LIU MAN HO SIMON AND OTHERS v. OPUS LOGISTICS LTD AND OTHERS

HCA 997/2011 &

HCA 1674/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 997 AND 1674 OF 2011

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1. These proceedings were commenced as derivative actions by Mr Simon Liu (the plaintiff) on behalf of Opus Logistics Limited (“the Company”). The two actions were consolidated and tried together.

2. The Company was incorporated by Mr Liu and Madam Chow (the 2^nd defendant) in January 2008.  They were the Company’s only two shareholders, each holding half of the issued shares.  Mr Liu and Madam Chow were also the only two directors of the Company. 

3. Everfine Logistics Limited (“Everfine”) (the 3^rd defendant) was acquired by Madam Chow on about 18 July 2008 and has since been under her control.  Madam Chow was Everfine’s sole shareholder and director. 

4. Gold Mark Express Limited (“Gold Mark”) (the 4^th defendant) was incorporated on 6 December 2010.  Madam Chow was one of its two directors. 

5. On behalf of the Company, Mr Liu claims against Madam Chow for breach of fiduciary duties by engaging in business in competition with the Company and by diverting business opportunities from the Company.  Mr Liu claims an account for profits and other reliefs against Madam Chow, Everfine and Gold Mark. 

Background

6. Mr Liu and Madam Chow met each other in 2005 and became friends. 

7. Later in about September 2007, Madam Chow came to know one Mr Kong of Eastern Worldwide Company Limited (“Eastern”), a large operator in logistical services.  Madam Chow learnt that Eastern was looking for subcontractors to provide delivery to customers of the Jusco Supermarkets in the Lok Fu, Tai Po and Tuen Mun area.

8. Madam Chow had no experience in doing business.  She turned to Mr Liu and they agreed to take advantage of the opportunity of doing business with Eastern.  As Eastern required delivery to start in October, Madam Chow and Mr Liu agreed that Mr Liu’s own company, Opus Development Limited (力作發展有限公司), would be used to undertake the business at the initial stage until a new company was set up. 

9. Mr Liu purchased a van for the business.  He engaged Mr Kwok Chi Keung as a driver‑cum‑delivery worker and employed Miss Ng as clerical assistant. 

The Company

10. The Company was incorporated in January 2008 and took over the business from Mr Liu’s Opus Development.  Madam Chow and Mr Liu both made contributions towards the Company’s capital.  Madam Chow injected cash of $100,000 whereas Mr Liu contributed $26,000 together with the transfer of the van.  Their contributions were regarded as equal.

11. Responsibility for the running of the business was shared.  The Company engaged various subcontracted drivers and Mr Liu was responsible for their coordination and arrangement for actual delivery.  On the other hand, Madam Chow dealt with the Company’s accounts and liaison with customers.  Both Mr Liu and Madam Chow were paid a monthly salary by the Company.

12. Mr Kwok and Miss Ng became the Company’s employees. 

13. From its inception, Eastern has been the only customer of the Company.

14. Since the latter part of 2007, Mr Liu had wanted to further his studies in Japan.  He told Madam Chow of his plan in January 2008 but at the time he had not decided when he would leave.  The working relationship between Mr Liu and Madam Chow had not always been smooth.  Madam Chow was unhappy because she considered that delivery had not been properly managed resulting in many complaints from Eastern and its customers.  Mr Liu on the other hand thought that Madam Chow was temperamental and had not been polite to the customers, and had also interfered with his duties.  

15. In about March, Mr Liu suggested that one of them should buy out the other’s share for $100,000.  There were occasions (which I accept on Madam Chow’s evidence) that Mr Liu had told Madam Chow that he wanted to quit.  However, as admitted by Madam Chow in cross-examination, Mr Liu never specifically said that he wanted the business of the Company to cease.  On the contrary, on Madam Chow’s evidence, Mr Liu proposed on more than one occasion that either of them should purchase the shares of the other and that he was genuine about such proposals.  That, she accepted, was indicative of Mr Liu wanting the operation of the Company to continue.  Madam Chow, however, did not respond to his proposals of a buy‑out. 

16. In April, Mr Liu’s study plan was confirmed and he informed Madam Chow about it.  There was discussion between them that, operationally, the Company should contract out the delivery work in future. 

17. In May, arrangement was made for Mr Kwok to change his employment status to that of a subcontractor.  The Company’s van was sold to him to enable him to operate as such.  Mr Liu told Madam Chow about the arrangement and she did not raise any objection to that.  As a matter of fact, Mr Kwok did not immediately have to make full payment of the purchase price for the van.  It was agreed that he could set off the price from the subcontracting fees he would earn in future.  It appears that all parties involved at the time had contemplated that the business of the Company would continue despite Mr Liu’s plan to leave for Japan. 

18. The arrangement was for Mr Kwok, in his capacity as subcontractor, to deal with delivery around the Lok Fu and Tai Po area whereas another subcontractor “流星語” would serve the Tuen Mun customers.  Mr Kwok had all along been much more friendly with Mr Liu and worked closely with him.  In contrast, Mr Kwok had never been on very good terms with Madam Chow.  

19. Between Mr Liu and Madam Chow, there continued to be disagreements concerning the running of the Company.  I accept that their differences had intensified.   

Events in July and August—Resolution of the Company?

20. On 11 July 2008 after a rather heated argument with Madam Chow, Mr Liu sent the following email to Eastern and to Madam Chow:

“URGENT NOTICS (sic)

To All Coustomers (sic)

Please be informed that I, Simon Liu, will not be handling any matters related to Opus Logistics Ltd, effective immediately (11 July 2008).

As of today, please contact [Madam Chow] at [xxxxxxx] for all matters related to Opus Logictics (sic) Ltd.

I will not have responsible (sic) on any matters related to Opus Logistic Ltd.

Thank you for your kind attention!

Simon Liu

Opus Logistics Ltd.”

21. It was Madam Chow’s evidence that after she had received the email, she sent an SMS message to Mr Liu asking him for an explanation.  According to her, Mr Liu’s response by SMS was that he would quit, he did not want to continue with the Company’s business and would not care anymore.  He asked for a return of his investment and termination of the Company’s business.  Madam Chow called Mr Liu by phone and he gave her largely the same reply.  He repeated his demand for a settlement of the Company’s account and a return of his investment because he was to leave for Japan. 

22. Madam Chow went on to say that on the same day she contacted Mr Kwok about delivery arrangement.  Mr Kwok refused to perform further service for the Company because, allegedly, he was asked by Mr Liu to stop dealing with the Company.  

23. For Madam Chow and Everfine, these events on 11 July 2008 are significant because it is their pleaded case that Mr Liu’s conduct and his responses by way of the SMS and by phone on 11 July constituted a unanimous resolution that the Company (they being the only two directors) should no longer carry on any business with immediate effect[1]. This, on their case, further indicated that any future orders from Eastern would be rejected by the Company and such a state of affair justified Madam Chow’s setting up Everfine on 18 July 2008 to replace the Company in handling Eastern’s delivery orders.  According to their pleaded case, Everfine’s business included not only Eastern but other customers.

24. Mr Liu’s evidence, on the other hand, was that after he had sent the email on 11 July, Madam Chow called him by phone and asked him for an explanation.  He denied that during that conversation he had said to Madam Chow that the Company’s business should cease or that he had demanded a settlement of the account of the Company.  He maintained that the email had merely informed the customer that he would no longer be involved in managing the Company.  It was apparent from the face of the email that his intention was not to cause the Company to cease business altogether. 

25. Madam Chow was cross‑examined in some detail on the exchanges with Mr Liu on 11 July. 

26. It is first noted that the alleged SMS response from Mr Liu, though referred to in Madam Chow’s Defence, was not produced in evidence. The non‑production of the SMS reply is in contrast with an earlier SMS message in June which Madam Chow did keep and produce.  When questioned why she had produced only the June message (which seemed less relevant for the purpose) but not the alleged SMS reply from Mr Liu, she explained that there were many messages which she had shown to her lawyers for advice.  According to her, their advice was that it was not necessary to produce Mr Liu’s reply because that SMS was incomplete without a context (無頭無尾).  This explanation, however, is inconsistent with the response proffered by her solicitors when Mr Liu previously requested specific discovery of the alleged SMS message.  At the time, through her solicitors, she replied that there was in fact no written record of that message and the message mentioned in her Defence was based merely on her recollection[2].

27. As for the telephone conversation with Mr Liu on 11 July, I am mindful that it took place nearly 5 years before the trial and therefore it would be unrealistic to expect exact recollection of what was said.  I was therefore rather sceptical of Madam Chow’s answer when she insisted at one point in cross‑examination that what she recounted were the exact words used by Mr Liu during the conversation.  Rather more significantly, that answer in fact contradicted an earlier admission when she said she could only relate what she was able to remember of the conversation and not his exact words.  The fact that she had seen fit to adapt her answers in the course of giving evidence has, in my view, undermined the reliability of her evidence on the subject and I am hesitant to accept such evidence especially when it was an oral conversation with no contemporaneous record or other corroborative evidence (though I am not suggesting that, legally, corroboration is mandatory in this regard). 

28. I have also considered Mr Kwok’s evidence.  His evidence was that Mr Liu had told him that he would no longer be managing the Company’s business.  On learning such news, he took the initiative to call Madam Chow the following day because he had always found Madam Chow difficult to work with and did not want any further dealings with her.  He asked for a settlement of the outstanding fees owed to him by the Company.  In relation to Mr Kwok’s evidence, I am conscious that he enjoyed a better relationship with Mr Liu than with Madam Chow and I had considered whether that fact might not have influenced his evidence.  At the end, I find nothing that would cause me to doubt Mr Kwok’s credibility.  I prefer his account to Madam Chow’s in relation to the conversation between them. 

29. But before coming to a view on the exchanges between Mr Liu and Madam Chow on 11 July and whether there was a deemed resolution of the Company as alleged, the subsequent events also shed light on the issue and it is necessary for me to have regard to them.

30. According to Mr Liu, later in July, after being prompted by one of the staff members from Eastern, he discovered that the delivery orders previously handled by the Company had been transferred to Everfine.  After discovering Everfine’s connection with Madam Chow, he demanded a return of his initial investment.  She however was only prepared to pay him half of the value of the Company.  Since the Company had lost its only customer to Everfine, he instructed the company secretary sometime in August to work out the final accounts of the Company with a view to winding up its business[3]. This was made necessary, according to him, to protect his interest because he would not want to be saddled with liability arising from anything done in the name of the Company. 

31. It is common ground that on 16 August 2008, there was a meeting at the carpark of Madam Chow’s residence in Sheung Shui, where Mr Liu, Mr Kwok, Madam Chow and some of her relatives were present. 

32. According to Mr Liu, the only matters discussed at the meeting were the outstanding payment for Mr Kwok and his own salary for the month of July.

33. On the other hand, Madam Chow’s evidence was that during the meeting she and Mr Liu discussed how the affairs of the Company should be wound up.  She suggested that the value of the Company should be divided equally after settlement of the Company’s account but Mr Liu demanded repayment of his initial investment of $100,000.  According to her, there was agreement between the parties that the Company’s operation should cease and that the company secretary would be asked to work out the final accounts and arrange for the de‑registration of the Company[4].

34. During cross‑examination, Madam Chow insisted that an agreement was reached at the 16 August meeting to terminate the Company’s business.  She went so far as to retract the statement in her Defence that Company had unanimously resolved to cease business with immediate effect from 11 July 2008[5].  Her explanation was that on 11 July, there was only a unilateral indication from Mr Liu that the business should cease, but upon reaching agreement on 16 August such agreement took retrospective effect from 11 July.

35. I have weighed up the evidence of both protagonists.  For the reasons already discussed, first, I am not convinced that Madam Chow has given a reliable account of the exchanges she had with Mr Liu after receiving the latter’s email on 11 July.  Her evidence as to Mr Liu’s responses on 11 July was confusing.  Moreover, her case that there was somehow a unanimous resolution that the Company would cease business with effect from 11 July was finally put to rest by her retraction of the statement in the Defence.

36. But, on the other hand, it appears that as of August 2008 both Mr Liu and Madam Chow, separately, did intend the Company to cease operation.  This is evident from the fact that, on the one hand, Madam Chow had caused Everfine to replace the Company to provide delivery service to Eastern.  On the other hand, Mr Liu wished to avoid being saddled with unwanted liability, and he had in fact caused financial statements to be prepared which stated that the Company was to cease business with effect from 31 August 2008. 

37. However, my view of the evidence is that notwithstanding the fact that they each intended the operation of the Company to cease, that did not arise from any agreement between the parties. 

38. In this connection, I note first that the alleged agreement of 16 August and its retrospective operation as now asserted by Madam Chow was never pleaded in her Defence. Significantly also, the letter from Madam Chow’s solicitors of 30 September 2008 (being reasonably contemporaneous to the events in question) made no mention of an agreement having been reached at the meeting on 16 August. 

39. What I believe happened at the meeting on 16 August was that the parties had had some discussions about the financial arrangements vis-à-vis each other.  This is evident from the memorandum signed between Mr Liu and Madam Chow. However, beyond mutual acknowledgment of each other’s contribution to the initial capital of the Company, no agreement was reached on whether or when the Company operation was to cease, or how the accounts were to be settled between them in such event.  Had there been agreement of any other terms, one would have expected such terms to be recorded in the memorandum, but there was none.  I think, more likely than not, such matters were simply left at large at the meeting, although Mr Liu and Madam Chow had each for their own reasons wanted the Company to cease operation. 

40. That being the case, it cannot be said that there had been a meeting of the minds of the directors.  I do not consider that a deemed resolution could have arisen with binding effect on the Company.  I would reject the case of Madam Chow and Everfine insofar as they sought to assert any resolution of the Company to cease business, whether it be a resolution taking effect from 11 July or 16 August 2008.  

41. Also importantly, despite the fact, as discussed, that the parties had both expected the Company to cease operation, it does not follow that Mr Liu had agreed also to Madam Chow’s unilateral diversion of the Company’s business to her account before the Company’s affairs were wound up and accounts of the parties finally settled.  I could find no evidence to support such a case.  Put in another way, even though both parties had intended the operation of the Company to cease, Madam Chow has still failed to establish any representation, by words or conduct on the part of Mr Liu, to the effect that she would be at liberty to divert Company’s business to Everfine before final settlement of the Company’s accounts and winding up of its affairs, or that Mr Liu would condone such conduct. 

Liability of Madam Chow and Everfine

42. For the foregoing reasons, I find that the Company has established its case against Madam Chow for breach of fiduciary duties. 

43. The basis of the liability of a fiduciary is well‑established, as explained in the following passage in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, at pp 144 - 145:

“The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however, honest and well-intentioned, cannot escape the risk of being called upon to account.”

44. Lawrence Collins J in CMS Dolphin Ltd v Simonet [2002] BCC 600 at p 623 echoed the same principle in the following passage:

“97. In many cases, an account of profits will be a more advantageous remedy than equitable compensation, since the actual profits obtained by the director may be higher than the damages for the loss of opportunity suffered by the company, particularly where (as in Industrial Development Consultants Ltd v Cooley and Canadian Aero Service Ltd v O’Malley) the company had little or no prospect of obtaining the benefit of the opportunity. The fiduciary is liable for the whole of the profit.”

45. As for Everfine, it being the corporate vehicle of Madam Chow, is equally liable to account for profits on the same footing. With Madam Chow as its sole shareholder and director, Everfine was clearly imputed with Madam Chow’s knowledge of her breach of duties.  Lawrence Collins J in CMS Dolphin (supra) explained at p 625:

“103. … But I do not think that it is necessary to resort to piercing or lifting the corporate veil, since Cook v Deeks shows clearly (as does Canadian Aero Service Ltd v O’Malley) that the directors are equally liable with the corporate vehicle formed by them to take unlawful advantage of the business opportunities. The reason is that they have jointly participated in the breach of trust.”

46. Applying those principles, even if the Company’s operation was to be put to an end, that fact should not affect the Company’s claim for the profits which Everfine and Madam Chow had derived from a diversion of its business.  Both Madam Chow and Everfine are liable to account for the profits they have made since July 2008 as a result of diversion of the Company’s business.  

Account for Profits—Quantum 

47. In the present case, the Company’s claim against Madam Chow and Everfine is set out in the Re‑amended Statement of Quantum.  The claim comprises, first, Madam Chow’s remuneration earned from Everfine for the period from 10 July 2008 to 31 December 2010 and from Gold Mark from 1 January 2011 to 31 July 2011, with allowance given for Madam Chow’s effort in earning the profits for those companies. Secondly, it comprises the claim for profits of Everfine from 10 July 2008 to 31 March 2011 with allowance given for administrative expenses. Everfine’s profits derived from business unrelated to Eastern are not included in the claim.

48. The general approach with respect to an account for profits is again helpfully illustrated by Lawrence Collins J in the following passage in CMS Dolphin (supra):

“97. … There are no firm rules for determining which is the relevant profit: see Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, at p 110, per Mason J. Where, as here, the business … is not restricted exclusively to the performance of contracts which were obtained from CMSD, the fiduciary should be accountable for the profits properly attributable to the breach of fiduciary duty, taking into account the expenses connected with those profits and a reasonable allowance for overheads (but not necessarily salary for the wrongdoer), together with a sum to take account of other benefits derived from those contracts. For example, other contracts might not have been won, or profits made on them, without (e.g.) the opportunity or cash-flow benefit which flowed from contracts unlawfully obtained. There must, however, be some reasonable connection between the breach of duty and the profits for which the fiduciary is accountable.” (emphasis added)

49. The editors of Snell’s Equity, 32^nd edition, para 7‑055, similarly emphasised the connection between the breach of duty and the profits:

“The profits for which the fiduciary must account must bear some reasonable relationship to the breach of fiduciary duty. The obligation is to account for profits which have been made in breach of fiduciary duty, not simply to account for profits in the abstract.” (italics in original text)

“Like all equitable remedies, the account of profits is discretionary. Thus, in cases which are more complicated than a simple case of the sort described above [e.g. involving the purchase and resale of trust property by a trustee], the account is fashioned to meet the circumstances of the case. …

Thus, where the profit is made out of a business, rather than a specific asset, given the risks inherent in business activities and the amount of time, effort and skill required to make a business successful, a principal will not necessarily be awarded an account of the entire profits of the business. It remains of first importance, in such cases, ‘to ascertain precisely what it was that was acquired in consequence of the fiduciary’s breach of duty.’ Thus, where a company manager set up his own business and deprived the company of a lucrative agency, the company was awarded an account of the profits of the manager’s new business for two years. This is based on the understanding that:

‘given the property in question is the goodwill of the company’s business, there will in all probability come a time when it can safely be said that any future profits of the new business will be attributable not to the goodwill misappropriated from the claimant company when the new business was set up but rather to the defendants’ own efforts in carrying on that business.’” (emphasis added)

50. In the present case, what had been misappropriated from the Company by Madam Chow’s breach was the opportunity to carry on business with Eastern, the Company’s sole customer.  The evidence revealed that in 2008, there was in fact no written contract between the Company and Eastern.  Madam Chow said, and I accept, that the business with Eastern was then conducted on a trial basis only.  The Company at the time was obviously trying to develop its goodwill but given the relatively short business relationship with the customer, any goodwill enjoyed by the Company would likely be limited.  In fact it was not until July 2009 that Madam Chow was able to secure an agreement in writing between Everfine and Eastern, and the entering into a formal written agreement was, in my view, properly attributable to Madam Chow’s efforts in managing the business.  I think the time of the formal agreement should mark the watershed for determining the extent of the Company’s entitlement to an account of Everfine’s profits.

51. I would therefore allow the Company’s claim for the first 12 months of Everfine’s profits (subject to deduction for proper expenses).  According to Everfine’s ledgers[6], the gross profits for the period up to the end of July 2009 was $404,198 (being gross revenue of $3,406,170 less freight costs of $3,001,972 for the corresponding period). 

52. Equity allows for a deduction of the fiduciary’s expenses incurred in bringing about the profits.  In this case, Everfine’s expenditure can be found in its auditor’s report which shows a total sum of $975,799[7], including $400,000 as director’s fees for the period from incorporation to 31 March 2010. 

53. On the question of allowance, the editors of Snell’s Equity, (ibid) further explained at para 7-055 as follows:

“Similarly, a fiduciary who has acted in breach of fiduciary duty, and against whom an account of profits is ordered, may nevertheless be given an allowance for skill and effort employed in obtaining the profit which he has to disgorge, where:

‘it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it.’

This power is exercised sparingly, out of concern not to encourage fiduciaries to act in breach of fiduciary duty. …..

The fiduciary bears the onus of convincing the court that an accounting of his or her entire profits is inappropriate in the circumstances.” (emphasis added)

54. Similar remarks were made in Quarter Master UK Ltd (in liquidation) v Pyke and others [2005] 1 BCLC 245, where the learned judge said at pp 271 - 272:

“76. I will next consider whether Mr Newson and Mr Pyke should be allowed a sum to reflect their efforts in earning the profits which are identified on the taking of such an account. ….

77. In my judgment, the right course for me to adopt on this question of a possible fair allowance for the efforts of Mr Newson and Mr Pyke in earning the profits that will now be payable to QUK is to apply the approach of Lord Goff set out in the Guinness case [1990] BCLC 402 at 421, [1990] 2 AC 663 at 701, to the effect that the exercise of this jurisdiction is restricted to those cases where it cannot have the effect of encouraging trustees (or directors) in any way to put themselves in a position where their interest conflict with their duties as trustees (or directors). Applying that approach, I hold on the facts of the present case that the fundamental principle should prevail that a director is not to benefit from his breach of fiduciary duty and that no allowance is to be made. I also bear in mind that this is not an ‘exceptional’ case; the mere fact that QUK would not itself have otherwise received all of the benefits from the …. contract does not, so far as reported cases go, make this case anything out of the ordinary. Further, this is not a case where the directors demonstrated any special skills or took unusual risks.” (emphasis added)

55. Bearing in mind the strict approach to discourage persons in fiduciary capacity to act in breach of their duties and that the power to give allowance is to be exercised sparingly, I find nothing to justify giving allowance to the director’s fees as deductible expenses: see also the observations of Lawrence Collins J in para 97 of his judgment in CMS Dolphin (supra) highlighted above.  The disallowance of such expenditure is, I believe, consistent with the approach of the Court of Equity to take a strict view against fiduciaries making profits out of their position.

56. By excluding the sum of $400,000, the amount qualified for deduction averaged about $28,088 per month[8]. The total allowance for the first 12 months is therefore $337,056.

57. In light of the above, Madam Chow and Everfine are liable to the Company for the profits in the sum of $67,142 (ie $404,198 - $337,056). 

58. At the trial, there was some argument as to whether legal expenses incurred for the purpose of defending the present Action should be regarded as a deductible item.  This question is now academic as those expenses were apparently incurred outside the first 12 month‑period.  In my view in any event, legal fees incurred by Madam Chow and Everfine in defending themselves do not properly qualify for deduction. 

59. Also as a result of my ruling that only profits from the first 12 months are accountable, the sum of $20,374 being other revenue of Everfine falls outside the relevant period.  The Company is accordingly not entitled to such sum.

60. For the foregoing reasons, the Company’s claim against Madam Chow in relation to her remuneration from Gold Mark is rejected.

Claim against Gold Mark

61. For similar reasons as above, the case against Gold Mark fails, even though Gold Mark has not defended the claim against it. 

Conclusion

62. The Company is entitled to judgment against Madam Chow and Everfine for the sum of $67,142.

63. As for interest, theoretically, it should accrue from various times when profits were earned.  However, as I have adopted the end of July 2009 for the purpose of calculating the profits, I would award interest to run from 1 August 2009 until payment at judgment rate. 

64. I would decline the plaintiff’s claim for injunction against Madam Chow and Everfine.

65. I would make an order nisi that Madam Chow and Everfine do pay the plaintiff the costs of this action, to be taxed if not agreed.

66. I would dismiss the claim against Gold Mark and make no order as to costs.