NG WOON v. KWONG WAI KEUNG

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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INTRODUCTION

1. In September of 1984 the Plaintiff, Mr. Ng Woon, and the Defendant, Mr. Kwong Wai Keung applied to the Business Registration Office at Causeway Bay to register a partnership business in the name of Wai Keung Transportation Development Company. The address of that business given in the Business Registration application form was 240 Tung Chau Street, Sham Shui Po, Mezzanine Floor. The nature of the business was said to be transportation and trading and the commencement date of the business was 12th September 1984. The present proceedings arose from that partnership.

2. Shortly before the partnership was registered with the Business Registration Office, the Plaintiff and the Defendant were total strangers to each other. The Plaintiff was in the construction business doing work as a sub-contractor.

3. The partnership between the Plaintiff and the Defendant was entered into pursuant to a written document which, in translation, reads thus:

"Hong Kong Wai Keung Transportation Development Company, Mr. Kwong Wai Keung and Mr. Ng discuss and consent that from September 1984 to September 1987 for the period of three years Mr. Ng provides $200,000 as floating capital for managing the Hainan Autonomous Region China Travel Agency's Vehicle business. Profits are divided into 50% which are calculated in accordance with payment from China. If any dispute happens both parties should base on friendship, discuss and solve the matter."

In terms the partnership was for three years. The partnership document which I have just read refers to the profits being divided 50:50. The document is silent as regards the division of capital and the refund of capital. This is governed by Section 26 of the Partnership Ordinance which states that the interest of partners in the partnership property shall be determined, subject to any agreement between the parties, by the following rule:

4. So, unless it can be said that the reference to the Plaintiff providing $200,000 as "floating capital" displaces this express statutory provision, the position in law is that the $200,000 became partnership property and therefore has to be shared equally between the Plaintiff and the Defendant.

5. As can be seen from the partnership document, the object of the partnership was to provide management: to manage the vehicle business of a concern called Hainan Autonomous Region China Travel Agency.

6. Lying in the background of the dispute between the parties in this case is another agreement which has been referred to as the Hainan Agreement. This was an agreement in writing which the Defendant, Mr. Kwong, entered into on 12th June 1984, quite a few months before he met the Plaintiff. Under this agreement Mr. Kwong is said to be Party B. Party A to the agreement is an entity which is called:

"The China Travel Service of the Lai' Tribe and 'Miu' Tribe Autonomous Region of Hainan Island Kwungtung Province".

Who exactly constitutes Party A, how many individuals are involved, it is not at all clear. It is perhaps not surprising that there were difficulties in carrying such an agreement into effect.

7. Under the Hainan Agreement Party A and Party B stated that under "the principle of mutual equality and benefit" and having gone through "friendly discussion" they had jointly formed another entity identified in the Hainan Agreement as Hainan Autonomous Region China Travel Vehicle Company. The evidence is silent as to whether that was a corporation in the sense as we understand it, and if not, what entity that is.

8. Under the Hainan Agreement Party B (i.e. the Defendant in this case) was responsible for buying 21 new Japan-made vehicles. The agreement envisages that within a month from the commencement date of 12th June 1984 not less than five vehicles should be imported to Hainan and that the remaining vehicles should be imported within the following three months.

9. The Hainan Agreement makes detailed provisions as regards the party responsible for arranging the importation procedures - purchasing fuel, paying road maintenance fees and insurance premium, engaging employees, the intention of the agreement being that from the second month onwards all such expenses should be defrayed from the income of the business. That at least is how I construe that agreement (clause 3(6) in translation is rather misleading). The agreement says that the company pays those sums (the expenses) back to Party A as from the second month onwards.

10. The agreement goes on to stipulate that each party i.e. Party A and Party B should appoint one person each to be accountant and cashier for the business and goes on to stipulate that the "term of co-operation" was three years.

11. As was explained in evidence by the Defendant, the intention was to operate on Hainan Island a fleet of passenger vans for the transportation of tourists visiting Hainan Island.

12. As can be seen from the terms of the Hainan Agreement itself, the performance thereunder was to be mainly in China and, therefore, the expenses of that business would be incurred mainly in China. Accounts were to be kept in China and the profits of that business, if there should be any, would depend to a very large extent on what could properly be attributed as the expenses of that business. It is only after the deduction of all proper expenses from the income of the business that one could ascertain whether the company was making a net profit or not.

13. The problem was further complicated by another fact. Party B at the date of the Hainan Agreement was itself an on-going business. The Defendant, Mr. Kwong, was at that time operating in Hong Kong under the name of Wad Keung Transportation Company quite a large fleet of vehicles. He said that five were owned by him outright and there were a total of thirty operated under his name.

14. The Defendant had in April of 1984 rented the office at Sham Shui Po i.e. No.240 Tung Chau Street, Sham Shui Po, the address which subsequently became the registered address of the partnership business between the Plaintiff and the Defendant.

15. So much then for the background to the partnership between the parties in this litigation. I come now to the formation of the partnership in dispute.

FORMATION OF PARTNERSHIP

16. The Plaintiffs evidence as to the formation of the partnership was somewhat shadowy. He said that he was introduced to the Defendant by a Mr. Ip Kin Kwok and he met the Defendant at a restaurant in Telford Garden. He said this took place at the end of September 1984 but he clearly was mistaken as regards the month, because the documents show quite clearly that by the middle of September 1984 the partnership had already been formed. He said that the Defendant told him there was some business concerning vans in mainland China and asked if he was interested in taking part. After some discussion the Plaintiff indicated that he was willing to put around $200,000 into the business. He said he was shown a copy of the Hainan Agreement. He noted that in the Hainan Agreement the Chinese parties were to take 25% of the profit whereas Wai Keung Transportation Company was to take 75%.

17. He was asked by Counsel for the Plaintiff this question: "Was there any understanding as to how you would be repaid the $200,000?" and the Plaintiff's answer was "Mr. Kwong would buy vans and transport them to Hainan Island. After sale and if we had profits, the amount would be repaid to me."

18. I cannot place much weight upon that answer. It was clear from the evidence that the first meeting at Telford Garden was intended to be only a preliminary meeting. The parties had met for the first time. I cannot see how from that chance remark I can infer that this was intended to be some collateral term of the written partnership agreement which the parties later entered into, as I was invited by Counsel to do.

19. But what that answer also shows is this: that Mr. Ng appears to have misunderstood the nature of the business. He referred to the sale of the vans and repayment of the $200,000 out of the profits. But it is clear from the Hainan Agreement that there was no intention that the vans should be sold, Party B under the Hainan Agreement simply being a party to the management in operating a fleet of vehicles.

20. I note in passing that this misunderstanding as to the fundamental nature of the business runs right through the Plaintiff's case because even as pleaded in the original Statement of Claim, paragraph 3, it was said that the parties entered into a partnership for the purpose of supplying motor vehicles to China Travel Service which is a mis-description of the nature of that business.

21. It may be important to look a little more closely at the respective contributions to capital. The Defendant clearly lacked capital for embarking upon the business of operating a fleet of vehicles. The Hainan Agreement contemplated that within one month five vehicles should be imported. Buy by September 1984 not a single vehicle had been purchased. What, therefore, the Defendant was seeking primarily was someone to put in capital to enable vehicles to be purchased, the vehicles to be brought to Hainan Island and the business to commence.

22. In the Defendant's Particulars served pursuant to a request for Particulars to the Defence, he asserts that he had spent more than $200,000 before securing the Hainan Agreement, stating that in about July 1984 there was a delegation of visitors from Hainan, and to them the Defendant gave substantial sums of money. The Particulars further state that he, the Defendant, had spent more than $60,000 in entertaining Hainan officials as well as for his own travelling.

23. The Defendant did not seek to substantiate by testimony these averments in his Particulars. In any case, I cannot see how expenditure incurred some months before the partnership was entered into between the Plaintiff and the Defendant could possibly be taken into acocunt as the Defendant's contribution to capital.

24. The result, in my judgment, is that in this case only the Plaintiff contributed capital. As there was no clear provision either orally or in writing to displace the prima facie rule under Section 26(a) of the Partnership Ordinance, that rule must apply. Any contri-bution to capital made by the Plaintiff became partnership property and prima facie was shared in common. There seems nothing inherently unfair in that because plainly the intention of the parties was that the Defendant should be the person managing the business of the partner-ship. The main contribution in terms of energy and effort was to come from the Defendant.

25. I look now at the facts of the case after the first meeting between the parties.

26. Within probably a week or two of the first meeting, the Plaintiff gave to the Defendant a cheque made out in the Defendant's name in the sum of $60,000. The cheque is dated the 10th September 1984. This was to enable the Defendant to order five vans for importation to mainland China. On that day, the Defendant handed to the Plaintiff a copy of the partnership agreement in Chinese written out in his own hand, the text of which I have read at the beginning of this Judgment. There were in fact two copies signed by the parties, one keeping a copy each. On that same occasion, the Defendant gave to the Plaintiff a copy of the Hainan Agreement.

27. On the 12th September 1984, the Plaintiff and the Defendant went to the Business Registration Office to register the partnership in the name of Wai Keung Transportation Development Company in the way I have outlined earlier.

28. About this time a partnership account was opened in the name of Wai Keung Transportation Development Company. It is a curious feature of this case that no evidence as regards this account was led by the Plaintiff. There is no evidence as to the bank or the branch at which such an account was opened. But as the Defendant himself in his testimony referred to the fact that an account in the partnership name was opened, I find as a fact that there was such an account.

PURCHASE OF VEHICLES

29. On the 20th September 1984, the Plaintiff wrote out a second cheque for $72,500, and this was for the purpose of paying for the balance of the price of five vans. The Plaintiff and the Defendant both went to the place of business of the supplier whose Chinese name was Pak Lee Hong and the English name was Barclay Trade Development & Co. The cheque for $72,500 was made payable in the name of Pak Lee Hong direct; that is to say, the Plaintiff did not, first of all, pay a sum into the partnership account and then draw upon the partnership account for the expenditure incurred on behalf of the partnership. Why that was not done was not explored in evidence.

30. A curious feature of the case is the receipt for the total sum of $132,500, that is to say, the $72,500 together with the initial deposit of $60,000. The receipt for the sum of $132,500, purportedly received by Pak Lee Hong, was in fact written out by the Defendant signing the name Pak Lee Hong, but apparently without any demur or objection on the part of the Plaintiff. Subsequently in this litigation there was disclosed on discovery three receipts from Pak Lee Hong, these shows a discrepancy of some $9,600 when compared with the receipt written out by the Defendant.

31. Miss Wong on behalf of the Plaintiff invites me to draw an inference adverse to the Defendant, suggesting that this was strong evidence to show the Defendant had diverted into his own pocket the difference of $9,600. However, the plain fact of the matter is that when the balance of the money was paid for the five vehicles this was apparently done in the presence of both parties. The Plaintiff presumably could have asked for a receipt direct from the supplier if he had wished to have such a receipt. He made no objection to the receipt which he knew was written in the hand of the Defendant.

32. In these circumstances I decline to make any adverse finding against the Defendant.

33. In October 1984, the five vehicles were ready for delivery to Hainan. There was some conversion work done. Additional seats were installed. The five vehicles were delivered by the Hong Kong suppliers to Man Kam To. The Defendant engaged the services of drivers who then took delivery of the vehicles and eventually drove them to Hainan. It was a journey of about three and a half days which clearly required the expenditure of money for fuel, oil, wages for the drivers, their board and lodging over-night, the freight for the vehicles and the passage money for the drivers to have the vehicles brought onto Hainan island.

VEHICLES ARRIVE AT HAINAN

34. When the vehicles arrived at Hainan, the Hainan officials refused to license the vehicles on the basis that they were renovated vehicles and not new. The Hainan Agreement, of course, called for new Japan-made vehicles.

35. The Plaintiff was told by the Defendant of this development. He was invited to go with the Defendant to Hainan Island, but somehow the arrangement for going together fell through.

36. According to the testimony of the Defendant, further work was done on the vehicles in Hainan to his knowledge. Eventually after about a month's delay the vehicles were licensed. It is not clear from the evidence, however, what dialogue there was between the Plaintiff and the Defendant from about October 1984 onwards, either concerning the vehicles, or anything else.

37. The Plaintiff on his own testimony did not appear to have taken much interest in his investment. He had never asked to see any accounts. He never visited the registered office of the business, and he did not even appear to have asked if the vehicles eventually became licensed; and he did not enquire whether they were ever operated as tourist transport.

DEFENDANT'S COUNTERCLAIM

38. The Defendant in his testimony says that he repeatedly asked the Plaintiff for the balance of the money, that is to say, the $66,000 odd to make up the balance of $200,000 which was to be the floating capital for managing the Hainan vehicle business.

39. In my judgment, there must be some truth in that and I do not wholly accept the Plaintiff's evidence when he denied that the Defendant ever asked him for the balance. However, the Defendant's evidence was vague in the extreme. At no stage had he any accounts of expenses which he showed to the Plaintiff. The Defendant claims that he had engaged the services of a cashier and that there were ledgers kept which were referable to the partnership business. No ledgers, however, were, disclosed on discovery. Nor have they ever been produced in this court.

40. The relationship between partners is founded in law upon utmost good faith. If the partner managing the business of the partnership truly required further capital from a co-partner for the operation of the business or to discharge partnership debts which had been properly incurred then it behoves the managing partner to satisfy his co-partner that there were expenses properly incurred. This was never done in this case.

41. In my judgment, therefore, whilst I find it as a fact that the Defendant did from time to time ask in vague terms for (as he called it) the balance of the money, the refusal of such request did not constitute a breach of the partnership agreement by the Plaintiff. To the extent that the Defendant avers in the counter-claim that there was breach of the partnership agreement in that the Plaintiff only contributed $132,500 and failed to contribute the balance, I reject the allegation and hold that there was no breach as alleged in the counter-claim.

DISPOSAL OF THE VEHICLES

42. I come now to the disposal of the five vehicles.

43. The evidence was extremely obscure as to the procedures for the licensing and registration of the five vehicles in Hainan. The Defendant says in his testimony that the vehicles were registered in the name of China Travel Service. Perhaps that that was so. No registration documents were ever produced. But one thing appears to be clear: throughout, the vehicles remained within. the control of the Defendant.

44. The Defendant avers in paragraph 6 of the amended-defence that the five vehicles were sold to a Pui Mei Fat for $150,000. As far as the Plaintiff is concerned, he learnt of this fact not directly from his partner, the Defendant (as one would have expected), but through Mr. Ip Kin Kwok. It is not averred by the Defendant that the Plaintiff was ever consulted or informed of his intention to dispose of the vehicles, and the Defendant admits that the Plaintiff only knew of that disposal after the event.

45. The Plaintiff says in his evidence that he first learnt of the disposal when he received from Mr. Ip Kin Kwok the three receipts which appear on page 21 of Bundle A.

46. I do not know the relevance of one of the three receipts for the sum of $3,000 (which appears to relate to fees paid for a plan of the Hainan Oriental Hotel), but the other receipts say that the Defendant Kwong Wai Keung had received from Pui Mei Fat the total of $150,000 "in payment of vehicles price of China Travel Agency".

47. The evidence shows that there was then a meeting between the Plaintiff and the Defendant at a restaurant in Sham Shui Po. According to the testimony of the Plaintiff, the Defendant told him this: he, the Defendant, and Pui Mei Fat had withdrawn from the agreement. When he was asked by his counsel to clarify, he said "by withdraw, he, the Defendant, meant he had sold the vans to Pui Mei Fat". He said that the Defendant told him that although the vans had been sold for $150,000 he (the Defendant) had not been paid.

48. He gave evidence to the effect that after that lunch meeting at the restaurant in Sham Shui Po, although he did not see the Defendant again, he had at least one telephone conversation with him. This was after he had learnt that the Defendant had received the money from the sale. When he asked the Defendant "How come you did not deposit the proceeds of sale into the current account?" the Defendant was silent.

49. I accept the Plaintiff's evidence as outlined above.

50. It must have been plain to the Plaintiff that after the disposal of the five vehicles by the Defendant the entire basis of the joint venture between him and the Defendant had effectively come to an end: unless, of course, somehow they were able to put in more money into the business and make further arrangements to import other vehicles to Hainan in pursuance of the Hainan Agreement. But that, of course, was totally out of the Plaintiff's hands since the performance under the Hainan Agreement depended also upon action on the part of Party A to that agreement, that is to say, the Lai and Miu Tribes of the Autonomous Region of Hainan Island: what in practical terms that actually would have meant escapes me.

51. Any way it was not until October 1985 that the Plaintiff through solicitors wrote to the Defendant complaining of the sale of the vehicles and asking the Defendant in effect to account for the proceeds of sale. There was no reply to that letter, although the Defendant acknowledged in the witness box he received it. Eventually the writ in this case was issued on the 7th January 1987.

52. It has never been satisfactorily explained why the Plaintiff took no action for so many months despite the fact that he knew by March of 1985 that the very foundation of the joint venture had been effectively removed by the Defendant disposing of the vehicles.

53. At any rate it was not until discovery was made in the present proceedings that it was revealed that of the $150,000 yielded by the sale of the vehicles to Pui Mei Fat $108,000 was paid into the Defendant's personal account with the Hong Kong and Shanghai Bank.

APPROPRIATION OF PARTNERSHIP PROPERTY

54. The Defendant claimed in testimony that he told the Plaintiff that he had received $105,000 into that account. All the evidence points against this assertion. It would seem most improbable that if the Plaintiff had known that the Defendant had actually diverted into his own pocket a substantial amount of the proceeds of sale, that should not have been made the subject of a specific complaint.

55. The Defendant's evidence and explanation with regard to that transaction is, I regret to say, both obscure and unsatisfactory. In the witness box he claimed at one stage that it was not a sale but a transaction akin to mortgage. He said that he had "transferred" the vehicles to Mr. Pui, but under an arrangement which meant that the ownership of the vehicles might revert to him. His relationship with Mr. Pui was never explored in much depth, but it is of significance to note that Mr. Pui had at least at one time been his manager and employee.

56. It is not necessary in this Judgment to explore the precise legal basis of the transfer of property to Mr. Pui, particularly since the legal ownership of the vehicles is itself obscure. But one thing is clear: $108,000 derived from the proceeds of sale went into the Defendant's pocket, that is to say, paid into his personal account. He justified the transaction in the witness box by saying that he had substantial expenses and had incurred substantial debt on behalf of the partnership. There is no doubt that expenses were incurred. The vehicles could not have been delivered to Hainan Island from Man Kam To without expenses having being incurred, but the scope of expenses which might properly be attributed to the partnership business is something quite different.

57. I repeat: The duty of a partner to his co-partner is one of utmost good faith. It is simply not sufficient for a partner in Mr. Kwong's position to vaguely aver that he had incurred expenses without particularising those expenses; his duty is to satisfy his co-partner, Mr. Ng, by producing concrete evidence, to enable Mr. Ng to form an independent judgment that the expenses were properly incurred in the business of the partnership. And whilst I find that there must have been expenses incurred, I also conclude from the evidence I have heard the expenses could not have been of a very large order.

58. According to the Defendant's own pleading, the profit anticipated to be yielded from the Hainan business involving 21 vehicles was the sum of $2,500 a month. This appears in the Particulars given under paragraph 12 of the Defence. What is more, according to the Defendant's own case, the parties never carried the terms of the Hainan Agreement into effect. According to the Defendant, it was the Plaintiff's breach of contractual obligation, that is to say, the failure to pay the balance of the $200,000, which led to this result. In the witness box, the Defendant contradicts this averment, and tells me that from about the month of October onwards, the business was carried on although not as prosperously as anticipated; in fact, he said, the business suffered a loss.

59. Giving every allowance to the Defendant and assuming that the five vehicles were not simply lying wholly idle at Hainan from October 1984 to March of 1985, it is impossible to imagine how expenses incurred on behalf of the partnership could possibly have swallowed up the sum of $108,000.

60. I note another significant fact. The proceeds of sale were $150,000. According to the testimony of Mr. Kwong, the Defendant, Mr. Pui, kept back $40,000 odd because he, Mr. Pui, had incurred expenditure on behalf of the partnership. The evidence indicates that Mr. Pui was, as it were, the Defendant's manager. If there had been more expenditure than that sum incurred, there is no reason why a sum greater than $40,000 should not have been held back in order to discharge any liability that might have been incurred by the partnership.

61. I note yet another fact. If indeed these vehicles had been operated between October and March then income would have been derived from the operation. Under the Hainan Agreement the parties to that agreement contemplated the expenses being defrayed from income.

62. From all the evidence that I have seen in this case, and the testimony I have heard, the appropriation of the sum of $108,000 out of the proceeds of sale of $150,000 was an act of bad faith on the part of Mr. Kwong. It was appropriation into his own pocket of partnership property. In law he is accountable for that sum.

63. The present partnership in accordance with the partnership agreement is to run for three years, that is to say, to expire in September of this year. At that time it will be the duty of the parties to wind up its affairs. Since such accounts of the partnership as exists are accounts kept by the Defendant, the primary duty will fall on the Defendant to render proper accounts of the partnership upon its termination. The duty will, therefore, be upon the Defendant to account to the Plaintiff for sums which he has received on behalf of the partnership and for expenses which he has properly incurred: only such sums could be deducted from such receipts.

64. In the meanwhile the evidence points conclusively, in my judgment, to the fact that the Defendant has mis-appropriated the sum of $108,000 being partnership property. Is it right in these circumstances then for me to leave the parties as they stand until partnership accounts have been properly rendered? If that was so, it would be plainly to leave a wrong unredressed.

65. One of the prayers in the Statement of Claim is for an order that the court d crees under the provisions of Section 37 of the Partnership Ordinance a dissolution of the partnership. But I ask this question: What purpose would be achieved by my exercising that power? It will simply result in my being asked, I presume, to make an order under Order 43 of the Rules of the Supreme Court that the Defendant makes proper accounts of the business of the partnership; the same wholly unsatisfactory evidence as regards vague expenditure will then have to be gone into all over again, by (presumably) the Master in chambers under the provisions of Order 43. I do not believe that I will be doing justice in such a case.

66. In my judgment, as there has been a clear act of misappropriation which has been proved, the right order for me to make is that the Defendant be ordered to pay to the Plaintiff the sum of $108,000 which the Plaintiff will then hold in trust for the partnership. I emphasize this. Whilst the partnership has not been wound up, property of the partnership is held in trust for the partnership which means in practical terms in this case in trust for the Plaintiff and the Defendant. Partnership property is available to meet any debts of that partnership properly incurred.

67. In giving judgment in favour of the Plaintiff in the sum of $108,000 and in declaring that he holds that sum in trust for the partnership the practical result will be this. When this partnership expires by the effluxion of time in September of 1987 (on the evidence, it will be the 12th of September 1987), it will be for the Defendant to take steps to wind up its affairs. If he can satisfy the Plaintiff, or those acting for the Plaintiff, that there are expenses incurred by him or by anybody else, which are properly attributable to the business of this partnership, then such sums will be payable out of the partnership asset, that is to say, the sum of $108,000 held by the Plaintiff. But the burden will be on the Defendant to produce proper accounts since it is he who has throughout been in management of the business of the partnership.

68. The judgment of the court is, therefore, that there will be judgment in favour of the Plaintiff in this case in the sum of $108,000 and costs.