JOE ZHIXIONG ZHOU v. SAIF PARTNERS II L.P. AND ANOTHER

HCCL 16/2016

[2022] HKCFI 3626

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 16 OF 2016

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BETWEEN

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D E C I S I O N

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1.  This is the appeal by Joe Zhixiong Zhou (“the Plaintiff”) from the Decision dated 4 May 2022 (“the May Decision”) of Master J Wong upon conducting an account taking exercise. At the conclusion of the appeal hearing, this Decision was reserved which I now give.

I. BACKGROUND FACTS

2.  The parties are all engaged in the venture capital business, commonly known as “VC”.

3.  In December 2004, the Plaintiff worked as a limited partner for the 1^st defendant, SAIF Partners II LP (“D1”) in which the 2^nd defendant, SAIF II GP Capital Limited (“D2”), was a general partner (collectively “the Defendants”).

4.  The Plaintiff left D1 at the end of February 2007. He sued the Defendants for over $22 million[1] while the Defendants made a number of counterclaims against the Plaintiff.

5.  After a trial lasting 11 days, on 21 March 2018, DHCJ Field (“the Trial Judge”) found for the Plaintiff on his claim (which the Defendants promptly paid) and found for the Defendants on their counterclaim against Plaintiff.

6.  On the counterclaim, the Trial Judge found that:

(a) while still a partner of D1, the Plaintiff identified a PRC technology company, Show World Information Technology Co Ltd (“Show World”), as a target for investment by SAIF’s Fund II;

(b) SAIF’s Fund II invested $8 million into Show World in February 2006;

(c) the Plaintiff left the Defendants in April 2007 and joined another private equity fund, Kleiner Perkins Caulfield & Byers (“KPCB”), causing it to invest $8 million into Xinrui (Beijing) Technology Company Co Ltd (“Xinrui”) which misappropriated the technologies which were supposed to be developed by Show World; and

(d) according to the Plaintiff, when he left KPCB to set up his own fund Keytone Ventures LP (“KV”) in April 2008, he caused KV to purchase the Xinrui Investment from KPCB, again at $8 million.

(A) The Orders made by the Trial Judge

(a) The Account Order

7.  Following those findings, the Trial Judge ordered that the Plaintiff, as a partner of D1, must account for and disgorge profits resulting from his breach of fiduciary duties in these terms:

“3. the Plaintiff shall account to [D1] for any profit that the Plaintiff made as a result of the investment made by KPCB China Fund LP under the Xinrui (Beijing) Technology Company investment agreement dated 24 August 2007;

4. all necessary enquiries and accounts to be taken to identify and establish such profits made by the Plaintiff. For that purpose, [D1] shall have liberty to seek directions for taking of such accounts;

5. the Plaintiff shall pay to [D1] any such identified and established profit and [D1] shall hold any such profit on trust for Fund II”.

8.  As the nomenclature used in subsequent Judgments and Decisions and submissions of the parties in referring to §§3-5 of the order the Trial Judge made on 14 February 2018 has not been consistent, to avoid confusion, in this Decision it will be referred to as “the Account Order”.

9.  In the Plaintiff’s affirmation dated 18 September 2018 (“Plaintiff 1”), filed to comply with his duty to account pursuant to the Account Order, he deposed that the sum invested in Xinrui by KPCB was $8 million on which no profit was made since it sold this investment to KV for $8 million in July 2008, the investment not having gone well. The Plaintiff went on to depose that in December 2009 Xinrui’s (KV’s) business failed and its registration was cancelled. Thereafter, the remaining assets of Xinrui were sold pursuant to an Asset Purchase Agreement between KV and MicroMedia Ltd for $3.5 million, producing a loss on the original investment of over $4.5 million.

(b) The Account and Disclosure Order

10.  Not surprisingly, the Defendants were not satisfied with the account rendered in Plaintiff 1. Upon their application for a more comprehensive account, after considering the parties’ respective written submissions, in his RULING[2] dated 26 June 2018, the Trial Judge held as follows:

“9. In my judgment, given [the Plaintiff]’s untruthful account … and the relative scarcity of the discovery he provided for the trial, D1 is entitled to an order that goes wider than might have been conventionally appropriate in setting the modalities for an account… the absence of any profit for [KPCB] … does not necessarily mean that [the Plaintiff] personally did not benefit financially in one way or another from the investment.” (Emphasis added)

11.  Accordingly, for the reasons stated in §10 above, he made a further account order with a much wider scope coupled with corresponding disclosures (“the Account and Disclosure Order[3]”), §1 of which provides (in pertinent part) as follows:

“[The Plaintiff] must, within 36 days of the date hereof, provide an account duly verified by affidavit identifying and attaching all vouchers and documents that are relied upon of all income, including salary, fees, dividends and other remuneration … received by [the Plaintiff] and/or entities owned and/or controlled by [the Plaintiff] down to 31 December 2012 (“the end date”) from (i) KPCB-CF and its subsidiaries, affiliates and related entities (KPCB); and (2) Keytone Ventures LP and its subsidiaries, affiliates and related entities (“KV”), identifying the entitlement under which the said income or other remuneration was received …”

12.  For convenience, the Account Order and the Account and Disclosure Order are hereinafter collectively referred to as “the Trial Judge’s Orders”.

(B) Subsequent proceedings

(a) CACV 62/2018 (“the CA Judgment”)

13.  The Plaintiff appealed the Account and Disclosure Order and challenged it as being made without jurisdiction and exceeding the permissible bounds for an order to account.

14.  Pending the hearing of the appeal, on 13 July 2018 the Plaintiff applied to stay the account-taking procedure directed under the Ruling until the final determination of the CA Judgment which application the Trial Judge dismissed on 11 January 2019.

15.  The Plaintiff alleged[4] that at the hearing on 11 January 2019, the Trial Judge confirmed that his Ruling is “limited to an account of the profits and income that I personally received from KPCB’s Keygate/Xinrui Investment and/or from Keytone’s Keygate/ Xinrui Investment and not to any other profits or income received by me.” Although the transcript formed part of the hearing bundles[5], inexplicably, the relevant passage has not been identified. In those circumstances, I do not consider that allegations borne out.

16.  The Plaintiff’s 4^th affirmation dated 21 March 2019 (“Plaintiff 4”) was filed in respect of the Account and Disclosure Order but which the Defendants found wanting. While stating that he was entitled to the ‘carried interest’ which is about 3% of profit distributions paid to KPCB’s General Partner of which the Plaintiff was one[6], and that he was entitled to salaries of around $1.2 to $1.5 million per year[7], the Plaintiff provided no further information in relation to those payments contrary to what he was required to do by the express provisions of the Account and Disclosure Order, namely, to provide an account of all income and to make disclosure of specific documents[8].

17.  Basically the Plaintiff claimed he had nothing to account and unilaterally qualified his disclosure obligation by adding a qualification which did not exist, that it was limited to income from KPCB and/or KV’s investment into Keygate/Xinrui.

18.  In dismissing the Plaintiff’s appeal on 12 July 2019[9], Kwan VP (at §§129-130) rejected the Plaintiff’s submission that the Trial Judge had no jurisdiction to vary or enlarge the Account Order as he had reserved the issue of detailed directions for the taking of such accounts[10].

19.  Kwan VP further held (at §135) that the Plaintiff was not asked to account for profits in the abstract. He was ordered to account for any profit he made as a result of the investment made by KPCB under the Xinrui Investment Agreement. The Court of Appeal endorsed the reasons the Trial Judge expressed when making the Account and Disclosure Order, observing that it was with those considerations in mind that that Order was made

“so that the court can properly ascertain whether and to what extent those monies could be regarded as falling within the scope of his duty to account and disgorge …”

20.  The Plaintiff had contended that because his salary was agreed with KPCB before they made the Xinrui investment[11], it could not be within the scope of the Account and Disclosure Order. But Kwan VP observed that

“if his salary was enhanced as a result of the profits he brought in by such investment, this may well be profit attributable to his breach of fiduciary duty for which he would come under a duty to account.”

21.  The Court of Final Appeal[12] dismissed the Plaintiff’s appeal.

(b) Contempt proceedings

22.  Notwithstanding his repeated unsuccessful challenges to the scope of his obligation under the Account and Disclosure Order, the Plaintiff persisted in his refusal to disclose all his income during the relevant period (i.e. down to 31 December 2012) received from KPCB and KV, disclosing selectively (through his affirmations[13]) some of his income. That led to contempt proceedings, the Defendants having obtained leave from the Trial Judge on 8 October 2019 to issue such proceedings against the Plaintiff.

23.  On 29 March 2021, Anthony Chan J (who heard the contempt proceedings) found the Plaintiff guilty of contempt of court for his breach of the Account and Disclosure Order by unilaterally reading down its scope, and limiting his obligation to income from the investment of KPCB and/or KV into Xinrui with the purpose of evading his obligations[14].

24.  On 21 October 2021, the Plaintiff was sentenced to prison for 2 months for his “contumacious and cynical” breach[15].

25.  Anthony Chan J’s finding was upheld by the Court of Appeal[16] when it dismissed the Plaintiff’s appeal on 20 January 2022.

II. THE ACCOUNT-TAKING EXERCISE

26.  Meanwhile, pending the account-taking hearing, in July 2020, the Plaintiff made 3 interlocutory applications: (a) to strike out large parts of Mr Lin’s 5^th affirmation (“Lin 5”) which set out D1’s Notice of Objection; (b) to require Mr Lin to attend for cross examination; and (c) to permit the Plaintiff to give evidence by way of video-link.

27.  The Plaintiff was unsuccessful in all his applications but did not appeal.

28.  The income that the Plaintiff chose to disclose in Plaintiff 4 to 7 falls into 4 categories, namely: (a) “distributions of capital gains or profits” from KPCB (category A); (b) “Other income” from KPCB (category B); (c) “distributions of capital gains or profits” from KV (category C) and (d) “Other income” from KV (category D).

29.  The Defendants challenge the Plaintiff’s contention that he had not received any income in categories B, C and D which falls within the Trial Judge’s Orders. They divided categories B and D into 3 subcategories, namely salaries, management fees and share options. In all, there are 7 separate items of income which the Defendants claim had been received by the Plaintiff.

30.  For the purpose of the trial for the Taking of Accounts, the Defendants prepared their Scott schedule identifying each of the 7 categories or heads of claim for determination at trial with reference to affirmations and documents filed by the parties with a brief summary of the Defendants’ contentions in relation to each claim.

31.  Section V of the Defendants’ Opening Submissions for the Account Taking adopted the format and approach of the Defendants’ Scott schedule but with detailed submissions and their underlying rationale in respect of each of the 7 claims.

32.  The Plaintiff’s expert, Barnaby Bruce Landen Terry (“Mr Terry”) and the Defendants’ expert Paul John Walters (“Mr Walters”) gave evidence at the account-taking hearing. There is also a Joint Expert Report identifying those parts of the evidence on which they agree and those on which they are not, in agreement, with reasons in support of their respective opinion and supplemental to their respective expert report.

33.  The Master rejected 2 of the 7 heads of claim and accepted the remaining 5 as appears from the summary set out in §83 of the May Decision (replicated below), awarding the Defendants the total sum of $5,933,253.31 with interest[17]:

III. LEGAL PRINCIPLES

34.  Generally speaking, an appeal from a Master is dealt with by way of rehearing de novo: Hong Kong Civil Procedure 2022 (“HKCP”), §58/1/2. But there are exceptions.

35.  Mr Pow SC, leading counsel for the Defendants, submitted that the taking of accounts is one of them. RHC O. 44 r. 11 provides that:

“Subject to … the result of proceedings before a master under a judgment shall be stated in the form of an order.”

36.  The taking of an account is a proceeding that resulted from the order of a judge in chambers and is not a decision made by the Master in his original jurisdiction (for example in an O.14 application). Where, as here, O.44, r.11 applies, O. 44, r. 12 applies, importing all the features of an appeal before the Court of Appeal. Thus, (i) a Notice of Appeal is required; (ii) Ladd v Marshall applies; and (iii) the judge hearing the appeal shall have the same power to draw inferences of fact as has the Court of Appeal under Order 59, rule 10 (3).

37.  The upshot is that “the judge hearing the appeal will not interfere with the master’s findings of fact, or admit fresh evidence (other than evidence as to matters which have occurred after the date on which the master’s order or decision was given or made), except on special grounds …”: See HKCP at §44/12/2 approved in Willwin Development (Asia) Company Limited & Anor v Wei Xing & Ors[2021] HKCFI 2933 at §10.

38.  In BMC v BGC[2020] HKCA 317, Kwan VP summarised the Court of Appeal’s approach to factual findings (1) of primary fact; (2) based on evaluation of facts; and (3) based on inferences as follows:

“83. For findings of primary fact, the appeal court must be satisfied that the trial judge has gone plainly wrong before it could interfere …

84. Where findings are based on evaluation of facts, they involved an assessment of a number of different factors which have to be weighed against each other … Such cases may be closely analogous to the exercise of the discretion and the appeal court should approach them in a similar way. In short, it would be most slow to disturb the judge’s evaluation of evidence and findings of fact unless the evaluation was tainted by a misapprehension as to the facts, or that he took into account irrelevant matters, or that he failed to take into account relevant matters, or that the conclusion he reached in his evaluation was outside the generous ambit within which a reasonable disagreement is possible …

85. Findings based on inferences can be made from primary facts or after a process of evaluation. If the former, the appeal court approaches an inference in the same way as it approaches an appeal against a finding of primary fact. If the latter, the court adopts the same approach as in relation to findings based on evaluation of facts.”

39.  Mr Barlow SC, leading counsel for the Plaintiff, did not take issue with the principles set out above but he does not consider them to be relevant in the present case. He takes the view that no primary facts were established. Rather, his focus was RHC O 43, r 5 which provides that:

“Notice to be given of alleged omissions, etc. in account

5. Any party who seeks to charge an accounting party with an amount beyond that which he has by his account admitted to have received or who alleges that any item in his account is erroneous in respect of amount or in any other respect must give him notice thereof stating, so far as he is able, the amount sought to be charged with brief particulars thereof or, as the case may be, the grounds for alleging that the item is erroneous.”

40.  The Plaintiff submitted that when an account provided is challenged, the party challenging the account bears the burden of proof, citing Pit v Cholmondeley (1754) 2 Ves Sen 565 (where the Lord Chancellor held that the onus is on the party seeking to challenge a stated account to surcharge and falsify) and Libertarian Investments Limited v Hall (2013) 16 HKCFAR 681 at §168 where Lord Millett NPJ held that “once the plaintiff has been provided with an account he can falsify and surcharge it.”

41.  While that principle is not controversial, its applicability and/or application to the facts of the present case is.

IV. THE PLAINTIFF’S NOTICE OF APPEAL (“NoA”)

42.  At this point, it would be appropriate to refer to the Court of Appeal’s judgment in China Gold v CIL Holdings Limited, CACV 11/2015, 27 November 2015 to which Mr Pow invited attention. Lam VP (as he then was) giving the judgment of the Court set out in clear terms what a properly formulated NoA requires:

“25. A notice of appeal should set out the grounds of appeal by identifying errors are of a nature which truly entitled the court of appeal to intervene with a finding of fact. We regret to say that in many cases we have seen numerous paragraphs which are in substance closing submissions made at the trial and references to evidence. We are firmly of the view that statements of such nature have no place in a proper notice of appeal.

…

27. We implore counsel (or whoever drafts a notice of appeal) to exercise discipline, proper care and professional judgment in the preparation of a notice of appeal. It should be a concise document setting out clearly and succinctly why the Court of Appeal should intervene with the judgment of the judge. In relation to findings of fact, the grounds of appeal must pinpoint the palpable errors of the primary judge. It is an abuse to canvass submissions at length in a notice of appeal. Such a practice proliferates unhelpful arguments and escalates the costs of the process. It also causes wastage in judicial resources which should be more fruitfully utilised for other purposes.

28. Lawyers and litigants are required by Order 1A Rule 3 of The Rules of the High Court to assist the court in the furtherance of the underlying objectives in Order 1A Rule 1. A notice of appeal which is prolix and unfocused containing statements in the nature of submissions or evidence goes against each and every objective set out in Rule 1. It is the duty of the court to discourage such practice. And it is the duty of the litigants and the professional duty of their lawyers to refrain from engaging in such practice.” (Emphasis added)

43.  The Plaintiff’s NoA falls foul of those requirements. The Defendants describe it as “a 10-page roving complaint divided into 12 grounds” and that much of what is written is “impenetrable”. It is certainly densely written and not readily comprehensible. Regrettably, the Plaintiff’s written skeleton does little to facilitate one’s understanding of the NoA as it largely replicates the NoA.

44.  In the circumstances, the best I can do is to set out under the headings below what I understand to be the issues that need to be addressed.

(A) The Plaintiff’s duty to render proper account

45.  The Master reviewed the parties’ respective understanding of the Plaintiff’s duty under the Trial Judge’s Orders in §§23-25 of the May Decision and concluded (at §26) that the “narrow” interpretation as proposed by Mr Barlow was incorrect and agreed with the one suggested by Mr Pow.

46.  The Master noted that a similar dispute had arisen before the Trial Judge who disagreed with the interpretation and order suggested by the Plaintiff as appears from §9 of his Ruling (set out in §10 above), resulting in the making of the Account and Disclosure Order.

47.  As earlier mentioned[18], the Plaintiff lost his appeals in the Court of Appeal as well as the Court of Final Appeal.

48.  Notwithstanding the repeated unsuccessful attempts to persuade the Court that his narrow interpretation is the correct interpretation, between 12 July 2019 (the CA judgment) and 28 December 2020 (the CFA judgment), the Plaintiff persisted with advancing his narrow interpretation of the Trial Judge’s Orders in the contempt of court proceedings that were heard between 10 March 2020[19] and 20 January 2022[20].

49.  In considering the ambit of the Account and Disclosure Order[21], Anthony Chan J rejected the Plaintiff’s interpretation, stating (at §64) that

“… the terms of the Order are abundantly clear. They were detailed because of the need to ensure that [the Plaintiff] would not try to wriggle out of it in light of his disinclination to comply with his disclosure obligation.”

50.  Even at this hearing, the Plaintiff focused on §§3-5 of the Account Order as somehow delimiting the ambit of his obligation to account, disregarding the Account and Disclosure Order altogether. He submitted that the sale by KV is not within the terms of the Account Order because once KPCB sold the Xinrui investment to KV, KPCB’s investment was concluded.

51.  The Plaintiff simply ignored the fact that the Account and Disclosure Order was an elaboration of the Account Order and specifically required the Plaintiff to account for

“all income, including salary, fees, dividends and other remuneration … from (i) KPCB[22]; and (2) KV[23], identifying the entitlement under which the said income or other remuneration was received .. to be supported by documents that [the Plaintiff] possesses …”

52.  He treated the Account and Disclosure Order as little more than making extensive interlocutory traceable discovery orders requiring the Plaintiff to disclose specific information and to provide specific classes of documents although the relief sought and granted was not proprietary, but purely personal, in nature. Tracing simply does not arise.

53.  I do not accept the Plaintiff’s interpretation of the Trial Judge’s Orders. It is the same misreading and misinterpretation that has been rejected on multiple occasions since the Ruling of the Trial Judge on 26 June 2018.

(B) The drawing of inferences

54.  Mr Barlow accepts that where (as in the present case) the plaintiff is absent from the Court as a witness, the Court is entitled to draw all reasonable inferences as to what are the facts which he has chosen to withhold and does not take issue with Lord Diplock’s statement in British Railways Board v Herrington [1972] AC 877 at 930G-931B[24].

55.  However, he submitted that before an inference can be drawn, there must be findings of primary fact, a foundation from which to draw the inferences which were missing below.

56.  Mr Barlow referred to the following passage in the judgment of Brooke LJ in Wisniewski v Central Manchester Health Authority [1998] PIQR 324 at 339 quoting Lord Lowry’s remarks made in R v IRC ex parte TC Coombs & Co [1991] 2 AC 283 (at p. 300):

"In our legal system generally, the silence of one party in face of the other party's evidence may convert that evidence into proof in relation to matters which are, or are likely to be, within the knowledge of the silent party and about which that party could be expected to give evidence. Thus, depending on the circumstances, a prima facie case may become a strong or even an overwhelming case. But, if the silent party's failure to give evidence (or to give the necessary evidence) can be credibly explained, even if not entirely justified, the effect of his silence in favour of the other party may be either reduced or nullified." (Emphasis added)

57.  Those remarks arose out of the somewhat unusual facts of that case which concerned a presumption arising under the Taxes Management Act 1970. A 2^nd notice requiring the applicants to disclose documents for inspection had been issued which the applicants sought to set aside. The House of Lords held that the commissioner (in granting consent) must be taken to be satisfied that the inspector was justified in proceeding under section 20 and hence that the inspector held, and reasonably held, the opinion required by section 20(3).

58.  After citing the passage from the Coombs case, Brooke LJ derived, inter alia, the principle that there must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue. In Coombs, that evidence was the presumption.

59.  I do not consider that Lord Lowry’s remarks assists the Plaintiff. If, by analogy, a presumption arises that the Plaintiff has complied with his obligation to provide the information required by the Trial Judge’s Orders[25], that presumption can be displaced if it can be shown that the information he has provided is demonstrably inadequate and deficient[26].

60.  Moreover, in Coombs, there was a credible explanation for the sparseness of the evidence adduced by the revenue whereas there is no in the present case.

(C) Reverse onus and evidential vacuum

61.  These twin themes run through all the Plaintiff’s submissions that the Master erred in reaching the conclusion that he did in respect of the various claims made by the Defendants.

62.  As I understand it, the thrust of the Plaintiff’s submissions is that the onus is upon the party challenging the account and onus of proof is not affected by the absence of evidence. It does not provide the Court with the basis for adopting a completely hypothetical construct, requiring the Plaintiff to show otherwise. Accordingly, the Master erred in reversing the onus of proof.

63.  Where a fiduciary ordered to provide an account of all his income received or derived from specific sources during a specified period fails to comply with the court order and renders an account that is demonstrably inadequate and incomplete, it runs contrary to reason and common sense that the party entitled to the account (“the beneficiary”) can nonetheless be expected to surcharge and falsify in the normal way. In my view, absent the rendering of a proper account in the first place, those tasks are impossible to undertake.

64.  It was contended that as an account had been rendered, there is no reason for O 43, r 5 not to apply. But it is not the provision of any account that is required but one that complies with the court order: in other words, a proper account.

65.  In my view, if it can be shown that the account provided is perfunctory and merely pays lip service to the court order which would be the case if its deficiency can be demonstrated, I do not consider that any court could insist upon compliance with O 43, r 5.

66.  In a situation where the fiduciary ordered to account is the only party in possession of or is privy to the requisite information but refuses to disclose the same, thereby deliberately engineering an evidential vacuum, I do not accept that no remedy can be fashioned to address the lacuna thus arising. This consideration is related to the next issue.

(C) The Libertarian principles

67.  Where a situation such as that outlined in §66 above arises, the Defendants submitted, and the Master accepted, that the Court may resort to the equitable principles enunciated by Lord Millett in the Libertarian case at §174:

“Where the absence of evidence is the consequence of the fiduciary’s own breach of duty the court is not without resource, for it can have resort to three principles. First, it may be able to take the fiduciary at his own word and use his falsehoods to establish the facts as if they were true even though they are known to be untrue. Secondly the court is entitled to make every assumption against the party whose conduct has deprived it of necessary evidence. And thirdly the court is entitled to be robust and do rough and ready justice without having to justify the amount of its award with any degree of precision.”

68.  The Plaintiff complained that the Libertarian principles were taken out of context and that they are only applicable in the context of the account that was relevant to that case when the actual remedy was equitable compensation.

69.  I disagree. Those principles are equitable principles and I can discern nothing in Lord Millett’s judgment to confine or restrict their application in the manner suggested by the Plaintiff.

(E) Penalising the fiduciary

70.  It was then stressed that the purpose of an account of profits is not to punish the fiduciary. That principle is not controversial and is well established. In the Libertarian case, Ribeiro PJ (at §83) observed that since the jurisdiction is not punitive, the fiduciary will not be made to account for more than he actually received as a result of his breach.

71.  In Kao Lee & Yip v Koo Hoi Yan & Others [2003] 3 HKLRD 296 at §§142 and 143(3), Ma J (as he then was) explained that where a fiduciary has taken advantage of the business opportunity in breach of his fiduciary duties, care must be taken not to penalise the fiduciary when ordering an account of profits. The overall object of the remedy of an account of profits is to give to the beneficiary the true extent of the profits made by the fiduciary, not to punish him

72.  Pausing there, in the course of his submissions, Mr Barlow appeared to hint that the damages awarded by the Master verged on the ‘punitive’, mentioning a figure of $20 million. The notion that the award was punitive needs to be immediately dispelled.

73.  The damages awarded was the Master’s order of $6 million. In response to the Court’s query over the amount awarded, it transpires that the balance of $14 million is solely attributable to interest ordered to be paid because the breach arose many years ago.

74.  Further, there is no challenge to either the rate of interest or the periods over which each item should attract interest[27]. Accordingly, there is no basis for any suggestion that the award was somehow ‘punitive’.

(F) Quantum - causation and remoteness

75.  In the Kao Lee & Yip case, Ma J considered that it is impossible to adopt an approach that borders on any mathematical exactness and the court must really work on what Slade J described in My Kinda Town Ltd. v Soll [1982] FSR 147, at 159, as “a reasonable approximation”.

76.  The court’s approach must necessarily be flexible in undertaking the critical inquiry which is the gain that the fiduciary has made as a result of his breach of fiduciary duty and there is a need to focus on causation and remoteness when examining the link between the breach of duty and gain: at §§143-144.

77.  Those principles are not controversial. It is their application to the specific claims considered below that is challenged.

(G) Specific claims

78.  Before turning to consider the specific heads of claim that Mr Barlow alluded to at the hearing, it would be helpful to recapitulate some preliminary matters.

79.  The Plaintiff’s criticism of the Defendants’ case is that it was based on Lin 5 which the Plaintiff described as “all conjecture, opinion and argument” rather than fact.

80.  But faced with the Plaintiff’s refusal to provide information in his possession that he was ordered to provide, the Defendants had little choice but to invoke the Libertarian principles and to ask the Court to make assumptions extrapolated from the available facts and documents disclosed.

81.  In respect of each claim, the relevant evidence in relation to that claim is set out. Based on the material before the Court, the Defendants made detailed submissions as to why certain assumptions should be made.

82.  In a nutshell, Mr Barlow’s grounds for overturning the May Decision stem from his submissions on evidential vacuum and reverse onus coupled with the application of the Libertarian principles, matters that have been addressed above.

(i) KPCB salary/ bonus

83.  The Defendants’ case is based on the Plaintiff’s evidence that he had received income of between $1.2 million to $1.5 million per year as salary from KPCB. Under his contract with KPCB, upon his departure, subject to the approval of KPCB, he is entitled to a 3 months’ performance bonus payable at the end of 2008.

84.  The Master took the higher salary figure on the basis that the burden was on the Plaintiff to come forward with an accurate account. As he had failed to do so, he cannot complain if the higher figure was selected to his disadvantage.

85.  The Plaintiff[28] (wrongly) accused the Master of failing to take account of the relevant timing when both experts have agreed that the Plaintiff’s salary would have been agreed and put in place by the time he joined KPCB in April 2007. As the Xinrui investment was not made until 4 months later, the Plaintiff had argued in the CA case that the salary he negotiated had nothing to do with the Xinrui investment, that it rendered the remuneration “incidental to” and not the result of KPCB’s Xinrui investment. Kwan VP did not agree[29].

86.  The Plaintiff’s criticism of the Master is disingenuous. He could not but have been fully aware of the reason why Kwan VP disagreed. It was because the Trial Judge had already ruled that the Plaintiff was discussing the matter a week or so before 6 February 2007[30], i.e. 2 months prior to joining KPCB. In other words, 2 months prior to his agreeing to his salary with KPCB the Plaintiff had already been actively contemplating stealing the Xinrui investment and parking it with his new fund.

87.  There is also the expert evidence of Mr Walters whose evidence the Master preferred given his 20+ years’ experience working in the VC industry in China, that having deals in hand strengthen a party’s negotiating position with the fund. Those matters established to the Master’s satisfaction the causation link between the KPCB salary received by the Plaintiff and the Xinrui investment.

88.  As the Plaintiff was managing 7 investments for KPCB including Xinrui, in the absence of evidence from him identifying the nature of the other 6 investments and his entitlement under each of the 7 investments, the Master apportioned the income between them so that only 1/7^th is attributable to the Xinrui investment. That approach is plainly in line with the reasonable approximation approach stated in the Kao Lee & Yip case[31].

89.  On the question of bonus which, contractually, the Plaintiff would receive subject to KPCB’s approval, his failure to disclose whether or not he did receive the same fully entitled the Master to make every assumption against the Plaintiff.

90.  Given those matters, the Master cannot be faulted in any way for finding that the Plaintiff’s annual salary and bonus was a profit made as a result of the Xinrui investment.

91.  The Plaintiff (a fugitive from justice who did not have the courage to attend the hearing because he had not yet purged his contempt of court) had the temerity to accuse the Master of “blocking cross-examination by video link” when, as he well knew, his interlocutory application to give viva voce evidence by video link had been rejected by the Master on 21 December 2021 and whose ruling he did not appeal.

(ii) KPCB management fees

92.  KPCB was obliged to pay a management fee to KPCB China Management Limited, an entity that the Plaintiff owned. The Plaintiff failed to disclose the amount of management fees to which he was entitled from the management company whether in the form of bonuses or otherwise.

93.  Typically, management fees are charged on the value of the asset under management (“AUM”) at the rate of 2% or 2.5%. Those percentages were agreed by the experts. Because the Plaintiff withheld the value of the AUM of KPCB under management, a straightforward calculation based on KPCB’s AUM could not be done. The only known AUM was the Xinrui investment worth $8 million.

94.  The Master adopted the rate of 2.5% which KV (who took over a significant number of portfolios from KPCB) charged for management. As the Plaintiff chose not to disclose expenses incurred to earn management fees and the total absence of evidence of actual expenses incurred, it is invidious to criticize the Master for making no allowance for the same.

95.  The award of $200,000 represented 2.5% of $8 million. It is not understood how the Plaintiff can complain when the absence of evidence is all of his own making. In any event, he has not pinpointed where the Master had gone palpably wrong.

(iii) Distributions of Capital Gains and Carry from KV

96.  The Xinrui investment was purchased for $8 million in July 2008 by KV, a fund he set up in April 2008. 17 months later, the Keygate/Xinrui investment failed and the remnants of the business was sold to MicroMedia Ltd for $3.5 million giving rise to a loss of over $4.5 million for KV.

97.  Mr Barlow remarked that there was no evidence as to how the Xinrui investment failed except that it was deregistered in December 2009, thus going out of business. The Master accepted 5 reasons[32] given by the Defendants as to why the Plaintiff’s account of the sale to MicroMedia for $3.5 million should be disbelieved. He also noted the absence of any convincing argument from Mr Barlow to the contrary.

98.  Mr Barlow resorting to his favourite themes, described the Master’s finding (that the Xinrui investment failed and was worth $8 million) as one based on “a complete evidentiary vacuum”, “a theoretical construct”, and incapable of discharging the Defendants’ onus of proof[33]. I do not propose to repeat my views on those matters.

(iv) Salaries from KV

99.  After the Plaintiff left KPCB, he joined KV which took at least the 7 investments from KPCB.

100.  The Master’s approach was similar to that adopted in calculating the Plaintiff’s KPCB salary and bonus. In KV’s case, the period of employment concerned was much longer, being 4.75 years.

101.  The Plaintiff made the same objections (of evidential vacuum, reversal of onus of proof and misapplication of the Libertarian principles) as he did with KPCB.

(v) Management fees from KV

102.  The Master adopted the same approach as for KPCB.

103.  The Plaintiff reiterated the same objections as those stated in §101 above.

V. CONCLUSION

104.  I find no merit in the Plaintiff’s appeal. For the reasons set out above, I reject the mainstays of his submissions which are evidential vacuum, reversal of onus, and misapplication of the Libertarian principles.

105.  Accordingly, this appeal is dismissed with a costs order nisi in favour of the Defendants, with certificate for 2 counsel.

Mr Barrie Barlow SC and Mr Chan Pat Lun, instructed by MinterEllison LLP, for the plaintiff

Mr Jason Pow SC and Mr Alexander Tang, instructed by Fangda Partners, for the 1^st defendant

HCCL 16/2016

[2022] HKCFI 1095

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 16 OF 2016

(TRANSFERRED FROM HIGH COURT ACTION NO 1551 OF 2010)

________________________

BETWEEN

________________________

_________________________________

TAKING OF ACCOUNT

_________________________________

INTRODUCTION

1.  This is a taking of account exercise.

BACKGROUND

2.  I set out some basic facts for the present purpose. Briefly, it is a hotly contested piece of litigation^[1] among parties in the venture capital business, commonly known as “VC”.

3.  At the material times, the plaintiff (“Zhou”) was a venture capitalist. He worked as a limited partner for the 1^st defendant (“SAIF”), in which the 2^nd defendant was a general partner. Zhou sued both defendants for over US$22 million sums due to him. The defendants on the other hand made a number of counterclaims against Zhou.

4.  The trial went before DHCJ Field in January 2018 for 11 days. The learned trial judge ruled^[2] for Zhou on his claim. SAIF promptly paid Zhou accordingly[3].

5.  However, SAIF also won one counterclaim so that Zhou had to account and disgorge profit he personally made by diverting the business and/or business opportunity conveniently known as “Xinrui investment”. This forms the beginning of the present taking of account.

6.  Zhou filed his first affirmation to comply with his duty to account. SAIF complained that it was inadequate. Upon application, the trial judge agreed with SAIF, directed Zhou to make discovery upon Zhou, including, those from KPCB-CF and its subsidiaries, affiliates and related entities (“KPCB”) and Keytone Ventures LP and its subsidiaries, affiliates and related entities (“KV”) as well as further gave his rulings^[4] on how the account of profit should be taken. In short,

(a) Upon undertaking by the defendants, Zhou had to provide an account verified by affidavit with all supporting documents.

(b) SAIF was at liberty to:

i. inspect the documents

ii. serve notice of objection, and

iii. file and serve affirmation in reply.

(c) Parties had to file and serve a Scott Schedule 14 days before PTR.

(d) Taking of account was to be held before a master for 2 days, with a PTR for half day at least 8 weeks beforehand.

(e) SAIF was also be at liberty to cross-examine on Zhou/deponent(s) on the affidavit(s) verifying the account.

7.  Zhou disagreed and took up the matters to appeal but lost them before both the Court of Appeal^[5] and the Court of Final Appeal^[6].

8.  In the meantime, Zhou further prepared his fourth affirmation to comply with the order of account. SAIF maintained that Zhou still failed to comply with the court orders.

9.  It further triggered contempt proceedings^[7] against Zhou. He lost his case before the Hon A Chan J^[8] and was finally sentenced for 2 months’ imprisonment. He appealed^[9] but failed again.

10.  Although Zhou did not come to Hong Kong to serve the punishment, he still engaged his legal team to defend for the taking of account.

(a) On 21 November 2019, the 5^th affirmation of Brandon Lin (“Lin”) was filed as a notice of objection.

(b) On 7 May 2020, the Scott Schedule of Parties’ Contention was lodged.

(c) Parties appeared before me for 3 PTRs and I made a number of directions and orders governing conduct of the taking of account, including:

(i) On 13 November 2020, I declined Zhou’s application to strike out part of the 5^th affirmation of Lin. I also declined his application to cross-examine Lin. However, I allowed his application for expert evidence although I preferred the directions proposed by SAIF.

(ii) On 21 December 2021, I dismissed Zhou’s application that his examination was to be done by VCF but allowed (with consensus from SAIF) that his expert could be done so.

11.  The taking of account came before me for 4 days in March 2022.

OVERVIEW OF PARTIES’ STANCE

12.  Parties made clear their position through counsel in their Openings.

13.  Mr Pow SC said that the trial judge found Zhou not a credible witness. He failed to comply with the disclosure order made against him. He did not disclose all income coming from KPCB and KV. He was found liable for contempt of court and sentenced to prison. He however did not come to serve it and became a fugitive from justice. Notwithstanding the suppressed information and lack of testing of his evidence under cross-examination, this court was not powerless and could adopt a flexible approach, taking every possible adverse inference against Zhou. With the available evidence before the court and the assistance of experts, SAIF sought a total sum of about US$6 million against Zhou under 7 heads.

14.  Mr Barlow SC disagreed and said that Zhou did not need to pay SAIF anything at all. Although the trial judge did order Zhou to account disgorge and disclose, it was only “profit made by KPCB under the Xinrui investment”. The present taking of account exercise was governed by the procedural framework in Order 43 of the Rules of High Court (Cap 4A). Burden fell on SAIF who chose to challenge the account rendered by Zhou. Although the court might approach the taking of account exercise in a flexible way, the question remained whether there was a profit made and proved to be payable within the judgment. The so-called profits claimed were only illogical conjecture or fantasy by SAIF. They were without basis in fact or in reality. There was nothing Zhou should pay to SAIF at all.

15.  I set out the differences between parties by the following table.

		SAIF’s case	Zhou’s case
Heads	Particulars	US$	US$
B1	Salaries from KPCB	267,857.14	0
B2	Management fees from KPCB	200,000	0
B3	Share Options in Keygate[10]	160,000	0
C	Capital Gain and Carry from KV	800,217.60[11]	0
D1	Salaries from KV	1,272,321.43	0
D2	Management fees from KV	3,392,857.14	0
D3	Share Option in Keygate	160,000	0
	Total	6,253,253.31	0

APPLICABLE LEGAL PRINCIPLES

16.  Both learned senior counsel drew my attention to different authorities governing how an account is to be taken. I endeavor to state them succinctly.

17.  Reyes, J in Kao, Lee & Yip v Donald Kao Hoi-Yan [2005] HKEC 2153 explained the basic scenario.

"64. When the Court orders an account of profit, the accounting party (Party A) typically prepares and verifies his version of what the final account should be…

65. The party to whom account is being made (Party B) may then challenge particular items in A's version or allege that A's version is incomplete…

66. A responds to B's case by accepting or rejecting B's contentions. A may amend his version of the final account to reflect any admitted errors.

67. If A and B cannot agree on what the final account should be, the matter proceeds to a substantive hearing, where the Court decides between the rival contentions. The Court may agree with some, all or none of A's version of the final account. The account taken by the Court then becomes the final account."

18.  Usually, the beneficiary or principal may challenge the account by 2 ways, namely, to falsify and/or to surcharge.

(1) To falsify means to have the entry deleted or reduced in favor of the beneficiaries or principal.

(2) To surcharge is to add into it an entry that was previously absent from the account in favor of the beneficiaries/principal.

See Pit v Cholmondeley (1754) 2 Ves Sen 565 … at 566 and Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681.

19.  The Court's equitable jurisdiction to require a defaulting fiduciary to account for unauthorized or secret profits merely constitutes the enforcement of his principal's equitable entitlement to profits. They are profits actually received but not in abstract. The principal shall not be unjustly enriched. In a taking of accounting exercise, no punitive element is involved as against the fiduciary. (Warman International Ltd v Dwyer (1995) 182 CLR 544 [P#4] at 556-557 and 561; Vyse v Foster (1872) LR 8 Ch App 309 [P#5] at 333, Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 [P#6], Mason, J, Tripole Trading Ltd & Others v Prosperfield Ventures Ltd & Another (2006) 9 HKCFAR 1, Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681)

20.  However, when it is not possible to approach the matter with mathematical exactness, for example, the fiduciary has mixed the secret profit with those of his own, the court could adopt “a reasonable approximation” approach and be “flexible”. (See Kao Lee & Yip v Koo Hoi Yan Donald [2003] 3 HKLRD 296 at §§143-144 per Ma J (as he then was)).

21.  Last but not least, it sometimes happens that the fiduciary is not helpful or even obstructive to the taking of account exercise, Lord Millett NPJ said in the leading case of Libertarian Investments v Hall (2013) 16 HKCFAR 681 at §174 as to how the court may deal with the situation with three principles.

“Where the absence of evidence is the consequence of the fiduciary’s own breach of duty the court is not without resource, for it can have resort to three principles. First, it may be able to take the fiduciary at his own word and use his falsehoods to establish the facts as if they were true even though they are known to be untrue. Secondly, the court is entitled to make every assumption against the party whose conduct has deprived it of necessary evidence. And thirdly the court is entitled to be robust and do rough and ready justicewithout having to justify the amount of its award with any degree of precision.” (emphasis added)

22.  Both learned counsel had no great dispute over the above principles and authorities, save that Mr Barlow argued that burden rested upon SAIF to prove. In my view, there is no real conflict between the learned counsel on their legal submissions. As usual, the key lies on the application of them at appropriate circumstances. In the present case, the authorities relied upon by Mr Barlow does not assist Zhou much because of the followings.

(a) Zhou’s (repeated) understanding and interpretation of the judgment/order of account given by the trial judge is wrong.

(b) Zhou has not completed his primary burden to render a proper account in the first place. Irrespective of the burden, it is undisputed or indisputable that Zhou has failed to account for his income received.

(c) This is a taking of account, and not an assessment of damages. A defaulting fiduciary cannot hide away from his obligation to account simply by insisting on keeping everything in the dark. This court is not powerless and can resort to the 3 principles put by Lord Millett NPJ as aforesaid.

THE JUDGMENT/ORDER TO ACCOUNT

23.  There is no argument that the present exercise stems from the order made by the trial judge directing Zhou to account. Mr Barlow stressed the need to understand such order correctly. I have no quarrel with him on this.

24.  In the words of Mr Barlow as per paragraph 12 of his Opening Submissions, the trial judge only ordered Zhou to:

“(1) “... account … for any profit ...”;

(2) “... that the Plaintiff made…”;

(3) “... as a result of the investment made by KPCB ...”;

(4) “... under the Xinrui ... investment agreement dated 24 August 2007”.”

25.  Mr Pow said it was ironic that yet again he was accused of misunderstanding of the order and judgment of the trial judge. He took this court through various passages of related judgments of the cases to demonstrate that Mr Barlow was wrong.

26.  Upon consideration, I have no hesitation to reject the “narrow” interpretation of the judgment/order of account as proposed by Mr Barlow, and agree with the one suggested by Mr Pow.

27.  As a matter of fact, similar dispute happened before the trial judge. Zhou deposed that investment did not go well. No profit was made when KPCB sold it to KV for US$8 million. KV further sold it at a loss of over US$4.5 million. SAIF disagreed and went back before the trial judge to seek further directions on the taking of account. The trial judge apparently disagreed with the interpretation of his judgment and order suggested by Zhou and said in his Ruling on 26 June 2018 herein that:

“9. In my judgment, given P’s untruthful account of when he began to discuss a possible investment in Xinrui and the relative scarcity of the discovery he provided for the trial, D1 is entitled to an order that goes wider than might have been conventionally appropriate in setting the modalities for an account of secret profits to be given by a fiduciary. It is also the case that, since P did not himself provide the alleged US$ 8million invested in Xinrui, the absence of any profit for CPCB-CF on the US$ 8 million investment does not necessarily mean that P personally did not benefit financially in one way or another from the investment (emphasis added).”

28.  Zhou took up the matter further and tried to convince the Court of Appeal that the trial judge was wrong. However, all the attacks failed[12].

“129. Mr Barlow submitted that the judge had become functus officio …

130. This is a bad point. …

131. A number of objections were taken …

132. The plaintiff contended that the order complained of exceeded the permissible bounds for an order to account…

133. He also complained that the order impinged upon his rights, the rights of KPCB and the rights of subsidiaries, affiliates and related entities of KPCB and KV...

134. I reject all the above contentions. Similar submissions had been made before the judge…

135. The plaintiff was not asked to account for profits in the abstract. He was ordered to account for any profit he made as a result of the investment made by KPCB under the Xinrui Investment Agreement. The Accounts Ruling made clear that given the plaintiff’s untruthful account of when he began to discuss a possible investment in Xinrui and the relative scarcity of the discovery he provided for the trial, it is appropriate to make “an order that goes wider than might have been conventionally appropriate in setting the modalities for an account of secret profits to be given by a fiduciary”… It is with such considerations in mind that the order was made, so that the court can properly ascertain whether and to what extent those monies could be regarded as falling within the scope of his duty to account and disgorge, instead of merely relying on the assertion made in his affirmation of 25 March 2018.

136. As for monies received including “salary, fees, dividends and other remuneration”, assuming that his salary was agreed with KPCB before they made the Xinrui investment, if his salary was enhanced as a result of the profits he brought in by such investment, this may well be a profit attributable to his breach of fiduciary duty for which he would come under a duty to account.”

29.  Last but not least, the argument also appeared before the Hon A Chan when he found against Zhou in contempt of the disclosure order made by the trial judge. The learned Judge commented[13] that:

“Ambit of the Account Order

63. …

64. In my view, the terms of the Order are abundantly clear. They were detailed because of the need to ensure that Zhou would not try to wriggle out of it in light of his disinclination to comply with his disclosure obligation.

65….

68. I agree with Mr Pow that the account may be provided by drawing up a table of all items of income which Zhou and his related entities had received from KPCB and Keystone (and their related entities), and attaching the supporting documents. The fact that such a simple exercise has not been carried out, despite the resources available to Zhou, speaks volumes.

69. The charge against Zhou here is that he had unilaterally read down the scope of the Account Order, namely, his obligation was limited to income from the investment of KPCB and/or Keystone (and their related entities) into Xinrui (see, as an example, para 28 above). Consequently, Zhou has failed to account for all his income as ordered by the court.

70….

71. Plainly, Zhou has not fulfilled his obligations. He has never tried to identify all the income which fit the prescriptions in the Account Order…

74. In the premises, I find it proved beyond all reasonable doubt that Zhou is in breach of the Account Order by failing to account for all his income.”

EVIDENCE

30.  Mr Barlow submitted that SAIF had absolutely no documentary evidence to support the “claim” as contained in Lin’s 5^th affirmation/notice of objection. The disclosure order only helped SAIF to trace into payment received by Zhou. There was no basis to suggest that Zhou had concealed or withheld or destroyed documents. There was no factual witness attending the taking of account exercise.

31.  Mr Pao disagreed and said that the trial judge specifically directed Zhou to make a wider discovery. The Court of Appeal illustrated with an example[14] how “salary” earned by Zhou could become “profit” accountable by him to SAIF. In light of the stance having been insisted upon by Zhou, Lin could not be said to be speculative. It was something asked and triggered by the conduct of Zhou. In any event, there was a lot of primary facts and evidence SAIF entitling it to raise the objection or case against Zhou. It started with findings by the trial judge. Lin then built up SAIF’s case from the non-disputed facts, limited disclosure and “admissions” by Zhou on affidavit evidence.

32.  Upon consideration, I take the view that the complaint raised by Mr Barlow does hold any water and I agree with the submissions by Mr Pao.

33.  First, the trial judge directed the preparation of affidavit by parties as well as the discovery. These matters form the backbone of the present taking of account. They stand as evidence before the court with or without cross examination.

34.  Second, I also allowed expert evidence to be filed. Expert reports were prepared. Both experts attended at the hearing to be cross-examined. They were evidence to be weighed and decided by the court.

35.  Third, at the contempt proceedings, it is true that the Hon A Chan did not rule against Zhou on the charge in respect of specific discovery, for a number of different reasons including that the required high standard of proof. However, more importantly, the learned judge did find beyond all reasonable doubt that Zhou was in breach of the account order by failing to accounting for all his income[15]. Hence, it is something that forms a binding fact of evidence before me.

THE EXPERTS

36.  Mr Walters and Mr Terry, the respective experts of SAIF and Zhou, helpfully agreed with a number of matters to put before the Court, including the following basic matters to help understanding of VC Industry.

37.  Five questions were put to the experts by this Court to resolve the disputes of parties. The experts also helpfully agreed their answers to Q3 and Q4. As to the remaining three, they party agreed on some of the answers but maintained some to be decided by me.

38.  Both of the experts attended the court for examination to assist the court further, Mr Walters appeared in person when Mr Terry, through VCF in England. They demonstrated to me to be a professional in their own expertise area.

39.  Upon consideration, regarding their differences, I prefer the opinion of Mr Walters than that of Mr Terry, whenever there are differences between them.

40.  First, Mr Walters is a better expert in the sense that he has been working in the “right” area for the present proceedings, namely, VC industry in Mainland China. He has worked in Hong Kong for more than 22 years and could help explaining the practices in the area of VC under the Greater China Region. However, in the cross examination by Mr Pao, Mr Terry:

“2. … admits that while he was involved in the set up of two technology funds, none of them ever invested into a Chinese tech portfolio company, and his experience

“has predominantly been in the UK” [Day 3/4/line 9].

3. He further admits that:-

a. He had never even set foot in Mainland China [Day 3/5/line 25].

b. He is “no expert” and has “no direct experience” in relation to the regulatory framework in China concerning foreign investments [Day 3/6/line 1-5]. His experience, he says, does not extend to the preparatory steps or regulatory gateways that would have to be passed before a deal can close in China [Day 3/7/line 3-9].

c. He is not conversant with the legal or regulatory constraints regarding the running of a VC fund in China [Day 3/6/line 3].”

(Closing Notes of SAIF)

41.  Second, in acceding to Zhou’s alternate application for expert evidence, I decided so because of, inter alia, his evidence and that of Lin might not be as neutral as possible. Hence, I opted to be assisted by professional experts. Nonetheless, Mr Terry might be too keen to help Zhou and therefore, is seen by the court as crossing the impartial boundary and stepping into the arena. During the cross-examination by Mr Pao upon paragraphs 37, 42 and 52 of his own report, he took the evidence of Lin on board and expressed disagreement with him. Expert must be clear about his duty towards the court, after CJR.

“General duty to Court

2. As expert witness has an overriding duty to help the court impartially and independently on matters relevant to the expert’ area of expertise.

3. An expert witness’s paramount duty is to the Court and not to the person from whom the expert has received instructions or by whom he is paid.

4. An expert witness is not an advocate of a party.”

(Code of conduct for expert witness) O 38 rr 35, 37B and 37C, RHC (Cap 4A))

42.  A simple confirmation by a signature on the report is not sufficient and the court will look at the document and see if it is only lip service being paid. Further, although it is tempting to agree on suggested paragraphs made by the instructing solicitor or counsel to be inserted into the draft report, the expert must be refusing it if the same will make him derelict from his duty towards the court.

43.  Third, the evidence of Mr Walters remained unshaken under cross-examination. However, it is not the case for Mr Terry. In Q2, the experts differed in their opinion as to whether Zhou, in negotiating his new funds and determining his remuneration, benefited from the ready-made deal of Xinrui. Mr Walters answered positively but not Mr Terry. However, in the words of Mr Pao, it was not in accordance with common sensical analysis. It was only how relevant and how much weight would depend on the deal at hand and how attractive it was. Mr Terry started to avoid the question:

“Q. …

So I want to understand your opinion. Are you saying that the fact that an individual has a potential investment to bring into the new fund can never be a relevant factor to persuade an investment company to take him up as a partner?

Do you understand my question?

A In my experience, if that was the only thing, I believe so. I believe so. In my experience if that is the only thing somebody is offering, then that would not be sufficient. The venture capital industry that I have been exposed to is a world where may investments are looked at and very few are invested in. And subsequently those investments that make a great deal of money make the fund. So actually starting from a situation where somebody is bringing you an opportunity is a very, very long way away from what you really are looking for.” [Day 3/10/21]

When he was further pressed by Mr Pao, he provided an unhelpful answer.

“Q. Even if that particular deal which he can present good materials and analysis, figures to arouse your appreciation of his potentiality is a matter of extent, is it, and degree, would you agree? It depends on how good the deal is presented before you?

A. I think -- I'm not so sure. I think the -- hiring people at a senior level, you are expecting this as a basic, in my view, level of what they are able to do. You would expect them to do this week in and week out over an extended period. So what you are suggesting might be some evidence of this, but I don't think on its own it certainly wouldn't influence me to hire somebody.” [Day 3/12/2]

Mr Terry finally conceded that a ready at hand deal was a relevant consideration, albeit reluctantly:

“Q. But to be fair, Mr Terry, I note your reservation, but would you agree that the fact that this candidate can present to you an existing ready-in-hand deal with sufficient force or persuasion -- that would at least be a relevant matter, relevant factor in your consideration as to whether you want to cooperate with him? Someone may put high weight on it, someone may put little weight on it, like you, but it would be a relevant consideration. Would it not?

A. I think it’s on the list and perhaps what I’m saying is it would be below -- for me, it would be below the threshold of which it would be important.

Q. All right.

A. But it would be a consideration, but it wouldn’t be a consideration that I would make very strongly.” [Day 3/14/13]

OTHER ARGUMENTS OF ZHOU

44.  At the closing submissions, Mr Barlow advanced some other arguments for Zhou. He offered to testify through VCF. SAIF objected to it and this court did not allow him to do so. The application to strike out certain part of affirmation of Lin was rejected and Zhou maintained that they were inadmissible and irrelevant. Lin did not agree to be cross-examined and this court also did not require him to do so. Court would not and should not draw the “adverse evidential inferences” upon Zhou.

45.  For the present purpose, I do not propose to deal with each of these arguments again and would only recap what I had explained to parties orally when I made the rulings.

“Striking out?

P sought to strike out certain parts of the 5^th affirmation of Lin. Mr Barlow SC said that they purported to advance expert ‘evidence’ on the alleged nature and practices of the venture capital fund management industry, in support of wholly conjectural theoretical hypotheses. They were untrue, speculative, in substance opinion as well as new allegations and inadmissible evidence firstly advanced. P had no opportunity to reply.

Mr Pow SC disagreed. Lin had to put forward D1’s case because P failed to give a proper account at all. From the leading authority of Libertarian, facing such situation, court was not powerless. He would find a rough and ready sum without resorting to precision. Lin’s evidence was a matter for the court to be weighed and decided at the taking of account, but never a question of admissibility. There could not be argument that evidence of business usage and industrial practice was factual and not opinion/expert evidence. The case of Unlimited Productions clearly affirmed such proposition.

Upon thought, I prefer the submissions of C for D1, Mr Pow. Unlimited Productions is a direct authority to such argument before me. As said and accepted by the learned Judge Poon (as Poon CJHC then was) therein “… business usage as distinguished from a common law custom can be proved by the direct evidence of witness. Hence, it is ultimately a matter of merits and not question of admissibility. …”. In this respect, there is no other authority referred to me by P’s counsel or that somehow the application of such proposition should be distinguished herein.

Directions on expert evidence?

Having decided not to accede to the striking out application, how should the taking of account be proceeded with? Indeed, during the hearing, parties did indicate a number of different options for this court to choose, including the followings.

(a) Should P be allowed to make a reply?

(b) Should Lin attend the taking of account hearing to be cross-examined?

(c) Should expert directions be given to the relevant issues having been identified by Mr Barlow and/or Mr Pow?

After thought, I take the view that a set of directions on expert evidence would be helpful and conducive in the taking of account exercise. Notwithstanding that both P and Lin are experienced businessmen in the field of venture capital fund, they are parties or somehow interested in the outcome of the proceedings. The expert’s need to be impartial and objective might be lacking or at least doubtful in both of them.

Both paragraph 2 (3) to (6) of P’s summons and Appendix A of the Skeleton from Mr Pow contain 2 different sets of expert directions for me to choose. Upon further thought and a close examination of them, I prefer the one prepared by Mr Pow. I agree that those contained in P’s summons are too general. Further, it appears that they only aim at attacking the 5^th affirmation of Lin. On the other hand, those proposed by Mr Pow are more specific and contain particulars under 3 headings, namely, remuneration of partners, calculation of management fees and practice in attributing profits. They all touch on the major disputes between parties in the taking of account. I will therefore respectfully agree and adopt the proposed directions from D1….”

46.  In dismissing Zhou’s application for his proposed giving of testimony through VCF, I said that:

“…C explained to me with reference to local and foreign cases, PD 29 and speech of CJ, on the applicable legal principles on giving of evidence by VCF. To recap them briefly,

(a) As a starting point, proceedings should be conducted in open court and giving of evidence by VCF is an exception. Departure from general rule requires good justification.

(b) There is no hard and fast rule and each case depends on its own facts.

(c) Ultimately, it is a matter of case management and judgment of the Court to be exercised judicially in light of all the circumstances of the case. Relevant factors include:

(1) fair and efficient disposal of the proceedings,

(2) ability of the witness to attend,

(3) prejudice,

(4) costs,

(5) delay,

(6) convenience or inconvenience,

(7) practical consideration,

(8) timing of the application,

(9) Covid-19 is not per se an exception.

(10) When credibility of the witness is seriously contested, it is important for him to be examined under the solemn atmosphere of the Court.

Both SC spent quite some time arguing on the legal implication when the applicant is a fugitive. In my view, I prefer the submissions of Mr Pow. It is a factor against affording the applicant the use of VCF. As a matter of public policy, it can never be a factor in favor of the applicant. In any event, for present purpose, I will consider it only as a relevant factor to be taken into account. This is the highest case proposed by Mr Barlow that I will accept for the benefit of P.

Applying the above to the present case, P has not been able to make out a case of exception.

He has not adduced any evidence, medical or otherwise, to satisfy he cannot come to HK. It remains a matter of his own convenience and reasons best known to him.

Mr Pow said that by P’s latest affirmation filed herein, he was in Beijing in September this year. On the other hand, by the latest skeleton, Mr Barlow submitted that P was a non-HK ID card holder. He had no fixed plans as to his whereabouts in March 2022. He could either be in the States or in the Mainland. However, our 4-day hearing was fixed at the 2^nd PTR herein in May this year. Irrespective of where P is or will be situated in March next year, ample and sufficient time has been given to parties to prepare. It also remains a matter of choice in P’s own hands of planning travelling and quarantine. In my view, the latest development of Omicron does not help P much in this respect.

There is no dispute that P is the key witness in the coming of taking of account exercise. It is the trial judge who directed him to provide the account and then to be cross-examined. His credibility is the core issue and seriously disputed. It is particularly important in light of the development of the case, namely, he was sentenced by A Chan J at committal proceedings wherein he was found failure to account for his income as ordered by the Court. The learned Judge also commented that P was deliberate and did it on purpose of evading his obligations under the Court order. P appealed against such ruling but has been dismissed by CA.

As it stands, as ordered by A Chan J, P is a fugitive because he has to serve the 2-month sentence if he would come to HK. When Mr Barlow tried to persuade the Judge not to impose custodial sentence, he submitted that such sentence would mean that P would unlikely come to HK for the Account proceedings. At the skeleton, submissions were made to the effect that P would be arrested and the court would not receive his evidence anyway. I did not hear such argument further probably because parties agreed that a body order could be issued to bring detainee to court. By oral submissions, Mr Barlow tried his best effort to persuade me to allow P’s application because: what then if the application is not granted, P would be deprived of the chance to give his evidence to the Court and to be cross-examined, as ordered by the trial judge and prayed by D1. To this, I will borrow the wisdom of A Chan J, namely, P cannot profit from his position as a fugitive of this Court, nor can the Court be held to ransom. Perhaps, I might further add that it is indeed not uncommon for this Court to only hear the available evidence before the Court and make rulings within the limited perimeters to the best of his ability….”

47.  Mr Barlow has not been able to persuade me to take different views.

48.  With the above, I now move to each of the seven heads put forwarded by SAIF and see if this court should or should not order Zhou to pay.

(1) B1 - Salaries from KPCB

49.  SAIF proposed the sum of US$ 267,857.14 (US$1.5m x 1.25/7).

50.  On oath^[16], Zhou believed that his salary was around $1.2m to $1.5m per year. SAIF picked the higher figure from the range, ie US$1.5 million. Zhou worked for one year and he was entitled to a 3 months’ bonus^[17]. It therefore became 1.25 years. Further, Zhou was managing 7 funds^[18] at the material times and so 1/7 of the salary and bonus would be attributed to Xinrui investment.

51.  Zhou disagreed. His salary had nothing to do with Xinrui investment. He only joined KPCB on 24 April 2007 when the latter signed the Xinrui investment 4 months later. He would have received the same salary regardless of such investment. Mr Terry also supported his case.

52.  Upon thought, on balance, I agree to accept the case of SAIF. The duty to produce an accurate account rested squarely on Zhou. If, for whatever reasons, he could not be precise and could only produce a range, there was no reason why one could not pick one to its disadvantage. Assumption could be taken against him.

53.  With the concession by Mr Terry under cross-examination and/or my preference of opinion of Mr Walters, I am satisfied that the causation link between the salary earned by Zhou and Xinrui investment have been established. The argument that the Xinrui investment was only entered into 4 months after the employment of Zhou by KPCB must fail because of, as pointed out by Mr Pow, the ruling of the trial judge^[19] that he was discussing the matter a week or so before 6 February 2007.

54.  Hence, there is no question that the salary earned by Zhou include the element of Xinrui investment, i.e. a mixing of accountable income with his other income. With the assistance from Kao Lee & Yip v Koo Hoi Yan Donald, such situation is not uncommon in taking of account exercise, a reasonable approximation approach is the way that the court should adopt. SAIF’s suggestion of 1/7, in my view, is a fair one in the circumstances.

(2) B2 - Management fees from KPCB

55.  SAIF said that Zhou should also pay it US$200,000 (US$8m x 2.5%) because he owned KPCB China Management Limited which was entitled to receive management fees^[20] from KPCB. KPCB’s investment in Keygate amounted to US$8m^[21]. Although Zhou failed to disclose such fee, the experts agreed that the percentage was usually 2% per annum and it might be even up to 2.5% for more established and prestigious funds. In the present case, SAIF proposed 2.5% because KV took over a significate number of portfolio investments from KPCB. KV was in similar nature to KPCB and charged management fees at the rate of 2.5% per annum. Hence, there was no reason to suspect that KPCB China Management Limited was charging less.

56.  Zhou disagreed and argued that SAIF failed to adduce any evidence that he had any proprietary entitlement to any part of KPCB management fees. Further, what about the expenditures to be paid by KPCB China Management Limited? Notwithstanding the denial by Zhou, Lin kept on making his conjecture. In any event, the suggestion of 2.5% was against the agreed evidence of the experts that it would usually be 2% only.

57.  Upon consideration, I accept SAIF’s case and declined that of Zhou. As aforesaid, Zhou did not duly comply with the duty to account. Nonetheless, with the limited discovery from him, SAIF could legitimately take Zhuo at his own word and use such information to build up its case.

58.  Lin proposed in paragraph 24 of his 5^th affirmation/ notice of objection that:

“24. … it is evident from the documents disclosed by the Plaintiff that he was entitled to a least a part of the management fees payable by KPCB to KPCB China Management, Ltd :-

(a) the Plaintiff was a shareholder of KPCB China Management, Ltd…However, he has failed to disclose his percentage shareholding in that company;

(b) KPCB had to pay KPCB China Management, Ltd. a percentage of the Management Fee as determined in the (undisclosed) limited partnership agreement of KPCB and the Investment Management Agreement dated 20 April 2007…

(c) KPCB, through its legal representatives, confirmed to the Plaintiff that “[the Plaintiff’s] sole rights to payments were by reason of owning the management company…” ... It would thus appear that the Plaintiff actually owned 100% of the shareholding in KPCB China Management Ltd.”

Facing such objection (or confrontation), Zhou chose maintaining his bare denial and adduced nothing further. With all these before me, I agree to accept the proposition suggested by Lin on balance, namely, Zhou was the “owner” of KPCB China Management Limited.

59.  As to the choice of 2% or 2.5%, I prefer the latter one in the present case.

(a) The experts did agree it was usually at 2% per annum, but 2.5% is still possible. Mr Barlow referred in his skeleton^[22] to the 1^st half of paragraph 29 of their joint expert report. However, the latter half continued with “… it may be up to 2.5% per annum for a more established or prestigious fund…”

(b) If KV did levy its management fees at 2.5% per annum, I take the view that it is more likely than not that the same would apply to the case of KPCB China Management Limited.

60.  Zhou also complained through Mr Barlow in his skeleton^[23] that:

“126. … Also, the 1^st Defendant has failed to adduce any evidence to rebut the likelihood that all those management fees were disbursed in paying all the KPCB management expenditures (including all the salaries, rent and other KPCB expenses). There is no evidence of any actual surplus, let alone of any actual payment to the Plaintiff. There is no evidence of any Plaintiff Receipt. There is only Lin Conjecture.”

I reject such argument. Although it is not difficult to understand the incurring of expenses to earn fees, Zhou chose not to disclose the information. There is no evidence at all before me as to the actual expenses incurred. The expert also did not make any particular comment on the same or suggested a certain percentage to be considered. This court can only rule according to the available evidence put before him. He cannot go beyond it arbitrarily and without any evidential basis to suggest any figure of expenses or by way of percentage. If someone is to be blamed, I am afraid that it must be Zhou himself. It also falls within the flexible way in which a taking of account exercise can be done, when the accounting fiduciary has not been co-operative at all.

(3) B3 - Share Options in Keygate

61.  SAIF said that Zhou was entitled to share options in Keygate. Lin premised his suggestion on 3 facts. Mr Pao said in his skeleton^[24]:

“(1) Clause 7.19 of the Xinrui Investment Agreement provides that Zhou shall be appointed to Keygate’s board ….

(2) Clause 9.2 of the Xinrui Investment Agreement further states that Keygate shall establish an employee stock option plan, including reserving a certain number of shares for its directors ...

(3) By virtue of his position on Keygate’s Board, Zhou is therefore entitled to a certain number of shares in Keygate. Such shares constitute a valuable benefit received by Zhou attributable to the Xinrui Investment.”

62.  Mr Pao also said that Zhou did not disclose any information and had not specifically denied having obtained any share options from Keygate. With the complaints raised by in in Lin’s 5^th affirmation and the principles in Libertarian Investments, Mr Pao proposed that it was just to assume at least 2% of Keygate’s value as the value share option benefits Zhou had obtained.

63.  Mr Barlow objected to the suggestion. It was as usual a conjecture only. He argued, inter alia, that there was no evidence that the share option entitlement had been adopted or approved by Keygate’s board. Further, even had such shares been granted (which was denied), Keygate’s business and Xinrui was deregistered on 24 December 2009 and any such share options in Keygate would have been worthless.

64.  With the evidence before me, I am afraid that I have to decline the claim of SAIF for the share option of Keygate.

(a) Lin said in paragraph 29 of his 5^th affirmation that “… it is simply impossible, at present, for the 1^st Defendant to attribute or calculate the value of such share options…” and put down “indeterminate” in the amount claimed.

(b) There was no further notice of objection suggesting any figure to be considered by the court.

(c) Although the experts agreed that stock options were possible, questions were not posed to them to seek for suggestion on the usual percentage payable.

(d) The suggestion of 2% only came from the bar table by the opening skeleton. While accepting that the court was entitled to be robust and do rough and ready justice, I believe that an imposition of a figure of 2% (one might argue why not 1%, 3% or 5%?) is stretching the flexibility rule too far.

(4) C - Distribution of Capital Gains and Carry from KV

65.  Zhou deposed that the Xinrui investment at US$8m was sold at a loss for only US$3.5m and as such, there was no capital gain or carried interest from KV at all.

66.  SAIF sought to falsify such account. Zhou should pay US$800,217.60 (US$8m x 20.8% x 48.09%).

(a) US$8m should be adopted because Zhou was not a credible witness, he failed to comply with the discovery order, so and so forth. The so-called sale at US$3.5 had to be rejected.

(b) It was more likely than not that KV operated the its investments on a particular mode called “fund-level carry” (as opposed to “deal-by-deal”). With the agreement by both experts, 20.8% would have been paid.

(c) From the evidence of Zhou himself, he would receive a 48.09% through his interest in 2 limited partners (Zhou/Ji Living Trust – 45.41% and Zhou/Ji Investment Partners – 2.68%)

67.  Zhou objected to it. It was entirely Lin’s conjecture. He had deposed and specially confirmed that he did not derive any income, salary or any other remuneration (whether by “Capital Distribution” and/or “Carried Interest” or similar) from Keytone’s Keygate/Xinrui Investment and neither did any of the other limited partners in Keytone. The calculation put forward by Lin was based on incorrect legal advice.

68.  Mr Pao proposed to deal with this argument by 2 questions.

(a) Whether Zhou should be believed? (And, if so)

(b) How the court should come up with a rough and ready estimate to cater for the benefit gained by Zhou?

69.  As to the question (a), I agree to accept the observations made by Mr Pao as per paragraph 56 in SAIF’s Opening Submissions.

“(1) Zhou had proven himself not to be a credible witness as observed by the Court a number of times, both at the trial, the account proceedings, and in the contempt proceedings.

(2) Zhou never provided any particulars explaining why KV was willing to purchase the Xinrui Investment at a significant amount of US$8 million in July 2008, only to have it “fail” in December 2009…

(3) In fact, there is no evidence as to how the Xinrui Investment “failed”, and what the description “failed” is supposed to mean when, even on Zhou’s own case, Xinrui at least still possessed valuable assets to the value of US$3.5 million….

(4) The purported sale of the “remnant assets” to MicroMedia is even more suspicious. Zhou only produced a copy of the purported Asset Purchase Agreement comprising of merely 4 pages … It is clear that the document produced is not a full document. Clause 2.2 refers to Exhibit A which is another agreement that should provide more information about the underlying sale. Zhou did not produce Exhibit A. Neither did he provide any evidence as to the identity of MicroMedia which could have been another vehicle of Zhou. In any event, MicroMedia did not even sign this purported agreement.

(5) Despite the transaction being for US$3.5 million (which is not a small sum), not even a list of assets had been produced. In fact, Zhou claims that “no list of assets was drawn up” … Such a purported sale makes no commercial sense at all – how could a sale of assets take place if such assets are not even listed?”

70.  To these comments, I have not heard any or any convincing argument from Mr Barlow to the contrary. It is particular true on point (4) above. The document showing and proving the sale was so important that Zhou only produced an “incomplete” one without signature from the purchaser. He took no further step whatsoever to improve or rectify the situation after objection from Lin.

71.  I move to question (b).

72.  In VC business, funds were invested in different investments. They would be sold for profits or at a loss. The experts agreed that there were two (2) usual ways to apportion the profit, fund-level carry model or deal-by-deal.

73.  Mr Barlow explained at Annex A to his Opening Submissions:

(1) The carried interest (usually 20% of the VC Fund's profits) will be paid by the VC Fund to its General Partner (who will pay a share of the sum received to the key investment professionals who run the VC Fund) using one of two models, namely:

(a) the "fund level" carried interest model, whereunder it only becomes payable following the repayment of all the Investors' Capital Commitment; and

(b) the "deal-by-deal" carried interest model, whereunder it becomes payable upon the realisation of each of the VC Fund's portfolio company investments.

(2) Under the "deal-by-deal" model, carried interest can be paid after a VC Fund's investment "... is exited, if the proceeds of disposal sufficiently exceed the cost of that investment and the preferred return promised to investors (ie usually 8% annualised return on the cost of that investment)".

74.  However, as the matter further developed, after examination of both experts, the difference between the 2 types of model became less important. As elaborated by Mr Pao in his Closing Notes:

“28. Now, as originally framed, there was this debate over whether or not Keytone works on the deal-by-deal carry model, or the fund level carry model. This is what the experts spent some time dealing with.

29. However, given the elucidation given by both experts over the last two days, it had become quite clear that this is a bit of a red herring, given the unique way in which Keytone was established.

30. Based on a reading of Keytone’s limited partnership agreement, Keytone actually runs on a ‘hybrid’ model. As Mr Walter explains…

“Q. My question is quite simple. Do these clauses indicate which of the two models is adopted by this particular partnership?

A. It's actually a hybrid. This is neither European or US. I've never actually seen these terms in a document. I'm used to either one or the other. But what this is doing, it's a hybrid because it's periodic, it's done on a fiscal year rather than on a deal exit. So it's not like a US deal where every time there's a deal you have to calculate carry, and it's not like a European where you have to look at the whole term. This is actually looking to take each fiscal year as a block. So, for example, if you had say five transactions in a particular year, you couldn't pay on the first one which made a lot of money, you would have to wait until the end of the year and then look at anything cumulative to that point. So I would say this is a hybrid and it's not clearly a fund-level or deal-by-deal carry. It's quite unusual.”

31. Mr Terry also accepted this analysis. At [Day 3/27/line 19]:-

Q. So it's not strictly a deal-by-deal arrangement but a deal-by-deal within a year arrangement. Would it be fair to say so?

A. I believe that is the right way of framing the Keytone agreement, yes.”

32. More importantly, rather than dwelling on meaningless labels, the experts agree as to how Keytone’s distribution structure works.

33. Basically, what happens is this – things are taken year by year. All transactions within a particular year are aggregated together, and if the net result is that there had been gains, a distribution can result. The fact that the experts agree is apparent from the cross-examination. This is clearest from the cross-examination of Mr Terry…

“Q: …So is it not aggregating the capital transaction gain that happened during a fiscal year and distribution would be made in that aggregate period of time?

A: Yes, I think that is correct.

Q. So if within that fiscal year -- the example I gave you earlier on, if I was able to sell investments 1 and 2 within that fiscal year, then the two transactions will be aggregated in order to calculate whether carry would be distributable; is that right?

A. I think that's right.

Q. And to take an extreme example, if the fund is able to sell all five investments within that fiscal year, then all five transactions would be aggregated together in order to do the calculation; is that right?

A. I believe so.”

34. In similar vein, Mr Walters explained as follows…

“Q. I think you have agreed with me within the fiscal year, if there are available capital transaction gains, they can be distributed at the end of the fiscal year?

A. Yes.”

35. Once this is clear, and using the same example I have put to Mr Terry yesterday, it is quite clear that there is basis to find that Zhou did benefit from Keytone’s sale of Xinrui, whether it was sold at US$8M or US$3.5M.

a. Now, we have not been provided any evidence by Zhou as to whether and how Keytone managed or sold its other deals in the year that Keytone was sold. In fact, even the allegation of Keytone selling the Xinrui Investment to MicroMedia is shrouded with suspicions as we noted in Our Opening §56.

b. In lieu of evidence from Zhou and the lack of opportunity to test such evidence through cross-examination, we say, again, following Libertarian, that every assumption can be made against Zhou.

c. In this regard, what we ask this Court to assume is that, in the same fiscal year as the alleged sale of Xinrui, there had been sales of other investments which generated sufficient profits which exceeded the total costs of the investments being sold (including the Xinrui project, at US$8M).

d. As a result, we say, the whole proceeds generated by the sale of Xinrui (whether it be US$8M or US$3.5M) is available for distribution as carried interest.

e. On such basis, based on the formulas set out in para.68 of our Opening, Zhou is entitled to carried interest (or if this Court takes the view that US$3.5M is the amount at which Keytone was sold, the calculation is at para.69 of our Opening).

f. Of course, we will ask the Court not to accept Zhou’s assertion of selling Xinrui at US$3.5M for the reasons we set out in §§56 & 57 of Our Opening.”

75.  With the picking of US$8m and “hybrid” model agreed by experts at the examination, I agree with Mr Pao and that Zhou should pay SAIF US$800,217.60 for his share of contribution or carry.

(5) D1 - Salaries from KV

76.  SAIF repeated his similar proposition of salaries earned by Zhou after he left KPCB for KV. The latter took at least the 7 investments from the former. Zhou earned US$1.5 million per year with an annual 3 months’ bonus. Hence, Zhou should pay SAIF US$1,272,321.43 (US$1.5m x1.25 x 4.75 years/7).

77.  Zhou also repeated his argument on the claim of salary by SAIF on that he earned from KPCB.

78.  I repeat my earlier explanation and agree with the sum suggested by SAIF.

(6) D2 – Management fees from KV

79.  Mr Pao said that Zhou had admitted to be the owner and controller of Keytone Management. KV had US$200m assets under management. Zhou also said that the management fee was 2.5% per annum (0.625% per quarter). Hence, with the same formula, he should pay SAIF US$3,392,857.14 (US$200m x 2.5% x 4.75 years/7).

80.  Mr Barlow reiterated his argument in management fees from KPCB.

81.  As in the management fees regarding KPCB, I accept the case of SAIF and reject the arguments of Zhou. Hence, he should pay SAIF as proposed.

(7) D3 – Share Options in Keygate

82.  SAIF asked for the second time share options in Keygate benefited by Zhou. I have declined it earlier. For the same reasons, I also decline the same again.

SUMMARY

83.  To sum up the above, Zhou should pay SAIF a total of US$5,933,253.31.

		US$
B1	Salaries from KPCB	267,857.14
B2	Management fees from KPCB	200,000
B3	Share Options in Keygate	0
C	Capital Gain and Carry from KV	800,217.60
D1	Salaries from KV	1,272,321.43
D2	Management fees from KV	3,392,857.14
D3	Share Option in Keygate	0
	Total	5,933,253.31

INTERESTS

84.  As to interest, Mr Pao suggested prime + 1%, the usual commercial rate to be payable from the respective due dates of sums under different heads.

Heads	Particulars	Justification	Interest Starting Date
B1	Salaries from KPCB	When Zhou left SAIF	April 2008
B2	Management fees from KPCB	When Zhou left SAIF	April 2008
B3	Share Options in Keygate	When Zhou left SAIF	April 2018[25]
C	Capital Gain and Carry from KV	Distribution should take place shortly after end of the year	February 2012
D1	Salaries from KV	Salaries should be paid annually after Zhou started to work in April 2008	(a) April 2009: US$267,857,14 (b) April 2010: US$267,857,14 (c) April 2011: US$267,857,14 (d) April 2012: US$267,857,14 (e) December 2012: US$267,857,14 x 0.75
D2	Management fees from KV	Management fees should also be paid annually after Zhou started to work in April 2008	(a) April 2009: US$714,285.71 (b) April 2010: US$714,285.71 (c) April 2011: US$714,285.71 (d) April 2012: US$714,285.71 (e) December 2012: US$714,285.71 x 0.75
D3	Share Option in Keygate	When KV purportedly disposed of Xinrui	July 2011[26]

85.  Zhou’s case was that he did not need to pay SAIF anything, let alone interest.

86.  The interest rate falls within the usual range allowed by the court in commercial dispute. The respective starting dates are reasonable. I would grant them accordingly until the date of this decision and thereafter at judgment rate until payment.

COSTS

87.  Costs follow event. I see no reason to depart from it. SAIF is the winner or substantive winner in the taking of account exercise. As to those costs reserved by me in the PTRs and summons heard by me throughout the relevant period, I also see fit to award costs to SAIF. There will be a costs order nisi that costs of the present taking of account, all PTRs and summons(es) with costs reserved, be borne by Zhou to SAIF, with certificate for 2 counsel for all hearings before me, to be taxed if not agreed.

88.  Last but not least, it remains for me to express my sincere gratitude towards all counsel for their assistance in the matter.

Mr Barrie Barlow, SC, and Mr Chan Pat-lun, instructed by MinterEllison LLP, for the plaintiff

Mr Jason Pow, SC, and Mr Alexander Tang, instructed by Fangda Partners, for the 1^st defendant

HCCL 16/2016

[2020] HKCFI 2952

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 16 OF 2016

(TRANSFERRED FROM HIGH COURT ACTION NO 1551 OF 2010)

___________________

___________________

HCMP 208/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 208 OF 2020

___________________

__________________

__________________

(Heard Together)

________________

D E C I S I O N

________________

1.  There are 2 Summonses before the court by which Zhou[1] seeks leave to appeal against the Decision of this court dated 17 September 2020 (“Decision”), as well as a stay of proceedings pending appeal.

2.  The Decision dealt with 2 applications by Zhou, namely, (a) to set aside an order granting leave to SAIFs to commence committal proceedings against him (“Leave Challenge”); and (b) set aside another order dispensing with personal service and for substituted service of the Originating Summons (“OS”) against him for the contempt proceedings (“Jurisdiction Challenge”).  Both applications were dismissed.

3.  Zhou contends that there are reasonable prospects of success in the grounds of appeal contained in the draft Notices of Appeal: see Wong Kar Gee Mimi v Severn Villa Ltd [2012] 1 HKLRD 887, §§29-30.  Zhou also relies on s.14AA(4)(b) of the High Court Ordinance, Cap 4: “there is some other reason in the interests of justice why the appeal should be heard”.

4.  With respect, I agree with SAIFs that the proposed grounds of appeal are re-gurgitation of the arguments heard and dismissed by the court.  I can find no real analysis in the skeleton arguments of Zhou on why the court had erred in the Decision. 

5.  I was unable to find merit in Zhou’s Challenges at the previous hearing, and I remain of the same view. 

6.  It is contended in ground 3 of the Leave Challenge that the court was confused about the timing where Lin 5^th was filed (Decision, §49).  However, it is clear from the Decision that the timing point was not an important one, and would not have affected the outcome since the court took the view that Lin 5^th was not material for the leave application. 

7.  Notwithstanding my view on the merits of the proposed grounds, I believe that the point of law concerning the necessity to invoke O.11 for service of the OS on Zhou when he had already submitted to the jurisdiction of this court by bringing proceedings against SAIFs (Decision, §§75-79) deserves the consideration of the Court of Appeal.  A decision from the higher court will likely put an end to similar argument by alleged contemnor based on authorities such as Mercedes Benz v Leiduck [1996] 1 AC 284. 

8.  Mr Tang, who appeared for SAIFs, had drawn the attention of this court to Liao Chen Toh v Loyal International Enterprises Co Ltd[2020] HKCFI 2661, where DHCJ Liu gave leave to appeal on precisely the same point of law. 

9.  Accordingly, I would only grant leave to appeal pursuant to proposed grounds (2) and (3) of the Jurisdiction Challenge.  For completeness, although on the same topic, grounds (4) and (6) are mere verbiage. 

10.  As regards the stay, I do not agree with Zhou that the appeal would be rendered nugatory in the absence of a stay due to his submission to jurisdiction by reason of participation in the contempt proceedings: see Rich Village Ltd v Grand Pride Holdings Ltd [2013] 1 HKLRD 389, §9.  Further, Mr Tang had informed the court that a letter will be sent to Zhou confirming that SAIFs will not be taking such point against him. 

11.  I am in agreement with Mr Tang that a stay of proceedings would mean that the contempt proceedings would be kicked into the long grass.  I agree with M Ng J in Chu Kong v Sun Ming[2020] HKCFI 2022, §120, that contempt proceedings should be dealt with “swiftly and decisively”. 

12.  There is already considerable delay in the resolution of the account proceedings.  It is evident from the procedural history that Zhou has no desire to have the account proceedings determined and he is resisting every step of these proceedings.  Having met their payment obligations in favour of Zhou under the Judgment of DHCJ Field, SAIFs have every right to expect the judgment on their counterclaim against Zhou would be resolved without delay.  Equally, SAIFs are entitled to believe that the contempt proceedings may cause Zhou to comply with the disclosure order against him for the purpose of the account proceedings. Thus, a stay would be prejudicial to SAIFs. 

13.  In the premises, I decline the stay application.

14.  Accordingly, the Summons for the Leave Challenge is dismissed.  For the other Summons, leave to appeal is granted on proposed grounds (2) and (3) only. 

15.  As for costs, I make an order nisi that: (i) the costs of the Leave Challenge Summons be paid by Zhou; (ii) ½ of the cost of the Jurisdiction Challenge Summons be paid by Zhou and the remainder be costs in the cause of the appeal. For taxation purpose, taking a global view of the 2 Summonses, I apportion the costs of the hearing equally between the same.

[1] The nomenclature used in the Decision dated 17 September 2020 is herein adopted.

HCCL 16/2016

[2020] HKCFI 2423

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 16 OF 2016

(TRANSFERRED FROM HIGH COURT ACTION NO 1551 OF 2010)

________________________

________________________

HCMP 208/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 208 OF 2020

________________________

________________________

________________________
(Heard Together)

________________________

D E C I S I O N

________________________

1.  There are 2 Summonses before the court. They were both taken out by Mr Zhou, who is the Plaintiff in HCCL 16/2016 and the Defendant in HCMP 208/2020.

2.  By his Summons filed on 9 June 2020 in HCCL 16/2016 (“HCCL Summons”), Zhou applies to set aside an order of DHCJ Field dated 5 February 2020 granting, inter alia, leave to the Defendants (“SAIFs”) to commence committal proceedings against him.  By another Summons filed on 22 June 2020 in HCMP 208/2020 (“HCMP Summons”), Zhou seeks to set aside this court’s Order to dispense with personal service and for substituted service in respect of the Originating Summons issued against him for contempt of court (“OS”).

Background

3.  The disputes between the parties had been the subject matter of a number of judgments, decisions and rulings of the court.  The following is a summary of the relevant facts, in particular, the material procedural steps.

4.  In HCCL 16/2016, DHCJ Field gave judgment on 14 February 2018 against, inter alia, Zhou on a Counterclaim for breach of fiduciary duty, and declared a duty on his part to account to the 1^st Defendant (“SAIF LP”) to disgorge any profit made in respect of an investment.  Zhou’s appeal against the judgment was dismissed by the Court of Appeal on 12 July 2019.

5.  On 18 September 2018, Zhou filed his first affirmation (“Zhou 1^st”) in purported compliance with the duty to account.  SAIFs took issue with the adequacy of Zhou 1^st, and applied for further directions from the court as to the manner in which disclosure in aid of the account should be made, and how the account should be taken.

6.  In a Ruling dated 26 June 2018, DHCJ Field disagreed with Zhou that he had by Zhou 1^st provided a proper account.  Consequently, the learned Judge made a comprehensive order covering the disclosure to be made by Zhou for the account, and the directions for the taking of the account (“June 2018 Order”).

7.  On 13 July 2018, Zhou applied for a stay of the June 2018 Order pending appeal.  On 11 January 2019, DHCJ Field declined the application.  In his Ruling, the learned Judge observed that “[t]here has been very considerable delay in the taking of this account.”

8.  On 18 February 2019, SAIFs were provided with a draft of Zhou’s 4^th affirmation[1] (“Zhou 4^th”) in purported compliance of the June 2018 Order.  SAIFs did not regard Zhou 4^th as compliant.  By a letter from their solicitors (“Fangda”) dated 6 March 2019 to Zhou’s solicitors (“MinterEllison”), SAIFs set out what they contended to be the deficiencies in Zhou 4^th.  No reply was made to the letter. 

9.  On 25 March 2019, SAIFs applied for a further order, to clarify any interpretation differences between the parties and to give Zhou another chance to comply with the June 2018 Order (“Further Order Application”). 

10.  The Further Order Application was delayed when Zhou made another application for a stay pending appeal, which was successful.  It should be noted that in his appeal Zhou also challenged the June 2018 Order, including the power to make the Order and the breadth of it. 

11.  After the dismissal of Zhou’s appeal in July 2019, the Further Order Application came before this court on 9 September 2019.

12.  This court dismissed the Further Order Application in light of Zhou’s stance that he had fully complied with the June 2018 Order and he “steadfastly declines a second chance”.  Upon SAIFs’ undertaking to initiate contempt proceedings against Zhou within 28 days, the costs of the Further Order Application were ordered to be in the cause of the contempt proceedings.

13.  On 8 October 2019, SAIFs sought ex parte leave to commence contempt proceedings against Zhou.  The application was made by letter submissions of that date.  It was supported by, inter alia, a Statement dated 3 October 2019 (“Statement”) and the 4^th affirmation of Ho-Ping Lin (“Lin”) filed on 8 October 2019[2].

14.  On 5 February 2020, DHCJ Field granted leave to commence contempt proceedings and dispensed with the requirements for personal service of the June 2018 Order with a penal notice endorsed thereon.  In his Decision handed down on 11 March 2020, the learned Judge observed that “it is distinctly arguable that [Zhou] is in breach of the [June 2018 Order]”.

15.  On 7 May 2020, Zhou filed his HCCL Summons. 

16.  By reason of the General Adjourned Period, the OS was only taken out on 10 March 2020.  Fangda attempted to serve the OS on MinterEllison on 11 March 2020.  On 18 March 2020, Minter Ellison replied that they had no instructions from Zhou to accept service.  The refusal to accept service led to the adjournment of the first hearing of the OS pending SAIFs’ application for, inter alia, substituted service.

17.  On 8 May 2020, SAIFs applied ex parte for leave to dispense with personal service of the OS and for substituted service.  The application was supported by Skeleton Submissions and Lin’s 1^st affirmation under HCMP 208/2020.

18.  By a letter dated 11 May 2020 to Zhou, MinterEllison and Fanda, Zhou was asked by the court to confirm whether he maintained refusal to accept service.  No reply from Zhou or his solicitors was received.  By a Decision dated 4 June 2020, the court granted dispensation of personal service of the OS and ordered substituted service of the OS and the supporting material on MinterEllison.  Service was effected on 8 June 2020.

19.  On 22 June 2020, Zhou filed his HCMP Summons.

20.  For completeness, in respect of the accounting exercise, SAIF LP had filed its objection to Zhou’s account on 20 November 2019.  A PTR was fixed before a Master.  Unfortunately, it had to be re-fixed to 3 September 2020 by reason of the Covid-19 pandemic.

21.  Further, there is an appeal by Zhou to the Court of Final Appeal which will be heard on 1 December 2020.

Issues

HCCL Summons

22.  Three grounds of complaint had been put forward by Zhou in the HCCL Summons: (a) the 2^nd Defendant (“SAIF GP”) does not have locus; (b) material non-disclosure; and (c) DHCJ Field should not have dispensed with personal service of the June 2018 Order.

23.  In his viva voce submissions, Mr Barlow SC, who appeared with Mr Chan for Zhou, also argued that the Statement had failed to make out a prima facie case of contempt. 

HCMP Summons

24.  Likewise, 3 grounds had been advanced by Zhou.  In addition to the locus point and material non-disclosure (largely the same arguments made in the HCCL Summons were also deployed here), there is a point of law whether the court had jurisdiction over the service of the OS on Zhou given that he resided (and resides) in Florida, USA. 

Law

25.  Contempt proceedings should be only be brought as a last resort when no alternative powers of the court could be invoked: see Hong Kong Civil Procedure 2020 (“HKCP”), vol 1, [52/1/8].

26.  There are strict requirements in respect of the O 52, r 2 statement used to support the leave application.  Such a statement “is to be treated in a similar manner as an indictment in criminal proceedings”, and should “state all the factual elements which, if proved, are sufficient to establish the contempt”, “how and in what manner is it alleged the order … has been breached, with sufficient particularity to inform the alleged contemnor … what it is that he has done or failed to do which constitutes the contempt”. Leave granted pursuant to a defective statement may be set aside: HKCP, [52/2/6].

27.  In Citybase Property Management Ltd v Kam Kyun Tak [2003] 2 HKC 98, it was held by Ma J (as he then was) :

“14. Before considering whether a contempt has been committed where the breach of a court order is involved, the court must be satisfied of the following:

(1) The relevant order, together with an appropriate penal notice, must generally have been personally served on the alleged contemnor: RHC Order 45, rule 7(2)(a), (4). …

(2) The relevant order must also contain, as I have said, a penal notice.  Where there has been a failure in this regard, the court nevertheless has the power to enforce the order subject of course to the exercise of its discretion: see Order 45, rule 7(6); Hong Kong Civil Procedure 2002 at para 45/7/6.  However, it is in my view essential that the alleged contemnor shall have been told, whether by being present in court or by being notified by telephone, telegram or otherwise, that the consequences of breaching any order made is to be held in contempt of court and liable to a process of execution.  This I regard as a natural consequence of Order 45, rule 7(4) which requires a penal notice to be endorsed on the relevant order.  In my view, whether the penal notice is made in writing or given orally, the alleged contemnor must be made aware of the consequences of a breach of the relevant order.  It would be an extremely rare exercise of discretion under Order 45, rule 7(6) for the court to dispense with this requirement and in principle, I cannot conceive of any circumstances in which it would be right to dispense with such a requirement: c.f. Hong Kong Civil Procedure 2002 at para 52/2/9.”

28.  On the exercise of discretion under O 45, r 7(7) to dispense with personal service and/or the penal notice, the court was referred to 3 authorities by the parties.  The highest authority is the Court of Final Appeal case of Kao, Lee & Yip v Koo Hoi Yan (2009) 12 HKCFAR 830, at §69.  Not dissimilar to the present case, it was a case about a breach of a duty to account and there was an issue on dispensation from the requirement for personal service of the underlying order.  It was held (the judgment was given by Brennan NPJ) that :

“… The purpose of O.45, r.7(2) is to ensure that notice of the Order is given to the party bound. In this case, the first Order for the maintaining of an account of work followed Mr Koo’s proffering of his keeping of a record of work for former KLY clients as a reason for refusing an injunction preventing him from commencing the practice of KP. Then the Order was considered by him and his solicitor shortly after the Order was made in order to chart his future conduct. In the circumstances, it is entirely just to make a dispensing order.”

29.  I agree with Mr Manzoni SC, who appeared with Mr Tang for SAIFs, that the CFA took a common sense approach in resolving the issue.  On the facts of that case, evidence that Koo must have considered the Order with his solicitors was held sufficient to support a dispensation order.  The ultimate question was whether it was just to make the order.

30.  In AXA China Region Insurance Co Ltd v Li Yu Ping [2002] 3 HKC 339, giving the judgment of the court, Stock JA :

(1)  held that the power to dispense with service applied to mandatory as well as to prohibitory orders, and that the court is conferred with an unfettered discretion under O 45, r 7(7) (§34);

(2)  cited with approval from Jolly v Staines County Court Circuit Judge [2000] 2 FLR 69 where the English Court of Appeal held that :

“In principle the jurisdiction should not be exercised too readily, lest what should be a dispensing power for use in exceptional circumstances may gradually undermine the express requirements of Ord. 29, r.1(3).” (§36);

(3)  held that there is also a power to dispense with the penal notice requirement (§37);

(4)  adopted the legal test in Nicholls v Nicholls [1997] 1 WLR 314 (Lord Woolf, MR) – that the discretion must be exercised “in a way which in all the circumstances best reflects the requirements of justice.  In determining this the court must not only take into account the interests of the contemnor but also the interests of the other parties and the interests of upholding the reputation of civil justice in general.” (§44);

(5)  on granting dispensation (the Order was served on the contemnor with a penal notice but those requirements were not met in respect of a later order which varied it), took into consideration the fact that the contemnor had filed had an affirmation in purported compliance with the Order (as varied) which evidenced that she knew she was legally obliged to do so and that failure to do so would lead to consequences (§46).

31.  In Lau Yee Ching v Wong Tak Kwong, unrep, HCCW 807/2004, 6 October 2005, Kwan J (as she then was), at §39, held that the discretionary power for dispensation should be only be exercised where the court is satisfied beyond reasonable doubt that :

(1)  the contemnor knew of the terms of the Orders;

(2)  the contemnor was well aware of the consequences of disobedience;

(3)  the contemnor was aware of the grounds relied on as a breach with sufficient particularity to be able to answer the charge.

32.  Lau Yee Ching was followed in Willwin Development (Asia) Co Ltd v Wei Xing, unrep, HCMP 2946/2014, 12 October 2015, at §90, per B Chu J.

33.  Mr Manzoni submitted that the test in Lau Yee Ching is a narrow one, whilst the higher courts have kept the test flexible.  Lau Yee Ching pre-dated Kao, Lee & Yip, and therefore should be considered to be subject to the later CFA decision.  In Willwin Development, it does not appear that the CFA decision was cited to the court.  I shall return to Lau Yee Ching below.

Analysis

HCCL Summons – Locus

34.  Zhou complains that SAIF GP has no locus in bringing contempt proceedings because the June 2018 Order provided that the account is to be provided to SAIF LP.  Firstly, it is, at the highest, a procedural point and only goes to costs.  There is no dispute that SAIF LP has locus to enforce the June 2018 Order and it is a party to the contempt proceedings.

35.  Secondly, I agree with Mr Manzoni that the objection is without basis because SAIF GP is a beneficiary of any profit which may be disgorged in the account exercise :

(1)  SAIF LP is a Cayman Islands limited partnership of which SAIF GP is its general partner[3];

(2)  As analysed by the Court of Appeal in Zhou’s application for leave to appeal to the CFA, such a partnership is not a separate legal entity, ie, it is a partnership in the true sense, and “SAIF PARTNERS II L.P.” is simply the firm-name denoting all the partners[4];

(3)  SAIF GP is a partner of SAIF LP;

(4)  Zhou therefore has a liability to account to SAIF GP as a partner of SAIF LP.

36.  Mr Manzoni also pointed out that SAIF GP had provided an undertaking under the June 2018 Order, and therefore entitled to enforce it.  Mr Barlow said that the undertaking had to be given by SAIF GP because it was the controlling partner.  I do not believe that this matter adds much to the above analysis.

Material non-disclosure

37.  The law in this area is trite and requires no reiteration. 

38.  Zhou has 3 complaints[5] :

(1)  SAIFs withheld from DHCJ Field his known case that he had complied with the June 2018 Order by the filing of Zhou 4^th;

(2)  SAIFs failed to disclose to the learned Judge that by filing their evidence (Lin 5^th) in objection to Zhou 4^th, SAIF LP had triggered the account-taking trial process thereby rendering the contempt proceedings unnecessary and an abuse of process;

(3)  SAIFs failed to inform the learned Judge that Zhou had complied with the disclosure obligations under the June 2018 Order by providing his 5^th, 6^th and 7^th affirmations.

39.  In respect of (1), it is very difficult to understand.  The alleged compliance is nothing but Zhou’s own insistence.  His case in this regard was summarized in §29 of the Statement, and it was clearly taken into account by DHCJ Field in his Decision on Application for Leave to apply for an Order of Committal dated 11 March 2020, §§7-8.  There was no non-disclosure.

40.  Further, the learned Judge granted the June 2018 Order and had a full understanding of the obligations it imposed.  In para 11 of the Decision, the learned Judge expressed the view that there is a distinctly arguable case that Zhou is in breach of the order.

41.  In respect of (2), by relying on (a) the principle that contempt proceedings is one of last resort (see para 25 above) and (b) an observation by this court in the Decision on the Further Order Application that: “… the precious resources of the court should be expended on either contempt proceedings against [Zhou] or in the taking of the account … to falsify the account put forward by him”, Mr Barlow argued that the contempt proceedings is an abuse of process. 

42.  I am unable to agree.  To begin with, the said observation was not a ruling made on contested arguments and cannot be used to limit the course open to SAIFs. 

43.  Secondly, SAIFs have never accepted Zhou 4^th as compliant with the June 2018 Order.  Para 11 of Lin 5^th stated as follows :

“I wish to state at the outset that [SAIF LP] is of the firm view [Zhou] has failed to comply with the [June 2018 Order] for failing to produce a satisfactory account.  … [SAIF LP] is thus handicapped from properly raising objections.  … The present notice of objection is compiled on the basis of the “account” which [Zhou] has so far provided … [SAIF LP] reserves the right to refer to any further disclosure arising out of, inter alia, the contempt proceedings.”

44.  To put the matter in proper context, the June 2018 Order provided a timetable for the taking of account. Lin 5^th was filed in compliance with the same, and under an unless order[6].

45.  Further, it is quite clear from Lin 5^th that SAIF LP’s position is that by reason of Zhou’s failure to comply with the June 2018 Order, in particular the disclosure obligations therein contained, it is handicapped in presenting its case and has to fall back on asking the court to draw inferences against Zhou. 

46.  I accept Mr Manzoni’s submission that the accounting process will not resolve the inadequacy of Zhou’s compliance with the June 2018 Order.  I am unable to see why it is an abuse of process for SAIFs to pursue the contempt proceedings in the circumstances.  Zhou cannot, by his refusal to comply with a court order, limit the right of SAIFs to enforce that order. 

47.  Finally, the principle of last resort has been misused by Zhou. The authority of Kennedy v Cheng Kelly (2009) 12 HKCFAR 601 cited by Mr Barlow provides an illustration of the proper application of the principle.  In that case, the liquidator of a company disclosed the transcripts of private examination of the former directors of the company conducted under s 221 of the Companies Ordinance, Cap 32.  The CFA held that no contempt was committed. Para 16 of the judgment referred to the finding of the High Court on one of reasons advanced by the liquidator in support of his argument that there was no case to answer on the contempt.  Kwan J (as she then was) referred to the principle of last resort and took the view that even if the directors’ complaints were justified, “it is clear that there were other steps that they could have taken.  There was … ‘simply no need to resort to contempt proceedings’”.

48.  The issue in Kenney was whether the leave of the court was required for the disclosure of the transcript (see §1).  Apart from this obvious difference, in the present case there is no other step open to SAIFs to obtain compliance by Zhou.  In Kennedy, the directors might seek an injunction to prevent the use of the transcripts.

49.  For completeness, I agree with Mr Manzoni that given that Lin 5^th was filed after leave was grant to bring contempt proceedings, at the highest, disclosure of Lin 5^th could only be in fulfilment of SAIFs’ continuous obligation of disclosure.  For the reasons already discussed, I do not believe that Lin 5^th has any material impact on the consideration of leave.  There is no material non-disclosure. 

50.  As regards (3) (see para 38 above), there is nothing in the complaint.  Zhou’s 5^th to 7^th affirmations were all brought to the notice of DHCJ Field: see Lin 4^th, §7(o), (u) and (v). 

Prima facie case

51.  Zhou’s bold challenge that there is no prima facie case of contempt against him has no merit.  It is inappropriate for the court to engage in a detailed analysis of the issues which are likely to be ventilated in the contempt proceedings.  For the present purpose, I need only say that I agree with the observation of DHCJ Field that: “In my judgment it is distinctly arguable that Mr Zhou is in breach of the [disclosure obligations under the June 2018 Order] as alleged by [SAIFs].”

Dispensation

52.  There are 2 scattergun points made by Zhou which can be dealt with briefly.  In respect of the complaint that the dispensation order was applied for ex parte, I agree with Mr Manzoni that O 52, r 2(2) provides that leave to commence contempt proceedings should be obtained ex parte. It is a requirement for leave to be granted that there be proof of personal service: HKCP [52/2/6].  The application for dispensation of the requirement for personal service (and penal notice) was rightly taken out in the context of the wider leave application. 

53.  As regards other procedural “defects”, DHCJ Field was clearly informed of the fact that the June 2018 Order had not been sealed promptly (it was sealed on 28 March 2019), nor had it been served in accordance with the normal requirements: see Statement, §§43 to 45 and the Leave Decision, §12.

54.  The dispensation involved two aspects – personal service of the June 2018 Order and penal notice. 

55.  In respect of the failure to personally serve the June 2018 Order, endorsed with a penal notice, on Zhou.  SAIFs’ evidence was that the sealed order (without a penal notice) was served on Zhou’s solicitors on the day it was sealed.  It is common ground that Zhou resided (and resides) in Florida. 

56.  Mr Manzoni submitted that this case should be considered in light of the fact that Zhou had actively participated in the proceedings, including of course the application which led to the June 2018 Order, and had been represented all along by a team of lawyers of good standing.  Indeed, Zhou was represented by Senior and junior counsel in that application, which was extensively contested[7]. Thus, Zhou was fully aware of the relief sought against him by SAIFs and the Order subsequently made. 

57.  In the circumstances of this case, I can understand why the sealed Order was served on Zhou’s solicitors, especially when he resided abroad.  However, it should be said that more could have been done to ensure the compliance with the service requirements, eg, Zhou could have been asked via his solicitors if he would waive such requirements or efforts could have been made to serve the Order, properly endorsed, on him in Florida.  The court does not lightly overlook the non-compliance.  On the other hand, the law dictates that it is a matter which should be taken into consideration on the requirements of justice: see AXA China Region Insurance, which is binding on this court. 

58.  The fact that Zhou was and is fully aware of the terms of the June 2018 Order is not open to doubt.  In Zhou 2^nd (used in support of his stay application) and Zhou 4^th, both of which were filed by his solicitors, the terms of the June 2018 Order were recited.  The June 2018 Order was later challenged in Zhou’s appeal unsuccessfully. 

59.  It can be seen from the contents of Zhou’s affirmations, especially Zhou 4^th and Zhou 5^th, that he repeatedly argued that he had complied with the June 2018 Order.  Undoubtedly, these arguments were advanced with the benefit of the advice of his lawyers.  It would be very surprising if Zhou was not advised about the consequences of failure to comply with the Order.  There is considerable force in Mr Manzoni’s submission that the repeated acknowledgment and arguments made in Zhou’s affirmations that he had complied with the Order demonstrate that Zhou knew that he needed to comply and that there would be consequences of disobedience.

Personal service

60.  Drawing the strands together, there is a clear case for the dispensation of personal service.  Zhou was and is fully aware of the terms of the June 2018 Order (even the narrower test of Lau Yee Ching (see para 31 above) would be satisfied).  Thus, the lack of personal service resulted in no prejudice to him.  The requirements of justice are strongly in favour of dispensation.  I should say that the persistent non-compliance here, if established, flies in the face of the court. 

Penal notice

61.  Much of the above analysis applies to the consideration here. However, it was submitted by Mr Barlow that the Lau Yee Ching test cannot be satisfied based solely on the fact that Zhou was advised by his lawyers.  But the evidence goes further than that. 

62.  It may be helpful to revisit first principles and consider the rationale for a penal notice.  In Bell v Tuohy [2002] 1 WLR 2703, CA, Neuberger J (as he then was) observed at §53 :

“The purpose of giving notice in writing to a defendant to the effect that his failure to comply with a court order could lead to his being sent to prison is to bring home to him the terms of the court order and the seriousness of his failing to comply with that order, and to give him a proper opportunity to consider his position, to take advice, and to make appropriate arrangements. In the the present case, I think that, by the time the judge decided to commit Mr Tuohy, he had had every possible opportunity to appreciate and consider his position, …”

63.  The further evidence which goes to show that Zhou was aware of the consequences of breach of the June 2018 Order came from what transpired at the hearing of the Further Order Application.  At that hearing, Zhou, acting by his lawyers, steadfastly declined a second chance to comply.  There is considerable force in Mr Manzoni’s submission that it was something that no lawyer would do unless Zhou was fully informed of his rights and the consequences of non-compliance.  Moreover, the following exchange took place between Senior Counsel of the parties :

“Mr Pow SC: Do I take my learned friend’s not responding as an acknowledgment that they do not want a second chance to comply with the order, knowing that we’ll move for contempt?

Mr Barlow: … [my client’s] position is that he’s complied with the order.  Now if there are contempt proceedings, as we know, ignorance of the law is no excuse.”

64.  The costs of the failed Further Order Application were ordered to be in the cause of the contempt proceedings which SAIFs undertook to initiate. There was thus ample warning of the contempt proceedings.

65.  In my view, what was said by Senior Counsel on behalf of SAIFs at the hearing of the Further Order Application is no different to a penal notice as a matter of substance.  Clearly, Zhou was warned that if he refused to comply with the Order, contempt proceedings would follow.  Indeed, SAIFs gave an undertaking to commence such proceedings.

66.  A penal notice is a convenient way by which the consequences of disobeying a court order are brought to the awareness of the person subject to the order.  In Citybase Property, Ma J (as he then was) acknowledged that a penal notice might be given orally (see §14(2) at p.102F).

67.  Apart from Mr Manzoni’s submission that in declining a further chance to comply with the Order through his Senior Counsel, Zhou must have been fully advised by his legal team about the seriousness of the matter and the consequences of disobedience, it is inconceivable that Zhou’s team of lawyers would have failed to advise him on the outcome of the proceedings and the expectation of contempt proceedings. 

68.  In these circumstances, I have no reasonable doubt that Zhou was and is fully aware of the consequences of disobeying the June 2018 Order. 

69.  For these reasons, I am of the view that exercising the discretion vested in this court under O 45, r 7(7) to dispense with the service of the Order would best reflect the requirements of justice.

70.  It must follow from the above discussions that the 2^nd requirement of Lau Yee Ching test is also satisfied. 

3^rd requirement of Lau Yee Ching

71.  With respect, I do not believe that the 3^rd requirement of awareness of the grounds relied on as a breach with sufficient particularity applies to dispensation of personal service or endorsement of a penal notice on the order to be enforcement.  The function of informing the contemnor the grounds relied on as a breach with sufficient particularity belongs to the statement filed pursuant to O 52, r 2(2). 

72.  I have examined all the authorities cited in para 39 of Yau Yee Ching.  It is apparent that the reference to the 3^rd requirement came from the first instance judgment (HHJ Alton) which was cited in para 29 of the judgment of the Carnwath LJ in Benson v Richards [2002] EWCA :

“Having identified these technical problems, [HHJ Alton] noted that under CCR 29 Rule 1 the Court had a discretion to dispense with service of the order or the application notice if it thought it just to do so; and that by implication this would also involve dispensing with the requirement for a penal notice (p 22). However, in deciding whether to exercise that discretion, the court would need to be satisfied that the purposes of the requirements had been achieved. As she put it, the court would have to be satisfied “beyond reasonable doubt” that the defendant knew the terms of the orders relied on, that she was well aware of the consequences of disobedience, and that she was aware of the grounds relied on as a breach with sufficient particularity to be able to answer the charge (p23).”

73.  It is reasonably clear that the 3^rd requirement was in relation to the “application notice”.  In Benson, HHJ Alton was dealing with the committal proceedings.  Under County Court Rules 1981, Ord. 29, r. 1(4), an application notice was required to initiate the committal proceedings and it had to be served on the contemnor personally.  Pursuant to r. 1(4A), the notice should be supported by an affidavit stating the grounds on which the application was made and the affidavit had to be served with the notice.  Those procedural requirements (application notice and supporting affidavit) may be equated with an originating summons, the statement and verifying affidavit prescribed under O 52, RHC. 

74.  Even if I were wrong on the applicability of the 3^rd requirement, I agree with Mr Manzoni that the narrower test can be satisfied in this case. It would be disingenuous for Zhou to claim that he is not aware of the grounds relied on by SAIFs as breaches of the June 2018 Order with sufficient particularity. One only needs to examine the terms of that Order and the purported compliance by Zhou to see the mismatch.  The letter from Fanda to MinterEllison dated 6 March 2019 which highlighted the deficiencies in Zhou 4^th was ignored (see para 8 above).

Jurisdiction

75.  Zhou’s argument here is that, based on a number of authorities, eg, Mercedes Benz AG v Leiduck [1996] 1 AC 284, there is no applicable gateway under O 11, r 1 for the service of the OS out of jurisdiction on Zhou, and there is no inherent jurisdiction of the court to permit such service either. 

76.  Firstly, the above propositions of law were squarely brought to the attention of the court in SAIFs’ ex parte application for leave to dispense with personal service of the OS and for substituted service: see SAIFs’ written submissions dated 8 May 2020 and the Decision of the court dated 4 June 2020 (“Decision”).

77.  Secondly, the authorities relied upon did not deal with the situation in this case where Zhou, the party to be served with the OS, had brought proceedings in Hong Kong and thereby submitted to the jurisdiction of the Hong Kong court.  The principles adumbrated in those authorities are not in conflict with the analysis set out in the Decision. 

78.  Apart from relying on those authorities, Zhou had not identified any fragility in the analysis in the Decision.  The issue was summarised in para 17 of the same:

“With respect, I fully agree [with the decisions of Teare J]. The analysis of Teare J resonates with common sense. Once a party is under the jurisdiction of the court, it would not be necessary to invoke O 11, which provides for the extension of the court’s jurisdiction (to parties situated aboard), against him. In this case, Zhou brought proceedings against the Plaintiffs in HCCL 16 of 2016. He had submitted to the jurisdiction of the court, and it is unnecessary to invoke O 11 for the service of the contempt proceedings on him.”

79.  In the Decision, this court agreed with and applied the analysis of Teare J set out in two English authorities.  In Annex A of his skeleton arguments, Mr Barlow had included an analysis of the procedural difference of the English regime.  However, the rationale that once a party is subject to the jurisdiction of the court he must also be subject to the same on the incidental contempt proceedings does not turn upon any procedural difference. 

80.  I am unable to see any merit in Zhou’s challenge.

Disposition

81.  For these reasons, both the HCCL Summons and the HCMP Summons are dismissed.  There be an costs order nisi that the costs of both Summonses be paid by Zhou with a certificate for 2 counsel in favour of SAIFs.

82.  I am grateful to counsel for their assistance.

Mr Barrie Barlow SC and Mr Chan Pat Lun, instructed by MinterEllison LLP, for the Plaintiff in HCCL 16/2016 and the Defendant in HCMP 208/2020

Mr Charles Manzoni SC and Mr Alexander Tang, instructed by Fangda Partners, for the 1^st to 2^nd Defendants in HCCL 16/2016 and the 1^st to 2^nd Plaintiffs in HCMP 208/2020

HCCL 16/2016

[2019] HKCFI 2467

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 16 OF 2016

(Transferred from High Court Action No 1551 of 2010)

____________

____________

______________

D E C I S I O N

______________

1.  This application is based primarily on Order 45, rule 6 of the Rules of High Court, seeking an order that the Plaintiff do comply with an Order dated 26 June 2018 under which he is obliged to provide an account ordered in a judgment dated 14 February 2018.

2.  The Defendants say that there has been deliberate non-compliance by the Plaintiff of the Order and that by this application he be given a last chance to properly comply with the same.

3.  It is somewhat ironic that the Plaintiff is maintaining the stance that he has fully complied with the Order and he is resisting this application vigorously.  I have to say that in this situation, where the alleged infringer steadfastly declines a second chance, and that there is no suggestion that the terms of the Order are unclear, it is difficult to see why the court should exercise its discretion to impose a second chance on him.

4.  With respect, I am inclined to the view that the precious resources of the court should be expended on either contempt proceedings against the Plaintiff or in the taking of the account where it will be open to the Defendants to cross-examine the Plaintiff and to adduce evidence to falsify the account put forward by him.  Indeed, the procedure for the accounting exercise had been comprehensively provided for in the Order.

5.  I have a great deal of reservation whether the jurisdiction under Order 45, rule 6 is meant for a case where the respondent had steadfastly refused to comply with the court order.  There seems to be no reason to believe that making another order in largely the same terms as the existing one by this court would produce a positive result for the Defendants.

6.  The Defendants rely heavily on Re Ho Yuk Wah David (bankrupt) [2015] 2 HKLRD 603.  It was a case where the respondents were liquidators of a company.  It was found by the court that in respect of one of them, he was not acting reasonably in complying with the order.  Various arguments concerning the scope of the order and the entitlement of the applicant were raised.

7.  It is important to note the following dicta of To J at para 19 :

“… in considering whether to exercise the discretion under this rule, there is no need for the court to revisit the appropriateness or otherwise of its previous order. The question is simply whether in all the circumstances the respondent should be excused from performing the act under its previous order. As the court’s orders are made to be complied with, such circumstances must be very rare indeed. A possible example would be impossibility of performance as a result of a change in circumstances.”

8.  With respect, the facts of Re Ho Yuk Wah were rather different to those before this court.  I do not see the present case as one involving a very rare set of circumstances which may justify the discretionary order sought.

9.  For completeness, it should be mentioned that the cards are on the table concerning the alleged non-compliance of the Order by the Plaintiff. It is very clear that he is not accepting the second chance offered by the Defendants.  In the event of contempt proceedings, the Plaintiff may be at risk of having these matters taken into account by the court.

10.  For these reasons, I dismiss the Summons and I shall hear the parties on the costs.

Mr Barrie Barlow SC and Mr Chan Pat Lun, instructed by MinterEllison LLP, for the Plaintiff

Mr Jason Pow SC and Mr Alexander Tang, instructed by Fangda Partners, for the 1^st and 2^nd Defendants

HCCL 16/2016

[2019] HKCFI 159

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 16 OF 2016

(TRANSFERRED FROM HIGH COURT ACTION NO. 1551 OF 2010)

________________________

________________________

________________________

R U L I N G

________________________

1.  There is before the court a summons seeking a stay of the taking of an account that was directed by an order made on 26 June 2018. 

2.  The background to the application is this.  Following an 11‑day trial that concluded on 24 January 2017, the court gave judgment on Valentine’s Day, 14 February 2017, dealing with the plaintiff’s claim for sums alleged to be due under provisions in a limited partnership agreement and separation agreement and a counterclaim for restoration of a secret profit made in alleged breach of fiduciary duty. The plaintiff’s claim succeeded  but he was found to be in breach of fiduciary duty in respect of his involvement in developing a project whereby a company (Xinrui) which was separate from the company that had become a portfolio company for Fund II, would develop and monetise what was referred to as Diandao technology. He was accordingly ordered to disgorge any profit that he made personally from the investment agreement dated 24 August 2017 that he was involved in acting for a party thereto, KPCB China Fund LP Limited.  That agreement was referred to in the judgment as the “Xinrui investment agreement”. 

3.  The court ordered that all necessary enquiries and account should be taken to establish such secret profit made personally by the claimant, which would then have to be paid over to the 1st defendant who would receive the secret profit in trust for the investors in Fund II.  A relatively short time after judgment had been handed down, the plaintiff served an affirmation which he contended was in compliance with the order for an account of any secret profit made, in which he stated that no profit at all had been made under the Xinrui investment agreement.  On the contrary, KPCB China Fund LP had made a loss.  It had invested US$8 million and in the end it sold the investment to a third party for around $4 million.

4.  The defendants sought an order from the court directing that this evidence did not satisfy the requirements of the order for an account and specified the particulars of the account that the court ought to direct.  It was that approach to the court that led to the order which is sought to be stayed, the order made on 26 June 2018. The court recognised, when it made that order, that it was making an order that went beyond what conventionally would be directed.  It explained that that was in the light of the findings the court had made as to the falsity of part of the evidence that the plaintiff had given, and in the light of the very sparse discovery that he had given in the proceedings.

5.  On 13 July 2018, the plaintiff issued the summons that is now before the court.  That led to a consent order being made by Justice Mimmie Chan on 24 July 2018 which directed that the summons be adjourned to a date to be fixed in consultation with counsels’ diaries.  It is clear that by 24 August 2017, the date for the hearing of the summons had been fixed to be 11 January 2019 before myself.  As I mentioned in the course of oral submissions, I am very surprised indeed that this summons was adjourned for such a long period of time.  We are talking about 4½ months.

6.  The approach to be adopted by the court when determining an application for a stay of execution pending an appeal was helpfully stated by Ma J (as he then was) in Starplay Development v Bess Fashion Management Company Limited [2007] 5 HKC 84.  The principles enunciated in that case can be stated as follows:  (1) no stay will be ordered unless the applicant can demonstrate a good reason for a stay; (2) by itself, the existence of a merely arguable appeal would not constitute sufficient good reason for a stay; (3) the existence of a strong appeal or a strong likelihood of success of the appeal by itself could constitute a good reason for a stay; (4) a good reason for a stay may also be shown if, without a stay, the appeal would be rendered nugatory or was otherwise disproportionately prejudicial to the applicant for a stay, all this depending on the circumstances of the case; (5) in considering an application for a stay pending an appeal, it is impracticable and undesirable for a court to go deeply into the merits or strengths of the appeal, although the court must still form a preliminary view of the merits; (6) ultimately, the court will need to decide upon the balance of prejudice, being the balance between the prejudice to the respondent of being kept out of the fruits of his judgment, and the prejudice to the applicant or others if no stay is granted. 

7.  In Strix Limited v Otter Controls Ltd [1995] RPC 675, where a stay of an inquiry as to damages flowing from the breach of a patent was sought, Laddie J observed that there was a well-established practice that an applicant for a stay has to show “special circumstances”.  What the court must look at is all the circumstances for and against and decide whether, on balance, there are good reasons to depart from the plaintiff’s normal entitlement to seek assessment and payment of damages as quickly as the court’s procedure will allow. In all cases where a plaintiff wishes to push ahead with an inquiry, he does so at the risk of bearing the costs of the inquiry in case the judgment is overturned on appeal.  The mere existence of the irrecoverable costs and efforts is not by itself a justification for staying an inquiry.  If it were, all inquiries would be stayed.  This is not to say that costs cannot be taken into account. Lastly, commercial sensitivity and confidentiality is a factor, but it can be mitigated by measures such as a confidentiality club. 

8.  This approach of Laddie J was adopted by Chow J in Tang Ying Loi v Tang Ying Ip HCA 2487/2009, and also by Bharwaney J in Zhang Hong Li v DBS Bank (Hong Kong) Limited[2018] HKCFI 34. 

9.  The “good reason” advanced by Mr Barlow QC on  behalf of the plaintiff that justifies a stay is as follows.  All the parties to the judgment are appealing from it and the plaintiff has arguable grounds of appeal; if there is no stay, the plaintiff’s appeal may otherwise be rendered nugatory. The account‑taking exercise is likely to be a lengthy one, and any additional delay to the defendant can be compensated by the compound interest award that has already been imposed by the judgment. And finally, the balance of prejudice favours granting the application. 

10.  The argument that the appeal might be rendered nugatory if the account takes place notwithstanding the appeal is not founded on monetary considerations, but on an apprehension that documents containing information which is confidential and relating to non‑parties will have been made available in the course of the taking of an account to the potential prejudice of third parties which would not occur if the plaintiff’s appeal was successful.

11.  Mr Barlow contends that the balance of prejudice is in support of a stay.  The plaintiff stands to suffer significantly greater prejudice if the account is ordered to proceed, than are the defendants.  The account exercise is wide ranging, it is going to involve considerable industry on the part of the plaintiff and his solicitors and it is going to be costly, whereas any delay in the receipt of any secret profit found to be due on the taking of the account will be compensated by the order that compound interest should accrue on any such secret profit.  Mr Barlow pointed out that the appeals of the plaintiff and the defendants are due to be heard in about the middle of May of this year and the period of time from now to then is therefore, in the overall context, relatively short.  The delay in question should therefore be considered in that light.

12.  He also submitted that the court should take into account the fact that the court’s resources would be engaged in the account process in circumstances where that might never have needed to have happened if the plaintiff’s appeal was successful.  In my judgment, despite the attractive and clearly presented arguments put forward by Mr Barlow, the plaintiff, the burden being on him, has failed to demonstrate that there are special reasons for departing from the normal rule that a pending appeal is no basis or justification for a stay of the judgment being appealed.   

13.  I do not accept in particular the argument that if no stay is granted the appeal would be nugatory.  The issue of confidentiality is dealt with in the order sought to be stayed.  The account has only to be undertaken if the first and second defendants undertake that documents and information provided by the plaintiff in the course of the account will be held confidentially and the documents and information provided shall be used solely for the purposes of seeking to recover any secret profit made by virtue of the Xinrui investment agreement as ordered by the court. 

14.  It is also the case that if documents are found to be of a highly sensitive and confidential nature, an application can be made to the court for further measures designed to protect that confidentiality.  The court is invested with ample powers to order such measures.  These would go beyond the undertakings which have already been required and might lead to parts of any court hearing where such documents are to be referred to,  being held in-camera.  For these reasons, I do not accept the contention that the appeal would be nugatory if a stay is not granted. 

15.  As to Mr Barlow’s contentions on the balance of prejudice, it has to be remembered that at the centre of the court’s deliberations is the requirement that the party seeking a stay must show exceptional circumstances or good reasons for the normal rule that an appeal does not lead to a stay being departed from.  I accept that the accounting order made is wide ranging and it will involve considerable industry on the part of the plaintiff and his lawyers.  It will also lead to considerable expense, but as Laddie J observed in Strix, if no secret profit comes to be awardable following the taking of the account, the defendants will be liable in costs for the steps which the plaintiff has taken to be in compliance with the order.

16.  No costs order will fully compensate the plaintiff for the costs incurred and for the time invested, but as Laddie J pointed out, this is in the nature of the remedy of an account. 

17.  There has been very considerable delay in the taking of this account.  The order was made, as I have stated, in June of 2017, and since the issue of the summons for a stay in July, nothing has been done in compliance with the order.  We are now at the 11 January 2019.  In my judgment, following the hearing of the appeal in the middle of May 2019, judgment is likely not to be given until at least two to three months following the appeal.  That would take things through to around September, and only then the order would kick in giving the plaintiff 36 days in which to carry out the steps identified in the June order. 

18.  This delay does, in my judgment, prejudice the defendants.  As Mr Pow QC pointed out, the compound interest awarded is interest on any sum found to be due.  It will only be upon the establishment of what sum, if any, is due that interest will begin to apply.  The defendants had an entitlement under the judgment that was given almost a year ago to the taking of an account to vindicate their entitlement to such secret profit as the plaintiff made and in my judgment it has not been established that there is good reason that there should be further delay in the necessary account-taking process designed to identify such secret profit as is due to be paid to the defendants. 

19.  For these reasons, I refuse the relief sought in the summons. The account taking exercise must proceed down to the point when the parties will have to return to the court for a decision on the account provided by the plaintiff. Thereafter, the proceedings before the court will be stayed until judgment has been given on the plaintiff’s appeal.  

20.  Turning to the question of costs, it is true that the issue as to whether the undertaking first given by the first defendant was in conformity with the order came to be decided in these proceedings, and that is an issue that had to be decided, especially if the summons was dismissed.  However, in the exercise of the court’s discretion, I do not think it appropriate to proceed on an issue-style basis here regarding the order for costs.  There are a number of authorities where the court has concluded that although certain issues have not been successfully prosecuted by a plaintiff, overall, the plaintiff has succeeded and succeeded roundly and it is not appropriate to deny a defendant his costs. This is the view I take here and I bear in mind not only that consideration, but also I am not persuaded that the first draft of the undertaking involved any inappropriate intent to try and achieve some wriggle room in respect of the undertaking that the court required.  That said, it was an insufficient undertaking. It ought to have been in the wording that the court ordered. That, I am clear about.

21.  For these reasons, the undertaking issue taking up only a very small part of today’s proceedings, I do not propose to order any discount as to the costs that must be paid by the plaintiff on the dismissal of his summons. 

HCCL 16/2016

[2018] HKCFI 1448

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 16 OF 2016

(TRANSFERRED FROM HIGH COURT ACTION NO 1551 OF 2010)

______________

______________

____________________________

RULING ON HOW THE TAKING OF
AN ACCOUNT OF THE PROFIT MADE
BY THE PLAINTIFF ON THE KPCB
CHINA FUND LP IN XINRU (KEYGATE)
SHOULD BE TAKEN

____________________________

INTRODUCTION

1.  In paragraph 198 of the judgment, the Court held that D1 was entitled to an order that the Plaintiff (“P”) disgorge the profit he made personally as a result of the investment made by KPCB China Fund LLP (“CPCB-CF”) under the Xinrui investment agreement of 24 August 2007  .

2.  P has served an affirmation in which he deposes that the sum invested in Xinrui by KPCP-CF was US$8 million on which no profit was made since KPCB- CF sold this investment to Keystone for US$8 million in July 2008, the investment not having gone well. In fact, P adds, when the costs associated with the transaction and other operational costs are taken into account, KPCB-CF actually made a loss on the investment.

3.  P then goes on to depose that in December 2009, Xinrui’s (Keygate’s) business failed and its registration was cancelled. Thereafter, by an Asset Purchase Agreement between Keystone and MicroMedia Ltd dated 13 July 2011, the remaining assets of Xinrui were sold for US$ 3.5 million, producing a loss on the original investment of over US$4.5 million. 

4.  It is argued on behalf of P that by serving the aforementioned  affirmation he has satisfied the requirement of the judgment that he account for any personal profit made as a result of the investment made by KPCB China Fund LLP (“CPCB-CF”) under the Xinrui investment agreement of 24 August 2007 and that the court has no further jurisdiction to give directions as to the taking of the account ordered in the judgment. I reject this misconceived argument. It is for the court, not P, to determine the manner of the taking of the account

5.  Relying on paragraph 198, D1 and D2 (“the Ds”) seek in their reply submissions dated 7 May 2018 the following wide range of sub-accounts and supporting documents and associated directions (as judicially amended for editorial reasons) in aid of the overall account ordered in the judgment.

(1)the following accounts duly verified by affidavit identifying and attaching all vouchers and documents that are relied upon in producing the accounts:

(i) an account of all wages, income, salaries, fees, remunerations, benefits, privileges, bonus, dividends, other moneys and moneys’ worth (including but not limited to all “Capital Distribution” and “Carried Interest” or similar payments) received by P and/or entities owned and/or controlled by P from (1) KPCB-CF and its subsidiaries, affiliates and related entities (KPCB); and (2) Keytone Ventures LP and its subsidiaries, affiliates and related entities (“KV”), and all receivables of P vis-à-vis KPCB and KV but not yet received by P (the Monies), supported by documents that he possesses, or are within his power and/or control, including at least the following:

(I) a copy of the relevant partnership agreements amongst inter alia P on the one hand and KPCB and/or KV on the other;

(II) a copy of any consulting or employment agreements amongst inter alia P on the one hand and KPCB and/or KVon the other;

(III) a copy of the distribution letters and notices issued by KPCB and/or KV to P;

(IV) a copy of bank records showing payments received by P from KPCB and/or KV;

(V) The whole package of sale and purchase agreements relating to the alleged transfer from KPCB to KV at US$8 million;

(VI) A full list of assets of Kegate/Xinrui/Neogrid immediately prior to the alleged disposition in July 2011;

(VII) A full package of agreements covering the disposal of all assets of Kegate/Xinrui/Neogrid from KV to any entity including Micromedia Ltd.

(ii) if P contends that any part of the Monies are not attributable to the investment by KPCB under the Xinrui investment agreement of 24 August 2007 (the Xinrui Investment), an account for the apportionment of the Monies amongst the various investments that KPCB and KV had made (including the Xinrui Investment), together with detailed reasons and supporting documents which he possesses or are under his power and/or control.

(2)Ds shall be at liberty to serve notice on P within 28 days after service of the aforesaid accounts requiring P to produce for Ds’ inspection any documents or class of documents specified in and/or relating to the aforesaid accounts and any other documents produced and/or referred to by P in his affidavit or affirmation, and to produce photocopies thereof to Ds upon Ds’ request and payment of reasonable photocopying charges;

(3)P do, within 7 days after the service of any notice upon him pursuant to paragraph (2) above, serve notice on Ds stating a time within 14 days after the service thereof at which the said documents may be inspected at a place specified in the notice;

(4)Ds shall be at liberty to serve notice of objection to the said accounts produced and verified by P within 63 days after service of the aforesaid accounts;

(5)Ds shall be at liberty to file and serve any affidavit or affirmation evidence in reply to the affidavit or affirmation of P within 63 days after service of the aforesaid affidavit or affirmation;

(6)the parties do file and serve on each other a Scott Schedule summarizing their respective contentions at least 28 days before the date fixed for the pre-trial review for the taking of accounts;

(7)the hearing of the taking of the said accounts be fixed before a Master in consultation with counsel diaries, with 2 days reserved and a pre-trial review shall be fixed for a date at least 10 weeks before the taking of accounts hearing, with half-day reserved;

(8)Ds be at liberty to cross-examine P on the affidavit affirmed by him verifying the said accounts and the deponents of any other affidavits served by P on their affidavits;

(9)there be liberty to apply for further directions.

6.  Much of the above was set out in the Ds first round of submissions dated 12 March 2018. Responding to those earlier submissions, P argued that: (i)  the Court has no jurisdiction to make such hugely invasive orders against or in respect of absent  (offshore) non-parties whom D 1 has not served; (ii) P is no longer associated with KPCB-CF which is not a HK entity and P has no access to KPCB-CF’s accounts, records, or other documents, which are clearly not in his power, custody and or control; (iii) the accounts sought in paragraph 4 (1) above are unrelated to the account ordered and inconsistent with that part of the Separation Agreement that provided that P “was to be free of the non-complete covenants to which he was subject under the ALPA and other agreements and would become an “Inactive Partner”); (iv) the Ds’suggested accounts include claims or matters that have not been pleaded or tried in the Action; and (v) the directions proposed go beyond the bounds of the judgment and the order for an account.

7.  P further proposed in his reply submissions dated 27 March 2018 that the D s should have 14 days in which to serve a notice of grounds on which it sought to surcharge the account contained in P’s affirmation, P have 14 days to reply and thereafter either of the parties was to be at liberty to request a hearing dated for a Master to rule on the Ds’ notice and make pre-hearing directions.

Ruling

8.  The entitlement to recover any profit made by P from the investment made by CPCB-CF under the Xinrui investment agreement of 24 August 2007 conferred by the Court’s judgment is an entitlement conferred on D1 alone. That said, D2 will be well aware of the contents of P’s affirmation and it is inevitable that D2 will become privy to further information and documents provided by P pursuant to the order that I make herein. I have therefore concluded that both Defendants should be required to provide an express written undertaking that any further information provided by P pursuant to the said order will be kept confidential save for its use in these proceedings, which use shall be the sole use to which the information will be put.

9.  In my judgment, given P’s untruthful account of when he began to discuss a possible investment in Xinrui and the relative scarcity of the discovery he provided for the trial, D1 is entitled to an order that goes wider than might have been conventionally appropriate in setting the modalities for an account of secret profits to be given by a fiduciary. It is also the case that, since P did not himself provide the alleged US$ 8million invested in Xinrui, the absence of any profit for CPCB-CF on the US$ 8 million investment does not necessarily mean that P personally did not benefit financially in one way or another from the investment.

10.  With the considerations identified in paragraphs 7 and 8 above, I order as follows:

A.   Upon each of the Defendants each serving on the Plaintiff (“P”) a written undertaking signed by an appropriate senior officer undertaking to keep confidential any documents or other information produced by P by reason of this order and in the case of the First Defendant (“D1”) undertaking to use the said documents only for the purpose of seeking any secret profit made P by reason of the Xinrui investment of 24 August 2007, P must, within 36 days of the date hereof, provide an account duly verified by affidavit identifying and attaching all vouchers and documents that are relied upon of all income, including salary, fees, dividends and other remuneration whether by way of “Capital Distribution” and/or “Carried Interest” or similar payments received by P and/or entities owned and/or controlled by P down to 31 December 2012 (“the end date”) from (i) KPCB-CF and its subsidiaries, affiliates and related entities (KPCB); and (2) Keytone Ventures LP and its subsidiaries, affiliates and related entities (“KV”), identifying the entitlement under which the said income or other remuneration was received, the aforesaid account to be supported by documents that P possesses, or are within his power and/or control, including at least the following:

 (a) a copy of the relevant partnership agreements amongst inter alios P on the one hand and KPCB and/or KV on the other, current down to the end date;

 (b) a copy of any consulting or employment agreements amongst inter alia P on the one hand and KPCB and/or KVon the other, current down to the end date;

 (c) a copy of the distribution letters and notices issued by KPCB and/or KV to P down to the end date;

 (d) The whole package of sale and purchase agreements relating to the alleged transfer from KPCB to KV at US$8 million;

 (e) A full list of assets of Kegate/Xinrui/Neogrid immediately prior to the alleged disposition in July 2011;

B.  

i. Save to the extent that documents have been produced by P in providing the account ordered above, D1 shall be at liberty to serve notice on P within 21 days after service of the aforesaid accounts requiring P to produce for D1’s inspection any documents or class of documents specified in and/or relating to the aforesaid accounts and any other documents referred to by P in his affidavit or affirmation, and to produce photocopies thereof to D1 upon D1’s request and payment of reasonable photocopying charges;

ii. P must, within 7 days after the service of any notice upon him pursuant to paragraph (i) above, serve notice on D1 stating a time within 14 days after the service thereof at which the said documents may be inspected at a place specified in the notice;

iii. D1 shall be at liberty to serve notice of objection to the said account produced and verified by P within 36 days after service of the aforesaid account;

iv. D1 shall be at liberty to file and serve any affidavit or affirmation evidence in reply to the affidavit or affirmation of P within 36 days after service of the aforesaid affidavit or affirmation;

v. the parties must file and serve on each other a Scott Schedule summarizing their respective contentions at least 14 days before the date fixed by the Master for the pre-trial review for the taking of accounts;

vi. the hearing of the taking of the said account shall be fixed before a Master in consultation with counsels’ diaries, with 2 days reserved and a pre-trial review shall be fixed for a date at least 8 weeks before the taking of accounts hearing, with half-day reserved;

vii. at the said hearing, D1 shall be at liberty to cross-examine P on the affidavit affirmed by him verifying the said accounts and the deponents of any other affidavits served by P on their affidavits;

viii. there shall be liberty to apply for amendment of this order for good cause or for further directions.

  

  

HCCL 16/2016

[2018] HKCFI 898

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 16 OF 2016

(TRANSFERRED FROM HIGH COURT ACTION NO 1551 OF 2010)

______________

______________

____________________________

RULING ON COSTS

____________________________

INTRODUCTION

1.  There are two consequential matters on which the Court must rule—Costs and Directions as to the taking of the account ordered by the Court.

2.  The opening and reply submissions on the question of costs are all before the Court but the defendants seek more time to deal with an affirmation relating to the account with which they were served on 26 March 2018.  In these circumstances, I propose to give two rulings, one on costs which follows below and one on the necessary directions for the taking of the account which must await service on the Court of reply submissions.

3.  I further direct that the defendants served their reply submissions on the account directions within 7 days of the date of this ruling. 

COSTS

4.  The plaintiff (“Mr Zhou”) contends that:

(1) D2 should be ordered to pay on an indemnity basis all of the costs he incurred in bringing his carried interest claim and all of the costs he incurred in resisting D2’s counterclaims since he succeeded on his carried interest claim and D2 did not succeed on any of its counterclaims;

(2) D1 should be ordered to pay on an indemnity basis all of the costs of his carried interest claim and four–fifths of the costs he incurred in resisting the D1’s counterclaims because he succeeded on his carried interest claim and succeeded on all of D1’s five counterclaims for an account of profits, save for the claim in respect of KPCB China Fund LP’s investment in Xinrui (“the Xinrui counterclaim”).

5.  In support of contentions (1) and (2), Mr Zhou submits that:

(a) the defendants abandoned their “absurdly exaggerated” counterclaims for damages late in the day after failing to obtain leave to adduce expert evidence in support thereof;

(b) having made two late applications to adduce the evidence of Xie Xuejun by video link and succeeded on the second application, the defendants then decided not to call this witness;

(c) the witness statements of the defendants’ witnesses contained to varying degrees inadmissible hearsay, legal submissions and opinion, particularly in the case of Mr Andrew Yan;

(d) the defendants filed 7 separate lists of documents in respect of their counterclaims for damages, the last being provided just over 1 month before the trial, which significantly added to the large volume of unnecessary trial documentary evidence; and

(e) in the light of Mr Zhou’s testimony that the KPCB China Fund LP’s investment in Xinrui was not profitable, D1’s success on the Xinrui counterclaim was a “Pyrrhic” victory only.

6.  In regard to his contention that the defendants should pay costs on the indemnity basis, Mr Zhou submits that this was his entitlement under Article 4.3(a) of the ALPA.  In the alternative, he argues the Court should award costs on this basis as a matter of discretion, on the grounds that:

(1) the defendants pursued their massive damages counterclaims, on which a great deal of time was spent only to abandon these claims shortly before trial;

(2) the defendants’ defence to Mr Zhou’s claim was bound to fail on the true construction of the Separation Agreement and the ALPA;

(3) the only reason Mr Zhou was prevented from succeeding on his summary judgment application was the defendants’ reliance on serious allegations of misconduct that were spurious;

(4) the defendants at an inexcusably late stage (either shortly before trial or during the trial) abandoned numerous allegations,including: (a) allegations of misconduct in relation to the loansof US$300,000 and US$250,000 made personally to Zhou Yang. 

7.  The defendants contend that:

(1) the Court should proceed on the basis that the trial involved two “events”, the claim on which Mr Zhou prevailed and the counterclaims where the defendants prevailed;

(2) the costs of the proceedings should be divided into two parts —the Pre-Trial Costs and the Trial Costs;

(3) since Mr Zhou was the winner on the claim, he should have all of the Pre-Trial costs pertaining to his claim;

(4) since the defendants were the winners for the most part of the counterclaims, they should get 50% of the Pre-Trial costs pertaining to the counterclaims;

(5) at least 75% of the time spent on the trial was taken up with the cross-examination of witnesses going to the defendants’ allegations of wrong-doing by Mr Zhou and in light of the Court’s findings that Mr Zhou had given untruthful evidence and the Court’s findings against Mr Zhou in respect of the US$2.5 million loan made personally to Zhou Yang, the Xinrui counterclaim and the Mobile Winks claim, Mr Zhou should pay 80% of the defendants’ costs of the Trial.

8.  Replying to the submissions made on behalf of Mr Zhou, the defendants submit:

(1) there is no justification for distinguishing costs between D1 and D2 since D2 is the general partner of D1 and the partnership is not a separate legal entity, and all the Counterclaims were made by both D1 and D2;

(2) the defendants’ success on the Xinrui claim should not be regarded as a pyrrhic victory just because Mr Zhou, who was found to be an untruthful witness in respect to his dealings with Zhou Yang on the Xinrui transaction, testified that the transaction was unprofitable;

(3) the defendants having succeeded at least in part on their accountof profits counterclaim, it would be wrong in principle to award Mr Zhou any of his costs in resisting the counterclaim;

(4) but for the issue of contractual interpretation, the defendants would have succeeded on their misconduct allegations in respect of the US$2.5 million loan and the Mobile Winks claim;

(5) Mr Zhou has no entitlement to indemnity costs under Article 4.3 of the ALPA given that (i) Article 4.3 provides cover “only to the extent that (i) such Covered Person has not committed any act constituting Cause and has acted in a manner reasonably believed to be in or not opposed to the best interest of the Partnership, the General Partner, the Fund General Partner or the Fund …”; and (ii) the Court found that Mr Zhou solicited Zhou Yang to act in breach of the My Show Covenant contrary to Article 3.2(a)(ii) of the ALPA in connection with the Xinrui transaction;

(6) the Court ought not to award costs on the indemnity basis in the exercise of its discretion since the defendants’ case on the meaning and effect of the Separation Agreement and the ALPA was reasonably arguable; it is clear from the Court’s findings that the defendants’ allegations of misconduct were not spurious; the withdrawal of the defendants’ damages counterclaim was based on a responsible professional judgment in light of the refusal of the Court to allow expert evidence to be given in support of it; the Defendants at no stage withdrew the factual allegations underlying their case of breach of fiduciary duty.

THE RELEVANT APPLICABLE RULES OF COURT

Order 62, rule 3 :

9.

(2) If the Court in the exercise of its discretion sees fit to make any order as to the costs of or incidental to any proceedings (other than interlocutory proceedings), the Court shall, subject to this Order, order the costs to follow the event, except when it appears to the Court that in the circumstances of the case some other order should be made as to the whole or any part of the costs.

(2A)   If the Court in the exercise of its discretion sees fit to make any order as to the costs of or incidental to any interlocutory proceedings, it may, subject to this Order, order the costs to follow the event or make such other order as it sees fit.

Order 62, rule 5 :

10.

“ (1)   The Court in exercising its discretion as to costs shall, to such extent, if any, as may be appropriate in the circumstances, take into account—

(aa)   the underlying objectives set out in Order 1A, rule 1;

(a)   …;

(b)   …;

(c)   …;

(d)   …;

(e)   the conduct of all the parties;

(f)   whether a party has succeeded on part of his case, even if he has not been wholly successful; …

(g)   ….

(2)   For the purpose of paragraph (1)(e), the conduct of the parties includes—

(a)   whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

(b)   the manner in which a party has pursued or defended his case or a particular allegation or issue;

(c)   whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim; and

(d)   conduct before, as well as during, the proceedings.”

The application in Hong Kong of the Elgindata (No 2) principles

11.   The well-known principles enunciated by Nourse LJ in Elgindata (No 2) [1992] 1 WLR 1207 at 1214A–C are:

“ (i) Costs are in the discretion of the court. (ii) They should follow the event, except when it appears to the court that in the circumstances of the case some other order should be made. (iii) The general rule does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or cost of the proceedings he may be deprived of the whole or a part of his costs. (iv) Where the successful party raises issues or makes allegations improperly or unreasonably, the court may not only deprive him of his costs but may order him to pay the whole or a part of the unsuccessful party’s costs.”

12.   These principles, which pre-dated the Civil Justice Reforms in England and Wales, were adopted in Hong Kong before Hong Kong’s own Civil Justice Reforms were implemented.  In Wong Kam Tong v The IO of Yuen Long Tin Shing Court [2012] 2 HKLRD 1128 at para 13, Cheung JA (with whom the other members of the Court agreed) said that following the amendment to the Hong Kong Rules of Court in the wake of Hong Kong’s Civil Justice Reforms, “while the ‘follow the event principle’ will still play a significant role in Hong Kong, it will nonetheless only be a starting point from which the Court can depart, the rationale being that a mechanistic adoption of the ‘follow the event principle’ may result in parties incurring unnecessary costs in civil litigation.”

13.   More recently, in Kam Leung Sui Kwan, Personal Representativeof the Estate of Kam Kwan Sing, the Deceased v Kam Kwan Lai & ors, unreported, 3 February 2016, FACV 4/2015, the Court of Final Appeal has said:

“ As this Court has previously said, too inflexible an application of the rule that costs generally follow the event is to be avoided but the discretion to depart from the rule should be exercised with due circumspection since too ready a departure from the general rule encourages unnecessary argument. Nevertheless, the principles for depriving a successful party of part of his costs set out in Re Elgindata (No.2) are well-established and continue to apply in this jurisdiction notwithstanding the amendments to the rules of procedure under the Civil Justice Reform.”

DISCUSSION AND ANALYSIS

The costs pertaining to Mr Zhou’s claim for carried interest

14.   In my opinion, Mr Zhou should have all of his costs pertaining to his claim for carried interest.  The defendants’ defence based on the contention that he was guilty of misconduct amounting to “Cause” so that, pursuant to Article 7.1(c) proviso (iv) his applicable percentage became equal to 0.05 multiplied by what would otherwise be his applicable percentage, was legally misconceived.  It follows in my view that the fact that much time at the trial was taken up in cross-examining Mr Zhou on the defendants’ allegations of misconduct, including allegations that to some extent overlapped with the defendants’ breach of fiduciary allegations, is no reason why Mr Zhou should not be entitled to the costs of his claim without any deduction.

15.   I do not, however, accept the submission made on Mr Zhou’s behalf that the costs of his claim should be assessed on the indemnity basis.  Dealing first with the claim under Article 4.3 of the ALPA, I agree with the defendants’ contention that the Court’s finding that Mr Zhou solicited Zhou Yang to act in breach of the My Show Covenant contrary to Article 3.2(a)(ii) of the ALPA in connection with the Xinrui transaction means that he is not entitled to any indemnity under that provision.

16.   As to Mr Zhou’s claim for indemnity costs in the Court’s discretion, indemnity costs are awarded where a party is responsible for something “outside the norm”, see Excelsior Commercial & Industrial Holdings Ltd v Salisbury Hamer Aspden and Johnson [2002] All ER (D) 39 (Jun).  Examples of conduct outside the norm include baseless allegations of fraud, bringing a claim that totally lacks merit, and misleading the court.  In my opinion, the conduct of the Defendants in defending Mr Zhou’s claim in the manner they did was not “out of the norm” such as to require the Court to mark its disapproval thereof by awarding indemnity costs.  I reject the suggestion that the defendants knowingly manufactured a set of false, spurious allegations of misconduct against Mr Zhou.  Although the witness statements of the defendants’ witnesses contained inadmissible material, those witnesses gave truthful evidence.  I am also of the view that the defendants’ abandonment of their damages counterclaim and their misconduct allegations in respect of the loans for US$300,000 and US$250,000 late in the day is not conduct justifying indemnity costs.  I say this because I can see no proper basis for concluding that their counterclaim was anything other than a genuine claim and I am satisfied that it was abandoned in the light of the Court’s refusal to permit expert evidence to be given in support of it.  As for the decision not to press the misconduct allegations made in respect of the loans, this was responsibly taken by Mr Pow SC and the allegations in question were not improperly made.

The costs pertaining to the defendants’ counterclaims

17.   In light of the defendants’ abandonment of their damages counterclaim, Mr Zhou is entitled to his costs from both defendants in defending that counterclaim down to the point it was abandoned.

18.   D1 succeeded on its alternative account of profits claim for breach of fiduciary in respect of the Xinrui counterclaim.  It did so because it established that Mr Zhou owed the duties of a fiduciary as a Limited Partner under the ALPA (a contention hotly resisted by Mr Zhou) and by proving that Mr Zhou, acting in his own interest rather than in the interest of D1 and his Fund II co-partners, colluded with Zhou Yang to establish Xinrui as an enterprise separate from My Show and the WOFE whilst Mr Zhou was still an active partner under the ALPA.

19.   I reject the submission that D1’s success on this claim should be regarded as a “Pyrrhic” victory.  The extent to which any profit was made on the Xinrui investment will be determined upon the taking of the account that the Court has ordered.

20.   The defendants’ claim for breach of fiduciary duty in respect of the US$2.5 million loan failed on the facts—the Court found that Mr Zhou honestly believed that the US$2.5 million would be used to meet the WOFE’sworking capital requirements and that Zhou Yang could be trusted to use the money for those purposes, given in particular his (Zhou Yang’s) incipient right to acquire a 70% majority interest in My Show if that company’s earnings for 2006 were stated to be at least US$3 million in its accounts for that year. 

21.   The defendants’ account of profit claim in respect of Mobile Winks failed for lack of proof that Mr Zhou or Keytone Ventures or KPCB ever invested in Mobile Winks.  However, it is implicit in the Court’s finding that Mr Zhou solicited Zhou Yang to breach the My Show covenant and misused confidential information in his dealings with Zhou Yang concerning Mobile Winks, that in so acting Mr Zhou was wrongfully putting his own interest ahead of the interest of D1.

22.   The defendants account of profit claim in respect of My Show Ad failed fairly and squarely on the facts, the Court finding that Zhou Yang did not incorporate that company with the intention that it should be a secret competitor to the WOFE and that Mr Zhou was entitled to trust Zhou Yang to ensure that My Show Ad was run as part of the business of the WOFE.

23.   The defendants also had a pleaded case that Mr Zhou acted in breach of fiduciary duty and contrary to Article 3.2(d) of the ALPA in makingvarious public statements that disparaged the Partnership, the General Partner and Fund II.  However, this case was not substantively pursued at trial and in any event lacked any foundation for a claim for an account of profits.

24.   The above five account of profit claims were all predicated on Mr Zhou being subject to a fiduciary duty not to put his own interest ahead D1’s interest, but otherwise they were distinct, separable claims each depending on proof of the facts upon which each was based.

25.   It goes without saying that the Court should take into account in favour of the defendants that they won on the important issue whether Mr Zhou was subject to the duties of a fiduciary and that D1 succeeded on the Xinrui counterclaim which occupied a considerable amount of time at trial.

26.   I also think that the Court should take into account to a significant extent in favour of Mr Zhou the failure of the defendants to succeed on the claims made in respect of the US$2.5 million loan and the My Show Ad because these claims occupied a middling amount of time and were lost fair and square on the facts.  In like manner, the Court should in addition take into account the failure of the claim based on disparagement but to a much lesser extent since almost no time at the trial was taken up on this claim.

27.   As to the Mobile Winks claim, I do not think that any allowance in favour of Mr Zhou should be made based on the defendants’ failure to succeed on this claim.  I say this because the defendants established that Mr Zhou acted in breach of fiduciary duty, albeit that they were unable to show that he profited from the breach.

28.   Taking into account the considerations articulated above, I conclude that the defendants should have 65% of the costs of their account of profits counterclaim.

29.   I am also of the view that no distinction should be drawn between the defendants when making the appropriate costs order.  The counterclaims and the defences to the carried interest claim were all advancedjointly by one set of legal representatives without any distinction being made between the defendants.

CONCLUSION

30.   For the reasons given above I order that:

(1) The defendants must pay the costs of Mr Zhou’s claim for carried interest and the costs of their abandoned damages counterclaim, these costs to be assessed on the standard basis unless otherwise agreed.

(2) Mr Zhou must pay 65% of the defendants’ account of profit counterclaims, these costs to be assessed on the standard basis unless otherwise agreed.

HCCL 16/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 16 OF 2016

(Transferred from High Court Action No 1551 of 2010)

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D E C I S I O N

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1.  This is a very late application by the Defendants for the introduction of expert evidence on the valuation of their Counterclaim at the 11-day trial scheduled to commence on 9 January 2018.

2.  The trial dates were fixed back in September 2016, after a CMC which took place in July 2016 during which M Chan J gave directions for expert evidence on Cayman Islands law.  There was no suggestion of a need to have expert valuation evidence.  The present Summons was taken out on 25 October 2017, which was adjourned to today for argument.

3.  The expert evidence in question relates to the valuation of a substantial business the investment in which, the Defendants say, was made at the persuasion of the Plaintiff.  Allegedly, due to various wrongdoings of the Plaintiff, that investment became worthless.

4.  The subject matters of dispute in this action took place over 10 years ago.  It is quite clear that the valuation exercise, involving a substantial technology business in the Mainland which failed some 10 years ago, is far from straightforward. 

5.  The explanation for this late application is that the Defendants were recently advised by senior counsel newly instructed on these matters on the necessity of the valuation evidence.  

6.  The Defendants have been legally advised all along in these matters.  Their pleadings were settled by counsel.  Putting aside the contention of the Plaintiff that the proposed evidence sought to introduce a new unpleaded case (I should say that there is substance in the argument), it must be assumed that any lawyer handling this case would have considered the issue of evidence in support of the quantum of the Counterclaim. 

7.  I am unable therefore to simply accept that the instruction of new counsel is a proper explanation of the lateness of the application.  There is no explanation, eg, as to whether advice on evidence was sought from previous counsel and, if so, whether it was the case that no application was made to adduce valuation evidence based on previous advice.  If the Defendants acted against previous advice, it would be a material consideration for the court in exercising its discretion in this application. 

8.  The court is therefore faced with a situation where the serious delay has not been properly explained. 

9.  As in all cases of delay, the Defendants rely on the interest of justice argument.  With respect, there are 2 sides to the balance of justice. The rules and exercise of case management function by the court are to ensure that the scale of justice is appropriately balanced. 

10.  Although, sensibly, the parties are agreeable to the appointment of a single joint expert in the event that this application is granted, it cannot be seriously doubted that the trial dates would very likely be jeopardised if this application is to be allowed.  The parties are unable to agree on the expert issues, let alone who is to be appointed as the expert and the instructions to be given to him.  Inevitably, it will require some time for the court to resolve these matters before the expert can start to work. 

11.  Further, there is a dispute whether the Defendants have made proper discovery of all the documents relevant and necessary for the valuation exercise.  It is not possible for the court to resolve such a dispute in this hearing, nor is it appropriate for the court to invest considerable resources to endeavour to do so in light of the nature and context of the arguments. What the dispute demonstrates is that it is simply unrealistic to expect that the trial would not be prejudiced if this application is allowed.  It is doubtful if the discovery dispute alone can be resolved before trial.

12.  There is a piece of evidence adduced by the Defendants which suggests that a valuation report may be made available within 28 days.  It was a letter written by an expert proposed by the Defendants dated 26 October 2017.  This piece of evidence must be viewed in light of the coming festive season and the need to resolve the various disputes identified above.  I am unable to accept therefore that the valuation evidence will be in place before the trial.  It must also be pointed out that it would not be fair to distract the Plaintiff’s legal team from focusing on the trial.

13.  This action was started in 2010.  Any further delay to the resolution of this action would constitute serious prejudice to the Plaintiff. Even if the Defendants offer to pay all the costs thrown away by an adjournment of the trial (they have not done so), it cannot be accepted without more that the prejudice would be adequately remedied.

14.  As submitted by the Plaintiff, it will be open to the Defendants to try to persuade the trial Judge to order a split trial for the quantum of the Counterclaim.

15.  In the premises, this application is declined and I shall hear the parties on costs.