a winding-up petition in HCCW 306/2012 against Emagist Cayman, Boniface and Emagist HK.  The petition was struck out by To J on 16 May 2013 on the grounds of lack of locus with costs on an indemnity basis.  However, nothing significant turns on this for the purposes of this application.

10.  As can be seen from the Injunction Decision, the defendants raised a number of allegations of misappropriation by Boniface of Emagist HK’s assets.  Such allegations were taken into account by the deputy judge in requiring Emagist HK to provide fortification so as to ensure that Emagist HK remained in a financial position to be able to make good on its cross-undertaking in damages (at §50):

“Regarding the opportunity to be fairly compensated, by itself and linked together with Boniface’s alleged misappropriation of the plaintiff’s money, which is argued as casting serious doubt on whether the plaintiff would be able to honour its undertaking in damages, I consider that this worry would be fairly and safely addressed by ordering the fortification of the undertaking by having a large sum of money kept untouched in a bank account. During argument, I have already suggested a substantial sum of $23 million be kept in a fixed deposit account in a bank as fortification for the plaintiff’s undertaking as to damages. I consider this sum would be sufficient to put the personal defendants’ hearts at ease because it represents roughly the plaintiff’s profits for the past years plus two more years’ net profits from the operation of the Game for their alleged total shareholding of 52.5%. The sum would be good enough for compensating them, if I am wrong, for their loss of profits for about two years, the generously estimated time span required for an action to reach trial.”

11.  Mr Ian Chau, counsel for all the defendants except Eric, argued that as a result of the partnership claims, Ryan, Alvin, Terry and Simon have a proprietary claim against Emagist HK’s assets, and therefore, the principles governing this application are a “close analog to those concerning a downward variation of a Mareva and/or proprietary injunction for the payment of legal expenses”.  Hence, he says that Emagist HK must demonstrate that it does not have, or is unable to raise, any other assets with which to fund the litigation before the court would release any of the funds from the Fixed Deposit (see e.g. Wharf Limited & Ors v Lau Yuen How & Ors (unreported) HCA 1535/2008, 21 January 2010). 

12.  With respect, I disagree.  This was not the basis upon which the deputy judge required the Fixed Deposit:

(1)  The purpose of a cross-undertaking in damages is to protect a party enjoined by an interim injunction if it subsequently transpires that it should have not been granted.  The reason is that, at the stage of an interim injunction, the parties’ legal rights and liabilities have not been ascertained.  It may turn out that the interim injunction was wrongly granted, and the cross-undertaking seeks to protect the party enjoined against that eventuality – see Griffith v Blake (1884) 27 Ch D 474 and Hoffmann-La Roche & Co AG v Secretary of State for Trade and Industry [1974] 2 All ER 1128 at 1150, [1975] AC 295 at 360 – 361 per Lord Diplock;

(2)  The function of fortification is to provide security for that cross-undertaking where there is a real risk of substantial loss by the party enjoined and that it will not be able to enforce, or at least have difficulty enforcing, the cross-undertaking should it be entitled to do so;

(3)  Its purpose is not to protect or secure any substantive counterclaims that the party enjoined may have against the party obtaining the injunction.  If the party enjoined wishes to have such protection, it can make a cross-application of its own for interim relief, whereupon it, too, will be required to give a cross-undertaking in damages (and possibly fortification);

(4)  In the present case, there was no such cross-application by the defendants before the deputy judge nor is there one before me.

Discussion

13.  As to change of circumstances said to warrant a reduction in the amount of fortification, Mr Jacky Lee, counsel for Emagist HK, advances 3 main grounds:

(1)  The defendants’ actions since the Injunction Order have led to a delay in the progress of the action such that the trial will take place significantly later than the two-year estimate referred to by the deputy judge in §50 (cited above) (the “Delay Ground”);

(2)  Contrary to the assumptions relied upon by the deputy judge, Emagist HK’s earnings have begun “to dwindle significantly”, and failed to meet the expected accumulated net profits (the “Profits Ground”);

(3)  Emagist HK faces more prejudice than the defendants unless the present application is granted (the “Prejudice Ground”).

14.  I will address briefly each of these grounds in turn.

15.  In respect of the Delay Ground:

(1)  I accept that there has been inevitable delay to the progress of the action and additional costs incurred as a result of the effective consolidation of the present action with the Partnership Action necessitating, inter alia, substantial changes to the defence and counterclaim as well as the filing of supplemental witness statements;

(2)  However, I do not regard such matters as necessarily amounting to a significant change in circumstances;

(3)  First, the partnership claim is merely a further or alternative claim, and Ryan, Alvin and Terry maintain their primary claim that the copyright to the Game belongs to them jointly as co-authors and seek a declaration to that effect;

(4)  In any event, the partnership claim is based to a large extent on the same factual matrix as the original defence and counterclaim.  Amendments of pleadings and further rounds of evidence, whilst not ideal, are an inevitable part of the cut and thrust of litigation and not something that would not have been anticipated at the time of the Injunction Order.  Moreover, delay cuts both ways: if the plaintiff were in the end to fail in this action, the longer the Injunction Order remains in place, the greater the potential loss caused to the defendants.  Emagist HK does not suggest, for instance, that the Injunction Order should be discontinued due to the delay;

(5)  Mr Lam sought to cast doubt on the credibility of the partnership claim advanced by the defendants (with the exception of Eric) on the basis of inconsistencies with its previous defence and counterclaim. In particular, it is said that the alleged partnership agreement does not sit well with their original case of agreed shareholding of Emagist HK.  That may be.  However, it is unnecessary for me to delve into this in any detail.  Having read the materials before the court, there are plainly serious issues to be tried and it would be inappropriate for me at this stage to come to any firmer view as to the likelihood of success of any of the parties;

(6)  Irrespective of the legal basis of the defendants’ defence and counterclaim, if Emagist HK were to fail in this action, there will likely be substantial loss suffered by the defendants as a result of the Injunction Order, and it is this potential loss that the cross-undertaking and fortification are intended to protect.

16.  In respect of the Profits Ground:

(1)  As indicated in §50 of the Injunction Decision, the sum of HK$23 million was said to represent “roughly [Emagist HK’s] profits for the past years plus two more years’ net profits from the operation of the Game for their alleged total shareholding of 52.5% ...”.  Hence, the deputy judge based his calculation on a figure of about HK$43.8 million (HK$23 million / 52.5%) being an estimate of Emagist HK’s past and expected profits from the Game for two years following the Injunction Decision;

(2)  Mr Lam submits that that figure is not only flawed in that it operates on an unrealistic assumption that all of Emagist HK’s profits would be distributable to its alleged shareholders, but also that HK$43.8 million was an “overly optimistic of Emagist HK’s finances for the years between the [Injunction] Decision and the notional trial of this action.” It is not open to Emagist HK, however, to relitigate such matters before me now, when the same could (and should) have been fully ventilated before the deputy judge.  There has been no appeal from the Injunction Decision;

(3)  It is also said that Emagist HK’s profits have since the Injunction Order fallen short of the anticipated profits in the Injunction Decision, and the defendants’ share of actual profits on the basis of the agreed shareholding originally contended should be some HK$8.3 million less than the Fixed Deposit;

(4)  Again, I do not agree that this amounts to a significant change of circumstances; 

(5)  The amount of HK$23 million was merely an estimate rather than a precisely calculated sum.  It is well established that the court adopts a broad-brush approach on such matters, and it is in the nature of commercial affairs that profits rise and fall depending on a multitude of factors.  Both Boniface and the defendants blame each other for the decline in Emagist HK’s profits.  I refrain from expressing any view on such complaints.  These are plainly matters for trial or possibly any hearing for the enforcement of the cross-undertaking in damages.  In any event, it is entirely possible that Emagist HK’s future profits will meet or exceed the anticipated levels.  Emagist HK does not suggest, for example, that there has been a cessation or fundamental change in the nature of its business;

(6)  Moreover, notwithstanding Emagist HK’s contention that it has reduced its expenses as a result of the decline in Emagist HK’s profits since the Injunction Order, I note the defendants’ submission that Emagist HK has nevertheless continued to incur substantial administrative and other expenses, including directors’ remuneration, housing expenses, entertainment, motor vehicle and travelling expenses, a substantial amount of which has been for Boniface’s benefit.

17.  In respect of the Prejudice Ground:

(1)  Mr Lee raises three contentions under this ground: (1) the present application would not affect the defendants’ ability to  enforce the cross-undertaking had they maintained their original case; (2) Emagist HK would face significant financial burdens unless the application is allowed due to the fact that its net assets were merely HK$5.9 million (excluding the Fixed Deposit) as per its latest managements accounts dated 31 October 2017; and (3) there is an imbalance in the parties’ positions as there is no evidence that the defendants have the means to satisfy any judgment should Emagist HK succeed at trial;

(2)  In my view, none of these contentions has any merit;

(3)  First, I do not accept that a reduction of the Fixed Deposit would not impact upon the defendants’ ability to enforce the cross-undertaking.  Mr Lee’s argument is that as Emagist HK’s net asset position has diminished, the value of the defendants’ claim of 52.5% of Emagist HK’s shareholding, as originally pleaded, would similarly be diminished.  However, this ignores, inter alia, the defendants’ primary case all along that the Game’s copyright in fact belongs to Ryan, Alvin and Terry, and the claims that the decline in Emagist HK’s net asset position is due at least in part to Boniface’s misappropriation;

(4)  Second, as to Emagist HK’s financial burdens, it is not Mr Lee’s case that its claims would be stifled unless the application is allowed, nor is it suggested that Emagist HK does not have sufficient assets at the moment to meet its legal costs.  As mentioned above, Emagist HK has some HK$5.9 million in net assets (excluding the Fixed Deposit) as per its latest management accounts, which includes around HK$3.24 million in its Bank of East Asia account and some HK$514,000 in a PayPal account.  At the least, Emagist HK’s contention is premature.  I also accept Mr Chau’s submission that having commenced this litigation and obtained the Injunction Order in early 2013, Emagist HK ought to have set aside provisions in the past several years for its anticipated legal costs; 

(5)  Further, Boniface has now been joined as a defendant to the counterclaim.  He shares common representation and advances a common or at least overlapping defence with Emagist HK to the defendants’ counterclaim, and hence, Boniface would invariably share some of the legal costs.  In this regard, I do not accept Mr Lee’s submission that this would involve a violation of separate legal personalities;

(6)  Finally, whether the defendants are in a position to satisfy any judgment against them is irrelevant.  It is an inevitable risk of litigation that a successful claimant will not be able to enforce his judgment, whether in part or in full, and this is a matter to be considered before embarking on any litigation.  More importantly, it is Emagist HK and not the defendants that has obtained the benefit of the Injunction Order to which the fortification relates.

18.  For the above reasons, I find that there has been insufficient change in circumstances to revisit the amount of the Fixed Deposit as provided for in the Injunction Decision. In any event, even had there been sufficient change, having regard to all the circumstances, I do not think that such change warrants the reduction sought.

19.  I therefore dismissed Emagist HK’s application with costs, which were summarily assessed.

Mr Jacky Lam, instructed by Or & Lau, for the plaintiff (by original action) and the 1^st, 3^rd - 4^th defendants (by amended counterclaim)

Mr Ian Chau, instructed by Wong Hui & Co, for the 1^st to 3^rd, 5^th and 6^th defendants (by original action) and the 1^st – 4^th plaintiffs (by amended counterclaim)

Mr TC Wong, of CW Chan & Co, for the 4^th defendant (by original action) and the 2^nd defendant (by amended counterclaim)

HCA 1659/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATION REGION

COURT OF FIRST INSTANCE

ACTION NO. 1659 OF 2012

--------------------

________________________

REASONS FOR DECISION

________________________

1. At the conclusion of the hearing, I granted the injunctions sought. I now hand down my reasons.

Introduction

2. This is a success story where the relationship of the contributors has turned sour.  Mr Boniface Lee Shiu Yin (“Boniface”) of the plaintiff Emagist Entertainment Limited (“the plaintiff” or “Emagist HK”), Mr Alvin Law Chi Man (“Alvin”) the 2^nd defendant, Mr Ryan Ip Chi Yung (“Ryan”) the 3^rd defendant and Mr Terry Man Chi Wai (“Terry”) the 5^th defendant were the four persons who were involved one way or another in conceiving, creating and developing an online role playing game (“RPG”) called Ninja Saga (“the Game”) which was run on Facebook (“NS on Facebook”).  I shall call these three defendants collectively “the 3 defendant creators” as it is alleged they are the owners of the copyright of the Game.  Mr Eric Cheng Tak Kwong (“Eric”) the 4^th defendant was invited by Boniface to join the plaintiff for introducing capital injection or funding, and Mr Simon Lo Kwong Man (“Simon”) the 6^th defendant also joined the plaintiff at the invitation of Boniface to be an administrator who was, inter alia, responsible for human resources, accounts and administration of the plaintiff.  At all material times before the activities of the defendants complained of and more specifically described below, Eric and Simon, together with Boniface, were the only three directors of the plaintiff. 

3. The plaintiff was incorporated on 25 March 2009 under a different name and it changed into the present name on 19 May 2009.  It has been running a business of developing and publishing online games, social games on the web and mobile platforms.  NS on Facebook was officially released in July 2009.  Ninja Saga on App Store under the iOS system (“NS on iOS”) as well as on Google Play under the Android system (“NS on Android”) were also launched by the plaintiff as separate and distinct games respectively in May 2011 and around April 2012. The plaintiff had also in a joint venture with Mr Dary Lee, its Chief Technology Officer (“Dary”), developed a multiplayer war game under the title of Age of Heroes (“AOH”), although the game had not yet been published. 

4. NS on Facebook became a huge success, bringing to the plaintiff net profits in the tune of tens of millions of dollars.  While Boniface was on a business trip to Germany from 8 August 2012, planning to return on 22 August 2012, the 3 defendant creators and Eric removed the source code of the Game from the workstations in the office of the plaintiff and migrated it to the office of the 1^st defendant Nether Games (Hong Kong) Limited (“Nether”) which was incorporated at their behest only a short time before on 10 August 2012.  Boniface received an email on 19 August 2012 from a staff of the plaintiff which informed him that there was an unscheduled shutdown of the Game.  This shutdown was unusual and the informer was unable to find out the reason.  Boniface cut short his trip and returned to Hong Kong, arriving at the plaintiff’s office at about 8 am on 20 August 2012. There, he saw Alvin, Ryan and a staff Gary Leung working on something.  He also noticed that there was an external disk connected to a notebook.  When he enquired, they did not tell him what they were doing.  When Boniface was not paying attention to them, they left.  Simon and separately Eric with a solicitor also showed up for a time.  Then Boniface saw Ryan and Alvin packing up their personal belongings and they left.  Ryan removed the said external disk earlier seen to be connected to a notebook before leaving.  All data in this notebook were later found to be deleted.

5. After initial checking by Dary, it was discovered that

(a)  The running of NS on Facebook and its database, used to be stored in the local SVN server within the plaintiff and in Softlayer, which contained all the source codes and graphic artworks (graphic source files) had been taken over by a different server and was no longer under the administrative control of the plaintiff.  (It was considered that the source codes and the Game’s seven associated databases (storing the character’s profile, accessories, inventories, transactions and balance of virtual currencies of each and every player of the Game) must have been copied to this new server and were not controlled by the plaintiff, or otherwise the Game could not be run.)

(b)  Two of the seven databases stored in Softlayer had been removed.  (These two databases are for capturing and storing the features of the players, ie, their outfit and appearance and the transactions in and balance of tokens of players.  Without these two databases, the source codes do not know how a player is supposed to look like and how much tokens he is supposed to have.)

(c)  All the source codes in the SVN server for NS on Facebook, on iOS and Android in the plaintiff’s office had been removed. 

(d)  The source codes and graphic files of AOH stored on github.com in the account of the plaintiff were also deleted.

6. The 3 defendant creators, Eric and Simon all left the plaintiff’s office.  Later they met with a number of the plaintiff’s employees or ex-employees at Nether’s office, informing them that the plaintiff would not be able to pay their salaries/wages while they were welcome to join Nether.

7. In the following days, Boniface found that some of the plaintiff’s documents, such as the company kits of Funracing (a company wholly owned by Boniface), the employment contracts and non-disclosure agreements (“NDAs”) of Ryan, Alvin and some other employees of the plaintiff, were missing.  These documents were locked in cabinets to which only Simon had a key.  The remaining company documents were all mixed up making it very difficult to trace documents such as the employment contracts and NDAs with employees.

8. Upon final checking, the damage done to the plaintiff so far as the Game was concerned was as follows:

(a)  The server settings to NS on Facebook had been modified so that the Game was run from another server amazonaws.com (“AWS”) not under the administrative control of the plaintiff.

(b)  The Game’s seven databases were also transferred to AWS for its maintenance outside the reach of the plaintiff.

(c)  Two of the seven databases with Softlayer, CharacterDB and AccountDB, had been deleted.  The SlaveDB, MapDB and LogDB were transferred to a server at AWS.  An external USB device had been plugged into the SVN server, and the files and backup files in the SVN server were deleted and the structure of the SVN server destroyed.

(d)  The source codes in the SVN service for NS on Facebook, NS for iOS and NS for Android including their backups were deleted.

(e)  The source codes stored in ten of the workstations were deleted.

(f)  The contents of the said ten workstations were completely deleted, including the accounting ledgers of the plaintiff.

(g)  The master passwords to access the ten workstations had been changed so that they could not be accessed.

9. Boniface explained in his affirmation made on 11 September 2012 the unscheduled shutdown on 19 August 2012, as follows:

“30. As the database are updated continuously by players round the clock while the game is on, it is necessary to shut down Ninja Saga on Facebook completely in order to copy the database from Softlayer to AWS. Since Ryan Ip and Alvin Law were in possession of the root passwords of the database servers, I believe that it was Ryan Ip and Alvin Law who made use of the unscheduled shut down of Ninja Saga on Facebook to copy the database to AWS. They also made use of the time slot to delete AccountDB and CharacterDB from Softlayer with the intention to remove the control of Ninja Saga on Facebook from Emagist HK. The unscheduled shut down lasted for about 10 hours.”

10. By an inter partes summons dated 14 September 2012, the plaintiff seeks injunctions to enjoin the defendants to deliver up to the plaintiff the source codes of the Game and associated databases as well as to restrain the defendants from damaging or disposing of them.  The summons was eventually adjourned to be heard by me.  In the meantime, on 14 September 2012 when appearing before Au J, the defendants gave undertakings to the Court for maintaining the status quo pending the determination of the summons.

11. There is also an inter partes summons dated 14 December 2012 taken out by the defendants to seek an order to amend the sealed order of Au J dated 14 September 2012 which recorded the said undertakings of the defendants.  I shall return to this later.

The essence of the parties’ cases

12. The plaintiff claims to be the copyright owner of the Game and complains that the 3 defendant creators, Eric and Simon in the period between 4 and 20 August 2012 committed torts of infringement of copyright, trespass to chattels, conversion, detinue, breach of employment contracts, breach of confidentiality, breach of fiduciary duty, acts injurious to the plaintiff, etc and seeks injunctions from the court for the purposes of restoring the status quo ante bellum, ie, before the activities of the defendants complained of. 

13. On the other hand, the defendants do not dispute that they had copied (not removed) the source codes of the Game and associated databases but claim that they were entitled to do so.  It is alleged that the copyright in the Games at all material times belonged to the 3 defendant creators and it was they who licensed the plaintiff to publish the Game, being NS on Facebook.  However, Boniface did not keep his promise of giving them the proper quantity of shares in the plaintiff and they therefore terminated the licence of allowing the plaintiff to publish the Game or make profit from it. They say that the plaintiff had repudiated the licence agreement and they merely took steps in the way they did to terminate the licence in August 2012.

Serious questions to be tried

14. Mr Neville Sarony SC, leading Miss Angel Lau, for the plaintiff, submits that there is a serious question to be tried and the balance of convenience is clearly in favour of the plaintiff, so that an injunction should be ordered.  He puts the following questions as serious questions to be tried and contends that the plaintiff has a very strong case which justifies the granting of the injunctions, including mandatory injunctions, he seeks, namely,

(1)  Whether the 3 defendant creators were employees of the plaintiff or its predecessors so that the copyright in the Game to which they contributed their efforts, service, skill, labour and judgement belongs to the plaintiff.

(2)  Whether the 3 defendant creators or the plaintiff were the copyright owner.

(3)  Were the acts of removal of the source codes justified in light of the alleged termination of the licence agreement?

(4)  Regardless, who is the owner of the associated databases, notably the Account DB?

Employees or self-employed?

15. Mr Sarony relies heavily on section 14 of the Copyright Ordinance, Cap 528 which reads:

“(1) Where a literary, dramatic, musical or artistic work, or a film, is made by an employee in the course of his employment, the employer is the first owner of any copyright in the work subject to-

(a) any agreement to be contrary; and

(b)  subsection (2).”

16. Subsection (2) is not relevant for our present purposes. Insofar as the 3 defendant creators were under the employ of Boniface or the plaintiff, so Mr Sarony argues, the copyright in the Game which was created, produced or developed by them in the course of their employment is owned by Boniface or the plaintiff.  Whatever interest in that copyright that Boniface had was transferred to the plaintiff after its incorporation in March 2009. That was why the 3 defendant creators have been denying vehemently that they were at any material time the employee of Boniface or the plaintiff; but these were bare denials without any substance.

17. As far as the plaintiff’s interest and right to the Game is concerned, Boniface affirms as follows:

“8. The whole idea behind Ninja Saga originated from me in the middle to late 2008. The computer graphic works, animation and the writing of the computer codes of Ninja Saga on Facebook were done at my commission since in late 2008 before the incorporation of Emagist HK. I was the owner of the copyright of Ninja Saga on Facebook as created up to the stage of incorporation of Emagist HK. After the incorporation of Emagist HK, I transferred my ownership of Ninja Saga on Facebook to Emagist HK. Emagist HK published Ninja Saga and thereafter continued to develop it by adding new features and updating the game on a weekly basis. Ninja Saga under iOS system and under Android system were created, developed and published by Emagist HK at a much later stage. Evidence of the copyright ownership in me and in Emagist HK over Ninja Saga on Facebook, for iOS and Android will be fully set out in later part of the affirmation. Suffice it to say at this moment that as at the time of this affirmation Emagist HK is their owner in copyright and otherwise.”

18. Mr Sarony draws my attention to various documentary evidence lending strong support to the contention that the 3 defendant creators were under the employ of the plaintiff, namely,

(a)  an employer’s return by the plaintiff on employee’s remuneration and pensions to the Inland Revenue Department for the period 1 April 2009 to 31 March 2010 in respect of each of the 3 defendant creators;

(b)  an MPF (Mandatory Provident Fund) membership application form (relevant employee) regarding the employer’s and the employee’s respective contribution towards the fund each respectively signed by the 3 defendant creators in August 2011, all stating that the employment date was 1 January 2010;

(c)  copies of autopay instructions for MPF of the plaintiff’s employees for March to May 2012, showing that the 3 defendant creators were included in the employees list for MPF contribution by the plaintiff; and

(d)  a Manulife Employee Enrolment Form dated in December 2011 each regarding the 3 defendant creators on health insurance to be taken out by the plaintiff, signed by both the employee and the plaintiff, with the employment date of 1 April 2009, describing Alvin as Technical Director, Ryan as Director of Development and Terry as Animator.

19. Regarding Ryan, it was shown in the employees list for March 2012 under para 18(c) above that his salary was $20,000 but in the list for April 2012, it was $30,000.  This corresponds with an email dated 10 April 2012 from Boniface to the Human Resources Officer of the plaintiff asking the latter to “adjust Ryan’s salary from $20K to $30K starting from this month”.

20. According to Boniface, all 3 defendant creators had signed contracts of employment as well as NDAs with the plaintiff but he was unable to find them, and he attributed the cause to the removal of documents by the defendants on or before 20 August 2012.  He is only able to produce an NDA signed by Terry, which is undated.  This NDA was apparently also signed by Alvin on behalf of the plaintiff as its Technical Director.

21. The defendants’ response to these items of documentary evidence is contained in Ryan’s affirmation filed on 5 October 2012, which was adopted by Alvin and Terry, as follows:

“39. Alvin Law, Terry Man and I never signed any employment contracts with Emagist HK because we were never employees – we were Shareholders and/Founders of the company. Paragraphs 107 and 114 to 117 [paragraphs of Boniface’s affirmation] are denied. Our employment relationship ended since February 2009. …

40. …

41. Alvin Law and I never signed any Non-Disclosure Agreement. Only Terry Man signed such a document upon Boniface Lee’s request in or about July/August 2010 for people involved in graphics (whether employees or not) to sign a Non-Disclosure Agreement to prevent them from selling the graphics to a third party.

42. Signing of a Non-Disclosure Agreement is not very significant because it is very common for persons involved in graphics design to sign such agreements even if they are not employees of a company.

43. During the early stages of the business, from April 2009 onwards, Alvin Law, Terry Man and I were paid (by way of cheques) modest sums of money as consultants' fees and bonuses to meet our daily expenses. The payments were not for the same amount each time. There is now shown and produced to me marked exhibit “ICY-1” a true copy of a record of payments of consultants’ fees to us with the dates and amounts paid.

44. Although such payments are included in Emagist HK’s employer tax returns (signed by Boniface Lee) (exhibit “LSYB-32”) and we paid MPF contributions (exhibit “LSYB-33”), we were not employees of Emagist HK.

45.  In August 2011, the Bank of Asia suggested to our Human Resources Officer Jennifer Yu Wai Ming that Alvin Law, Terry Man and I that we should contribute towards MPF as long as we received any sort of income, whether we are employed or not. Based on the Bank of East Asia’s suggestion, Jennifer Yu then arranged for us to contribute to MPF and our contribution were dated back to 1st January 2010. We were not employees of Emagist.”

22. Mr Sarony points out that the MPF form to be signed by an employee (as those referred to para 18(b) above) is different from the form to be signed by an independent contractor and that the excuse given in paragraph 45 of Ryan’s affirmation cited above is very thin.  Moreover, there has been no explanation from the defendants why the 3 defendant creators were included in the Manulife health insurance scheme as employees.  Each of the 3 defendant creators signed an employee enrolment form respectively describing himself as Technical Director (Alvin), as Director of Development (Ryan) and as Animator (Terry).  These job titles are significant indicia that they were employed by the plaintiff to occupy those positions, and in my view, their denials of being employees of the plaintiff lack credence.  It is always difficult to use bare denials to counteract contemporaneous documents, especially those signed by the makers whose signatures are not challenged. 

Ownership of the copyright

23. Apart from the statutory provisions based on employment, Mr Sarony also addresses me on the evidence of the ownership of the copyright.  The 3 defendant creators say that they are the owner of the copyright in the Game, being its creators and developers.  The relevant parts of Ryan’s affirmation are as follows:

“7.  In 2008, Boniface Lee came up with theconcept of developing an online Role Playing Game (“RPG game”) which eventually became the game Rival Saga.  Alvin Law and I developed the game Rival Saga, the game engine, the design documents and the system architecture.

8.  Near the end of 2008, Boniface Lee, Alvin Law, Terry Man and I were working together to develop the game Rival Saga:

(1)  Alvin Law and I developed the game engine, the design documents and system architecture;

(2)  I was the team leader and director of the development teams.

(3)  Terry was in charge of the graphics and animation for Rival Saga.

9.  Alvin Law, Terry Man and I were employed and paid a salary by Key Value Business Ltd (an offshore BVI company).  The three of us and Boniface Lee came up with the concept of a ninja-based RPG game while brainstorming together.

10. Around December 2008, Boniface Lee, via Puffin HK Ltd, hired a team of part time illustrators in the Philippines to work on the Rival Saga game as graphic illustrators to create graphics based on my game design concept.  I led the whole team as developer director.  We recruited Ralph Rex as a Game Designer/QA Tester to assist me with the game design documents and English copy-writing.  Erich Rafer was not the team leader of the Philippine staff and he was only a part-time illustrator.

11.  The Philippine staff would send the graphical source to Terry Man and me to fine tune the graphics, complete animation and then I implemented them into the game engine.

12.  …

Setting up the new company (eventually Emagist HK)

13.  In February 2009, Boniface Lee held an informal meeting with Alvin Law, Terry Man and I in a restaurant in North Point and told us that he could not find any more investors and that he could no longer employ us and pay us a salary.  Keyvalue stopped paying us any more salary after February 2009.  This is why the cheque stubs for salary payments as exhibits … all end at February 2009.

14.  Our employment relationship and contracts with Keyvalue thus terminated as of February 2009.

15.  … Alvin Law, Terry man and I were not employees of Emagist HK.  We were promised equity interests in Emagist HK/Cayman as Founders and Shareholders of the company and business.  …

16.  In February 2009, Boniface asked the three of us if we wanted to set up a new company together to develop a new ninja-based RPG game:

(1)  The four of us would not get any salary and would not be employed by the new company.

(2)  Instead, the four of us would be the Shareholders and/or Founders of the new company and would get shares in the new company and be entitled to dividends for profits generated.

(3)  The contribution and/or posts of the Shareholders and/or Founders would be:

    i.  Boniface Lee – Chairman and Managing Director; in charge of the company set-up, marketing, business development and searching for potential investors.

    ii.  Alvin Law – Chief Technical Officer who creates and develops the game back-end system, system architecture and database;

     iii.  Ryan Ip – the Development Director and Chief Game Designer who creates and develops the front-end game engine and the game design;

     iv.  Terry Man – the Graphics Designer and Animator who creates and develops all the graphics and animations for the online game;

…

21.  … Alvin Law, Terry Man and I would be (and now are) the actual authors of the new online game (i.e. the game back-end system and database, the front-end game engine and the game design, the graphics and animation for the online game), so we would (and now do) own the copyright to Ninja Saga on Facebook.  In particular:

(1)  Alvin Law owns the copyright (literary work) to the game back-end system, system architecture and database of Ninja Saga;

(2)  Terry Man owns the copyright (artistic and/or literary work) to all the graphics and animations of Ninja Saga;

(3)  I own the copyright (literary work) to the front-end engine and the game design of Ninja Saga.

22.  The three of us expended skill, labour and judgment in creating, developing and maintaining Ninja Saga on Facebook.

23.  The three of us (as copyright owners) agree with Boniface Lee that we would grant the new company (Emagist HK) a license to publish the Ninja Saga game as a game publisher – i.e. a licence to make it available to the public on conditions that –

(1)  The new company (Emagist HK) would provide office premises and supporting staff for developing the game;

(2)  Alvin Law, Terry Man and I would be named as consultants to continue developing Ninja Saga;

(3)  Alvin Law, Terry Man and I would get an agreed portion of shares in the new company (Emagist HK);

(4)  We would be given an agreed portion of profits generated from the Game.

24.  Once we were allotted our agreed shares in the new company, we would assign the copyright of Ninja Saga (including Ninja Saga on Facebook) to Emagist HK and hand over control of the same to Emagist HK.  As will be later seen, Boniface Lee never allotted us our agreed shares, so the copyright in Ninja Saga was never transferred/assigned to Emagist HK and remains with Alvin Law, Terry Man and I as the authors and first owners.  Furthermore, I have retained control over Ninja Saga on Facebook all along and never transferred control over it to Emagist HK.  …

25.  Alvin Law, Terry Man and I are the authors and first owners of the copyright to Ninja Saga on Facebook.  At most, Boniface Lee brainstormed together with us and we collectively came up with the concept of creating a ninja themed online game.  Simply being part of a team that comes up with such a concept cannot form the basis of any copyright.

26.  We agreed the proposed division of responsibility and the fact that we would be paid no salary.

27.  …

28. Initially, we had not agreed on the actual figures for the shareholding we would each get, but we subsequently agreed on the actual figures at a later stage.  See later at paragraph 66 below.

29.  Alvin Law, Terry Man and I have retained the copyright in Ninja Saga all along, which is why the Facebook developer account for the Ninja Saga Facebook game has always been registered in my name.” 

(Emphasis added.)

24. Paragraph 66 and other relevant paragraphs of Ryan’s affirmation are as follows:

“66. In May 2010, after moving to the 8/F of Cyberport, I spoke with Boniface Lee in the corridor and asked for my share in Emagist HK. Boniface Lee then promised me a 9% shareholding in Emagist HK, which he calculated was worth around US$5,000,000.00.

67. I agreed with being allotted a 9% shareholding.

68. However, Boniface told me that the corporate structure for Emagist HK was not fully set up yet, so he would give me the documents and share certificates at a later date.

69. At different points in time, Boniface Lee promised the other Shareholders their shareholdings.

(1) Alvin Law – 14% (see Alvin Law’s Affirmation)

(2) Terry Man – 7% (see Alvin Law’s [should read Terry Man’s] Affirmation)

(3)  Simon Lo – 5% (refer to Simon Lo’s Affirmation).”

25. What Ryan seems to be saying is that the 3 defendant creators were originally under the employ of Keyvalue Business Ltd (“Keyvalue”), a company wholly owned by Boniface.  Their employments with Keyvalue were only terminated at the end of February 2009.  Near the end of 2008, Boniface and the 3 defendant creators worked together to develop an RPG game Rival Saga, the concept of which originated from Boniface: Alvin and Ryan developed the game engine, the design documents and system architecture, while Terry was in charge of the graphics and animation.  Around December 2008, Boniface via Puffin HK Ltd (a company owned by him), hired a team of part time graphic illustrators in the Philippines to work on Rival Saga.  While they were working for Rival Saga and paid a salary by Keyvalue Business Ltd, they and Boniface came up with the concept of a ninja-based RPG game while brainstorming together.  In February 2009, Boniface Lee held an informal meeting with the 3 defendant creators in a restaurant in North Point and told them that he could not find any more investors and that he could no longer employ them or pay them a salary.  Keyvalue stopped paying them after February 2009.  In February 2009, Boniface asked the three of them if they wanted to set up a new company together to develop a new ninja-based RPG game and they agreed that the four of them would not get any salary and would not be employed by the new company; instead they would be the shareholders or founders of the new company and be entitled to dividends from the profits generated.  Thus, the defendants’ case seems to be that the concept of ninja saga came up during brainstorming amongst the 3 defendant creators and Boniface, that that was in February 2009 about the time when their employment with Keyvalue was about to be terminated, and that before then when they were employed by Keyvalue (as in the position of the Filipino illustrators), they were only working on the RPG game Rival Saga, not Ninja Saga.  It was Boniface who agreed with them that they were to develop this new ninja-related game and all of them should not be paid a salary but instead should have a new company formed in which all of them would become shareholders or founders.  Thus the copyright in NS on Facebook was owned by the 3 defendant creators who had spent skill, labour and judgement, while Boniface who participated in coming up with the concept in the brainstorming did not qualify as a copyright owner of the Game. 

26. Miss Janine Cheung, Mr Alvin Tsang with her, for the defendants, draws support from Copinger & Skone James on Copyright, 16^th Ed, para 3-18 which reads:

“… it is not the concern of copyright to protect ideas unless and until the ideas have found expression in the form of a work of a category recognised as deserving of protection. … once the ideas have been expressed in the form of literary work, it is the form of expression which is the subject of protection, not the ideas, which themselves may be freely extracted from the work and absorbed and used by others to produce their own works so long as the form of expression of the copyright work is not also taken.”

27. Without analysing Ryan’s story in great detail, it suffices for me to say at the present moment that the 3 defendant creators were merely trying to stress the point that they were the copyright owners of the Game; however, it was difficult to try to cut out Boniface, the person who came up with the idea and who suggested to them to develop this new game together under the structure of a new company, of any entitlement as a partner in the intellectual property.  Moreover, Mr Sarony has drawn my attention to the emails from the Filipino illustrators in November and December 2008 that they were already working on the graphics of male and female ninjas.  Infinity Sound Production Ltd, the company that produced the background music for NS on Facebook, wrote in October 2012 to confirm that the copyright of the background music is owned by the plaintiff and that “Starting from 2009, Infinity Sound Production Ltd was appointed by Emagist Entertainment Ltd. as a contractor to create and produce the background music for Ninja Saga titles.”  These are items of strong documentary evidence that support the plaintiff’s claim of ownership of the Game.

28. Looking at the defendants’ case, nowhere is it specifically claimed that the 3 defendant creators were the exclusive copyright owners of the game.  Their agreeing to have merely shareholding and profit sharing is indicative that they are on their own case not the 100% owner.  How about Boniface’s interest in the copyright, which they have never expressly denied?  On the contrary, they recognise his contribution as a participant in coming up with the concept (see para 9 of Ryan’s affirmation) and suggesting in setting up a company to develop the Game (see para 16 of Ryan’s affirmation).  How about their respective percentage in the shareholding?  Their agreement with Boniface seem to be only bipartisan, between each of them individually and Boniface but not amongst all involved. How sound is this basis when they do not have a say regarding each other’s proportion in the contribution towards the creation, production and development of the Game?  The situation is more complicated when the proportions of the shareholding of Simon and Eric are considered.  These two defendants did not contribute to the copyright of the Game, and were brought in by Boniface for financial, administrative and management purposes.

29. On the other hand, Boniface’s story of the shareholding of the 3 defendant creators sounds more reasonable.  In his affirmation of 11 September, Boniface states:

“81. Ryan Ip, Alvin Law and Terry Man were employed by me to develop Ninja Saga on Facebook, which turned out to be very profitable, and accounts for around 99% of the revenue of Emagist HK. At the early stage of the development of Ninja Saga on Facebook, Emagist HK was not yet incorporated. I told them that I would put the business into a corporate vehicle and then they would become the employees of this corporate vehicle. I also told them that I would give them some equity interest in this corporate vehicle at an appropriate time as part of the employees’ benefit for their contributions to Ninja Saga on Facebook, but I never agreed with them or told them the quantity of the equity interest that they would receive.”

30. Boniface then talks about the restructuring of the corporate vehicle, having a Cayman Island company established as the holding company for the business of the plaintiff. Emagist Cayman was thus incorporated to which Boniface, Eric and Simon transferred all their shares in the plaintiff, and in return Emagist Cayman issued shares to them.  Boniface continues:

“87. As there was going to be a major restructuring of Emagist HK, I decided that it was the right time to fulfill my promise to Eric Cheng, Simon Lo, Ryan Ip, Alvin Law and Terry Man. I decided to allot some shares of Emagist Cayman to them.

88. Emagist Cayman was incorporated on 1st June 2011 with authorized share capital of USD 50,000 divided into 50,000 shares of USD 1 each. A total of 30,000 shares of USD 1 per share were allotted on 1 June 2011. As a result of the allotment, distribution of the shareholding in Emagist Cayman were:

Allottee	No. of Shares
Funracing [Boniface’s own company]	20,808 (69.3%)
Cherubic [an equity investor]	750 (2.5%)
Eric Cheng Eric Cheng [Eric]	5,250 (17.5%)
Man Chi Wai [Terry]	108 (0.36%)
Lo Kwong Man [Simon]	480 (1.6%)
Ip Chi Yung [Ryan]	897 (2.99%)
Law Chi Man [Alvin]	1,707 (5.69%)”

31. Boniface reiterates in para 91 of his affirmation that the above allotment of shares in Emagist Cayman was “something I had promised them at the time when they entered into employment by me before incorporation of Emagist HK.”  The essence of the parties’ differences is in the quantity of the shareholding.  The defendants say that Boniface promised them at different points of time the following: Ryan 9% (as opposed to 2.99%), Alvin 14% (as opposed to 5.69%), Terry 7% (as opposed to 0.36%) and Simon 5% (as opposed to 1.6%) (see what is cited from Ryan’s affirmation under para 24 above).

Termination of licence

32. I now turn to the questions relating to the licence agreement as claimed by the defendants. This is so crucial to the defendants’ case that I may be forgiven for repeatedly citing what Ryan says in paragraph 23 of his affirmation:

“23. The three of us (as copyright owners) agree with Boniface Lee that we would grant the new company (Emagist HK) a license to publish the Ninja Saga game as a game publisher – i.e. a licence to make it available to the public on conditions that –

(1) The new company (Emagist HK) would provide office premises and supporting staff for developing the game;

(2) Alvin Law, Terry Man and I would be named as consultants to continue developing Nin Saga;

(3) Alvin Law, Terry Man and I would get an agreed portion of shares in the new company (Emagist HK);

(4)  We would be given an agreed portion of profits generated from the Game.”

33. The main conditions that matter and appear not to have been satisfied are (3) and (4): the agreed quantity of shares and the agreed portion of profits.  Yet it seems to me that the two conditions are one and the same thing, because there is no specific complaint from the defendants that they were not given an agreed portion of the profits; their complaint is that they have not been given the correct portion of shares that will bring the correct portion of profits by way of dividends on those shares.  As their counsel Miss Cheung puts it, Boniface never having honoured his promise, the 3 defendant creators were entitled to withdraw the licence.  At the present stage, never mind whether the licence agreement sounds unreasonable or wants certainty or lacks documentary support or leaves a number of details undecided, even if the defence case is accepted without further ado, the defendants would be entitled to a claim to be allotted or distributed with the proper quantity of shares and, for that matter, profits.  They may claim that if they are not given those shares and profits, the licence would have to be determined.  However, there is not a single word in writing of any notice given to the plaintiff or Boniface that they were going to terminate the licence agreement.  Instead, they took action to migrate all the source codes and various softwares necessary for the operation of the Game from the plaintiff during Boniface’s expected absence on a foreign business trip. 

34. Their alleged licence agreement allowing the plaintiff to publish the Game and collect profits out of it and then terminating the licence appear to me to be an attempt to cloak their activities at the plaintiff’s office during the absence of Boniface on the days before 20 August 2012 with excuse or justification.  I consider that they were not justified to do so even if they were actually terminating a licence.  They took the law into their own hands.  Indeed, I consider that they were acting in an underhand and oppressive manner, trying to reap some strategic advantage over Boniface. 

35. In Ryan’s 4^th affirmation filed on 27 December 2012, it is disclosed that on 17 August 2012, he, being “the owner of the developer’s account for NS on Facebook”, directed Facebook to pay the revenues from the Game to his own bank account instead of the plaintiff’s which had always been the recipient allegedly pursuant to the licence agreement.  This evidence is intended to show that Ryan has always retained the control over the Game and the fact that he owns the developer’s account supports the defendants’ allegation that the 3 defendant creators were and are owners of the copyright.  However, this evidence rather shows that the defendants, especially Ryan, control the purse strings of the plaintiff, the revenue from the Game constituting about 99% of its income, and that there was no sound reason for them to take the matter into their own hands by grabbing the Game from the plaintiff and migrating it somewhere else when they were dissatisfied with Boniface’s not keeping his promise of giving them a quantity of shares.

36. Even Miss Cheung describes this matter as “not merely a copyright dispute but in essence a shareholder’s dispute”.  There was no proper reason for the defendants to take the law into their own hands and shut down the running of the Game for 10 hours at the expense of the plaintiff, a company in which they claim they are entitled to have substantial shareholding.

The associated databases

37. There appears to be no dispute that the databases associated with the Game are necessary for the running and updating of it.  There are seven databases, storing the character’s profile, accessories, inventories, transactions and balance of virtual currencies of each and every player of the Game.  Although without these databases, the Game cannot be run, what the 3 defendant creators contributed was their skill, labour and judgement in creating and developing the Game.  These seven databases were built up while the plaintiff was operating the game on Facebook when the players were playing the game.  I do not understand on what basis the 3 defendant creators say that these databases belong to them or they are attached to the copyright of the Game so that they are entitled to deal with or dispose of them as they wish to the exclusion of the plaintiff.  But of course, these databases had to be removed so that the defendants could replace the plaintiff in operating and administering the Game.

Mandatory injunction

38. Miss Cheung submits that it is exceptional for the court to grant a mandatory injunction in the interlocutory stage because it would render quite futile the defendant’s attempt to fight the eventual trial. As a matter of law, she contends, where the grant or refusal of an injunction at an interlocutory stage will in effect dispose of the action finally – in such cases where there would be nothing left to which it was in the successful party’s interest to proceed to trial, the American Cyanamid ‘balance of convenience’ test does not apply and there should be additional considerations as set out in the cases of NWL Ltd v Woods [1979] 3 All ER 614, Cayne v Global Natural Resources Plc [1984] 1 All ER 225 and in the Hong Kong case of Music Advance Limited v Neway.com Technology Limited, HCA 2574 of 2002 (30 August 2002, Ma J).  In Music Advance, Ma J (as he then was) stated under paragraph 12 of his judgment:

“(1) In the case of interlocutory mandatory injunctions, it is often said or assumed that a court will not grant one unless it feels a high degree of assurance that at the trial of the action, it will be shown that the injunction was rightly granted: see Shepherd Homes Ltd v Sandham [1971] Ch 340 at 351. This has been explained and sometimes understood as meaning that in the case of an interlocutory mandatory injunction, the applicant’s case on the merits has to be made out to a higher standard of proof than in the case of prohibitory injunction: see the Court of Appeal’s observations in TKI Limited v New Happy Limited [1995] 1 HKC 551 at 554 B‑D.

(2) Broad statements such as the above must, however, be properly put in context.

(3) The basic approach to interlocutory injunctions, whether mandatory or prohibitory, is the same. Section 21L of the High Court Ordinance, Chapter 4 makes no distinction between these two types of injunctions and simply states that interlocutory injunctions may be granted if it appears to be just or convenient to do so.

(4) At the interlocutory injunction stage, the principal concern of the court is that it might make a wrong decision in the sense that after trial, the party to whom an interlocutory injunction has been granted may lose or the party who has been refused one, may win. The court will therefore take whichever course appears to carry the lower risk of injustice if it should turn out that it is wrong. This “fundamental” principle is the source of the guidelines that have evolved for the determination of interlocutory injunctions (included are, of course, the American Cyanamid guidelines) and therefore, in the application of any guidelines, sight must not be lost of this principle. See here: Films Rover International Ltd v Cannon Films Sales Ltd [1987] 1 WLR 670 at 680 D‑G, in a passage from the judgment of Hoffman J which was approved by the House of Lords in R v Secretary of State for Transport ex parte Factortame Limited (No 2) [1991] 1 AC 603 and recently reiterated in the English Court of Appeal decision of Zockoll Group Ltd v Mercury Communications Ltd [1998] FSR 354 (which Mr Au was kind enough to place before me).

(5) Two common guidelines are of course the consideration of the merits of the plaintiffs’ claim and the balance of convenience. Here, it is of course easy to see at once how they are linked to the fundamental principle: there must be a risk of injustice if the plaintiff cannot even establish a serious question to be tried or that one or the other party will be put to substantial inconvenience or prejudice if an interlocutory injunction were or were not granted.

(6) In the case of interlocutory mandatory injunctions, the risk of injustice (being wrong in the sense referred to above) can be quite acute. In Films Rover International Limited, it was put thus by Hoffman J at 681 B‑E:

“In Shepherd Homes Ltd v Sandham, Megarry J spelled out some of the reasons why mandatory injunctions generally carry a higher risk of injustice if granted at the interlocutory stage: they usually go further than the preservation of the status quo by requiring a party to take some new positive step or undo what he has done in the past; an order requiring a party to take positive steps usually causes more waste of time and money if it turns out to have been wrongly granted than an order which merely causes delay by restraining him from doing something which it appears at the trial he was entitled to do; a mandatory order usually gives a party the whole of the relief which he claims in the writ and makes it unlikely that there will be a trial.  One could add other reasons, such as that mandatory injunctions (whether interlocutory or final) are often difficult to formulate with sufficient precision to be enforceable.  In addition to all these practical considerations, there is also what might be loosely called a ‘due process’ question.  An order requiring someone to do something is usually perceived as a more intrusive exercise of the coercive power of the state than an order requiring him temporarily to refrain from action.  The court is there more reluctant to make such an order against a party who has not had the protection of a full hearing at trial.”

(7) This passage in my view explains just why it is that generally a court will have to feel a high degree of assurance that at the trial of an action it will be shown that the interlocutory injunction was rightly granted before an interlocutory mandatory injunction will be given; all this being an exercise in assessing the strength of the plaintiffs’ case: see sub‑paragraph (1) above. However, I emphasize that this is only generally the court’s approach. Where it is shown, as an exception to this general approach, that the case is one in which the withholding of an interlocutory mandatory injunction would in fact carry a greater risk of injustice than granting it even though the court does not feel the “high degree of assurance” as aforesaid, it would be right to grant an interlocutory mandatory injunction: see Films Rover International Limited at 681 A‑B.

(8) This of course brings into focus the balance of convenience. Thus, if a plaintiff in seeking an interlocutory mandatory injunction cannot demonstrate more than a serious question to be tried, it will have to show that the balance of convenience tilts so much in its favour that justice requires such an injunction to be granted, even taking into account those aspects of an interlocutory mandatory injunction expressed Hoffman J in Films Rover International Limited.

(9)  At no stage, however, in the consideration of the matter does the court lose sight of the practical realities of the situation to which the injunction will apply: see NWL Limited v Woods [1979] 1 WLR 1294 at 1306C per Lord Diplock.” 

(Emphasis added.)

39. Miss Cheung submits that the matter is more fully expressed in the head note to the report on Cayne, which reads:

“Where the grant or refusal of an interlocutory injunction will have the practical effect of putting an end to the action, the court should approach the case on the broad principle of what it can do in its best endeavour to avoid injustice and to balance the risk of doing an injustice to either party. In such a case the court should bear in mind that to grant the injunction sought by the plaintiff would mean giving him judgment in the case against the defendant without permitting the defendant the right of trial. Accordingly, the established guidelines requiring the court to look at the balance of convenience when deciding whether to grant or refuse an interlocutory injunction do not apply in such a case since, whatever the strengths of either side, the defendant should not be precluded by the grant of an interlocutory injunction for disputing the plaintiff’s claim at a trial. …”

40. Kerr LJ analysed the matter further in his judgment at 236D‑F with reference to the facts of the dispute before him:

“As was pointed out during argument, if this position were viewed as an application for summary judgment under RSC Order 14, then it would be clear beyond argument that Global must be given unconditional leave to defend because it would obviously be entitled to a full trial. However, the grant of an injunction would preclude this so far as can be foreseen at present for the reasons already stated.

In these circumstances it seems to me that it would be wholly wrong for this court, in effect, to decide the entire contest between the parties summarily in the plaintiff’s favour on the untested material before us.  This does not present any overwhelming balance on the merits in the plaintiff’s favour or any other overriding ground for an immediate injunction without a trial.  There is only a triable issue whose outcome is doubtful and that issue should be tried and not pre‑empted.”

The main thrust of the defence case

41. Miss Cheung makes a number of points.  First – In the present circumstances, the orders for delivery up, if granted, will have the effect of disposing of the action entirely.  Once the defendants deliver the source codes and control of NS on Facebook to the plaintiff, the plaintiff will have already substantially obtained the relief they sought and there would be no incentive at all for the plaintiff to proceed to trial.  Ultimately, there will be no chance to determine whether the injunctions were properly granted since the matter would very unlikely proceed to trial.

42. Second – The defendants would not have the opportunity to be compensated in damages if it turns out that the interlocutory injunctions were improperly granted.  The damage and loss of profits caused to the defendants will be so great such that it may not be commercially viable for the defendants to press the matter to trial.  There is no assurance whatsoever that the plaintiff is in a position (with its lack of staff) to properly administer and market the game in the time it would take for the matter to go to trial, if there is a trial ― this is confirmed by Boniface who says that there are currently only 11 staff left in the plaintiff and “there is simply not enough manpower to restore the games and keep it developed and updated as before”.  Apart from a bare assertion by the plaintiff’s staff in the second round of affirmations filed that it can very quickly hire a staff to take up the running of the game, the plaintiff has not given any specifics as to how it would be in a position to train an entire new team of staff in short enough a period of time to protect against the loss of users ― again, on Boniface’s own claim, any short disruption in the operation of the game may have (allegedly) catastrophic effects on player revenue.  Should it transpire that the injunctions were wrongly granted and the game misadministered by the plaintiff’s new team (if they manage to procure one), the defendants would be left with a valueless asset.

43. Third – The damage caused to the defendants will also be irreparable because of the way the plaintiff has been run by Boniface, who has been spending the company’s money in an irresponsible manner and misappropriating it for his own use in breach of his fiduciary duties to the company.  It calls into serious doubt whether the plaintiff would be able to honour its undertaking in damages.  This is also a good reason for refusing to grant equitable injunctive relief because Boniface does not come with clean hands.

44. Fourth – Taking into consideration the merits, it can hardly be said that there is a high degree of assurance that the court would have found at trial that the injunctions were rightly granted: At its very highest, the plaintiff has only been able to establish that there is a dispute over ownership to the copyright of NS on Facebook.  The evidence shows that, on the most fundamental level, Ryan Ip, Alvin Law and Terry Man have good evidence in support of their case that they were not employees of the plaintiff or Boniface when they developed the Game.  The plaintiff is far from being able to establish clear rights to the Game on the evidence.

My view

45. I am afraid I do not accept an analogy with rules relating to summary judgment in the sense that only when the plaintiff’s case is so strong as entitling it to succeed in obtaining summary judgment against the defendant or that the defendant’s defence is such that no unconditional leave to defend is given that a mandatory injunction should be ordered.  It all boils down to whether it is just and convenient for an injunction to be granted, prohibitory or mandatory.  The court must be prudent to always bear in mind that it should only take a course that appears to carry the lower risk of injustice if its decision, to grant or refuse the injunction sought, should turn out to be wrong.

46. I am here confronted with the principle that the court only grants a mandatory injunction at the interlocutory stage with great caution before the court has heard viva voce evidence adduced by the parties, and is reluctant to make an order against a party who has not had the protection of a full hearing at trial.  However, I consider it important that the court should not and should not be seen to countenance a party taking the law into its own hands and taking advantage of a situation created by its own fault or blameworthy conduct.  Although the defendants claim that their activities in August 2012 were steps taken to terminate the licence to the plaintiff, they do not deny that they had copied (not removed) the source codes and associated databases of the Game, and for whatever reason, that was done while Boniface was out of Hong Kong.  One can discern the rationale behind the rule against ready granting of an interlocutory mandatory order which, if I may say so, comes down to whether it is just and convenient for the court to grant the relief or remedy when it so does at the interlocutory stage.  In the present case, even if I grant the mandatory injunction as sought by the plaintiff, I do not see that the defendants will be discouraged from coming to court to prove their claim to a certain percentage of the shares in the plaintiff or Emagist Cayman or in the profits from the Game being published on Facebook.  I do not see that their pursuit of what they are entitled to would be rendered futile. 

47. I will deal with Miss Cheung’s four points briefly but specifically.  The last point first.  I have already dwelled in some detail on the strength of the plaintiff’s claim to copyright of the Game as the employer, as compared with the defendants’ bare denials of their being employed. 

48. The first and second points of her arguments can be dealt with together.  While the injunctions that are sought by the plaintiff may have the effect of disposing of the action entirely in the sense that the plaintiff having obtained the injunctions may have little interest or incentive to pursue its action to the trial, it does not mean that the defendants may not wish to proceed to trial.  Indeed, according to their assertions, they have a claim against the plaintiff and/or Boniface for a substantial quantity of shares in the plaintiff or Emagist Cayman.  I do not see any possibility that such a substantial claim will be thwarted or discouraged by the injunction orders.

49. I do not understand why Miss Cheung argues that the defendants would not have the opportunity to be compensated in damages if it turns out that the interlocutory injunctions are wrongly granted, or that it may not be commercially viable for the defendants to press the matter to trial.  The plaintiff had the track record before the defendants’ activities in August 2012 complained of in administering and updating the Game profitably, and it is well prepared to continue to do so when the control of the Game is returned to it.  Indeed Miss Cheung’s argument or comments could well be made if the Game remains to be controlled, administered and updated by the defendants.  The recent figures after their taking over in August 2012 tell against them rather than the plaintiff.  I have something further to say on this under the heading of “Balance of convenience” below.

50. Regarding the opportunity to be fairly compensated, by itself and linked together with Boniface’s alleged misappropriation of the plaintiff’s money, which is argued as casting serious doubt on whether the plaintiff would be able to honour its undertaking in damages, I consider that this worry would be fairly and safely addressed by ordering the fortification of the undertaking by having a large sum of money kept untouched in a bank account.  During argument, I have already suggested a substantial sum of $23 million be kept in a fixed deposit account in a bank as fortification for the plaintiff’s undertaking as to damages.  I consider this sum would be sufficient to put the personal defendants’ hearts at ease because it represents roughly the plaintiff’s profits for the past years plus two more years’ net profits from the operation of the Game for their alleged total shareholding of 52.5%.  The sum would be good enough for compensating them, if I am wrong, for their loss of profits for about two years, the generously estimated time span required for an action to reach trial.

Balance of convenience

51. Furthermore, the balance of convenience is also in favour of the plaintiff.  Miss Cheung has told me, in support of her summons for altering the undertaking given by Ryan, that the 3 defendants creators were working flat out to keep the Game on Facebook running, because they did not have the permission of the court to withdraw the money in the bank account run by Ryan into which all the income from the Game has been deposited to employ others to do the job, especially that for updating the Game.  On the other hand, the plaintiff’s case is that there is no difficulty for Boniface to get qualified personnel, including some of the deponents of the affirmations filed on behalf of the plaintiff, to look after the Game and update it so as to maintain its popularity amongst online players.  Miss Cheung’s argument based on the reference to the plaintiff currently only having 11 staff left and that “there is simply not enough manpower to restore the games and keep it developed and updated as before” takes the matter entirely out of context.  It seems to me that what is important to both parties to this case is not who is in charge of running the Game; what actually matters is that profits can be maintained or even improved.  Since the defendants have been running this game at the end of August 2012, income from Facebook has been on a sharp decline, except for the last period, ie, the second half of November 2012, but nothing has been said as to the reason why.  I consider this a significant factor to weigh against allowing the defendants to retain the control of the Game.

52. Where the profits from the operation of the Game by the defendants are decreasing, the claim of the plaintiff for damages (if injunctions are not now granted) would grow and no evidence has been adduced by the defendants to show that they are financially sound enough to be able to pay such damages as may be found payable to the plaintiff.  This is to be contrasted with the plaintiff’s undertaking as to damages, which is fortified with a fixed deposit of $23 million with a bank.

Conclusion

53. In all the circumstances of this case, I propose to grant both the mandatory and prohibitory injunctions sought by the plaintiff.  I ask assistance of counsel for both parties to put their heads together to draft the orders that will cover all practicalities and workable with their clients, and in the event of their failing to do so, at least disputes and differences can be crystallised for my decision.  I am grateful to counsel for the drafts prepared by them based on which I make an order. 

54. Since injunctions are to be granted, the defendants’ undertakings given to the court on 14 September 2012 are no longer needed.  However, these undertakings should continue to be extant and valid until the completion of the handover referred to in the order I make.  The summons dated 14 December 2012 to alter the terms of one of the undertakings is rendered unnecessary and futile.  It is dismissed.

55. Having heard counsel on costs, I make the following orders.  There be no order on the costs of the said summons dated 14 December 2012.  There be no order as to costs on the proceedings before Au J on 14 September 2012 and before Deputy High Court Judge Sakhrani on 17 October 2012.  The costs of the application for interlocutory injunctions, excluding the costs aforesaid, be the plaintiff’s costs in the cause, with a certificate for two counsel.