HAU SIU WAH v. OR PIK KAN t/a FORTUNE NATURE CRYSTAL

HCA3986/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3986 OF 2001

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J U D G M E N T

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1. The plaintiff and the defendant were friends since about August 1997. The plaintiff was a saleslady with a cosmetic company and the defendant was a saleslady of Quartz Right (International) Company selling crystals and precious stones. Later on, in October 1997, the defendant set up her own crystal business selling crystals and precious stones at an upper floor premises in Prince Edward Road West.

2. By March 1999, the two parties became quite good friends and the defendant agreed to do business together with the plaintiff. They found a shop in Admiralty Centre. On 15 March 1999, they both signed a tenancy agreement with the landlord, represented by a Mr Poon. Both of them were described as tenants.

3. The plaintiff paid the landlord by her personal cheque in the sum of $40,664 comprising the following items :

(1) three months' rental deposit	$24,000
(2) air-conditioning and management fee deposit for three months	$6,498
(3) one month rental in advance	$8,000
(4) air-conditioning and management fee for one month	$2,166
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Total	$40,664

4. The tenancy agreement was signed on 15 March 1999 and the cheque therefor was made out on the same date. It was delivered in escrow and was later on dated 16 April 1999. The plaintiff also paid half of the stamp duty of $230 by cash and the total amount paid was $40,894.

5. There was a stocktaking at the defendant's home in Shun Tin Estate, although the parties disputed as to the time of the stocktaking and the number of times involved. The plaintiff said it was only once before signing of the tenancy agreement whereas the defendant said it was two or three times after the tenancy agreement was signed.

6. On 29 March 1999, the plaintiff made out a cheque to the Hong Kong Government in the sum of $2,250 for the payment of the registration fee of the business registration. The application to register the business with the Business Registration Office was made on 20 March 1999 and was submitted over the counter on the same day. The plaintiff's sister, Hau Mei Kee, was registered as a co-partner of the defendant. The defendant admitted that that was at the request of the plaintiff and her sister represented the plaintiff in the relationship between the plaintiff and the defendant. Both sides agreed that it was due to the fact that the plaintiff was at that time going through a divorce with her husband and the plaintiff would not like to reveal her involvement in this business. The date of commencement was described therein as 20 March 1999.

7. The shop was in the previous Chinese name of 皇族水晶 and its English name was Fortune Nature Crystal. The shop was formally opened with a ceremony on 5 April 1999 and the photographs taken that day clearly show that only the plaintiff and the defendant cut the ribbon together.

8. On 9 April 1999 the plaintiff deposited a sum of $42,809 into the account of the defendant. This represented the balance of the plaintiff's contribution to the business.

9. However, the parties disputed as to the actual relationship between them. The plaintiff said it was a partnership business in equal share between them whereas the defendant denied any partnership existing between the two parties.

The plaintiff's case

10. The plaintiff gave a straightforward version of how they became partners in the business of Fortune Nature Crystal. After they have agreed to do business together, they went to the defendant's home to take the stock of crystals. According to the latest Bundle D produced by the defendant just on the day of the trial, they have come to an agreement that the total stock would be around $159,000. The plaintiff had by then contributed $103,171 to the set up of the business. Apart from the aforesaid sum of $40,894 paid by the plaintiff in respect of the rental deposit and half of the stamp duty, the plaintiff had also paid $62,277.10 for other miscellaneous items of expenses.

11. Thus the total amount of the contribution by the two of them would be $262,171 (i.e. $159,000 + $103,171). The plaintiff would have to contribute an amount equivalent to about half of this amount, i.e. $131,085. The plaintiff would have to make up the difference of $27,915. However she had to pay a further amount of $14,894 (although she cannot remember now what this item was), making a sum of $42,809 which she deposited into the defendant's account on 9 April 1999 as evidenced by the document at Bundle B-3.

12. When the plaintiff calculated all sundry items paid by her, originally she said that she paid about $84,000 for miscellaneous sundry items. She said that that was calculated roughly from her memory when she made the witness statement in November 2002, which was about three and a half years later. Various invoices and receipts were lost. Many items could not be remembered clearly and the value of each item could not be traced except for the vacuum cleaner she bought for the partnership from Fortress which she had checked again from the pricelist in Fortress Shop next door. Upon seeing the newly produced Bundle D, she could remember that at page D24, she had put down the figure of 62,277.1. This was the only handwriting of the plaintiff among this pile of documents involving calculations. The defendant also agreed that that was written down by the plaintiff herself. It can be seen that all items of stocktaking were eventually reduced into round figure and the figure 62,277.1 was the only figure with a 0.1 decimal. The plaintiff said she calculated all the items when the invoices were with her by a calculator and reached an exact figure to the decimal point.

13. Apart from the money contribution, the two parties applied for a business registration on or about 20 March 1999. However as aforesaid, instead of the plaintiff's name, the plaintiff's sister, in the name of Hau Mei Kee, was registered as a co-partner instead of the plaintiff, Hau Siu Wah. Even the defendant agreed that the sister of the plaintiff represented the plaintiff and the defendant hardly knew the plaintiff's sister there and then. I find it quite extraordinary that the defendant could say the plaintiff's sister (who was registered as a partner) represented the plaintiff in the business registration and in the same breath could deny the plaintiff as an equal partner.

14. Be that as it may, thereafter, both parties agreed that the plaintiff's main task in the business was to look after the shop and deal with the customers. She would be there to open the shop in the morning whilst the defendant would usually be late. Her main task was to source for merchandize and deal with suppliers. She usually stayed late and closed the shop instead.

15. Thereafter the books of the business revealed that both of them would take an equal amount out of the profits of the business. From the available books, it is quite clear that both of them took a few thousand since August 1999 equally. For example, on 17 September 1999, the defendant took $3,000 whereas the plaintiff took only $2,000 out of the profits of the company. The plaintiff made up the difference in the amount of $1,000 by withdrawing the same four days later. This pattern of taking equal amount from the profits of the business of the partnership was so consistent that there was not even one incident of exception.

16. By October 2000, the plaintiff's sister Hau Mei Kee decided to withdraw her name from the business registration because at that time the MPF Scheme came into operation. She did not want to be burdened with the liability of having to contribute to the fund. She was under some pressure from her own husband. Thus, the defendant informed the Business Registration Office in November 2000 that Hau Mei Kee had withdrawn from the partnership as from 10 October 2000. However in spite of repeated requests and demands, the defendant refused to put back the plaintiff's name on the business registration record. She said that it was better to leave her own name on the business registration for tax efficiency. By March or April 2001 when it was time to renew the business registration, the same subject matter was raised by the plaintiff again. However, the defendant still refused to add the plaintiff's name back onto the record.

17. This time the defendant suggested to open another shop in another district. The plaintiff said that she could only agree if they used the profits from the partnership to open another shop as she did not want to invest a lot more money into a branch shop.

18. However, on or about 18 June 2001, the plaintiff was informed by the defendant that a new shop would soon be opened in Wanchai. The plaintiff instructed her lawyer to make a business registration search and discovered that the Wanchai branch shop was registered on 20 June 2001 in the same business name, but the proprietor was one Cheung Kwong Kuen who is actually the defendant's husband. The defendant in evidence admitted that part of the capital of this Wanchai shop came from the profit of the partnership in Admiralty main shop.

19. By the end of June 2001, due to a shortage of cash at the Admiralty shop, the plaintiff transferred a sum of $15,000 from her own account into the partnership current account. This sum, according to the plaintiff, had never been repaid up till now. By August 2001, the plaintiff considered that she could not trust the defendant anymore. Thus on 9 August 2001, she proceeded with her legal adviser and professional valuers to take a stock of the inventory of the business at the Admiralty Centre shop. The defendant was informed in the mist of the stocktaking by an employee of the shop and she was extremely upset by the plaintiff's action. The police was called in by the defendant. Thereafter the plaintiff considered that the partnership had come to an end since she could not trust the defendant anymore. Thus after the stocktaking she did not attend the shop anymore. The writ was issued on 6 September 2001 by way of partnership action.

20. I find the plaintiff's vision given by her in evidence was entirely straightforward and logical. She is a credible witness. On the contrary, when I scrutinize the defendant's case in detail, denying there was a partnership between the two of them, it was entirely illogical and incredible. I shall analyse the defendant's case in detail hereinbefore.

The defendant's case

21. The pleadings in the defence have changed four times up to the Further Re-Amended Defence. The first version was that the plaintiff requested the defendant to allow the plaintiff's sister Hau Mei Kee to set up the present partnership as a partner and to employ the plaintiff as a sales lady only for the firm. This obviously defiled any logic and is entirely untrue. Even the defendant herself admitted in the witness box that she hardly knew the plaintiff's sister by then and that her sister represented the plaintiff herself. The plaintiff's sister did not contribute any money to the business.

22. The second version was that the defendant agreed to allow the plaintiff to join her in setting-up the firm and allow the plaintiff's sister to put forward her name in the setting-up. It was not very clear as to what was the basis of the plaintiff's joining in the setting-up of the firm.

23. Eventually the defendant pleaded that the defendant only allowed the plaintiff to invest in the business and the plaintiff was no more than an investor cum employee of the firm. It should be noted that even in terms of investment it can be an investment as a partner, although clearly the defendant denied any partnership and did not spell out the basis of the investment.

24. The defendant's evidence is quite incredible in the first place when she described how the tenancy agreement was signed with the plaintiff's name added as a co-tenant and the plaintiff also ended up paying the rent and rental deposit by her own personal cheque. The defendant said that the plaintiff originally just accompanied her to go to the landlord. Since the landlord required cheque payment and she did not have any cheque with her, therefore the plaintiff ended up paying to the landlord with her own personal cheque. Even then the plaintiff could just be a lender and there was no need for the plaintiff to be included as a tenant of the landlord. As Mr Alex Luk, counsel for the plaintiff submitted that, mere employee would not co-sign a tenancy agreement with her employer. Given the fact that the defendant asserted that the plaintiff was poor and needed "job security", it is entirely incredible to suggest that the plaintiff ended up paying $40,664 for the rental deposit and half of the stamp duty by cash.

25. It is also not disputed that the stock-taking took place at the defendant's home. If the defendant was only an employer as she had alleged, she need not go into such stock-taking detail and write down the individual items as such to an employee with other calculations. The stock-taking was quite detail and was rounded up to the nearest dollar. The real purpose of such stock-taking was that the plaintiff would have a better idea of how many stones and crystals were contributed by the defendant into the partnership. I find that the plaintiff's version of the real purpose of stock-taking much more credible. It was taken only after they have agreed to enter into partnership in the business. The total amount of stock contributed by the defendant was $159,000 which was written on D7.

26. Bundle D was only produced by the defendant on the first day of the trial. The total figure written thereon was $262,171 and the figure $131,085 obviously represented half of this amount. Why should it be halved if the business was not intended to be a partnership business to be shared equally by them? When the defendant was asked what this figure of $131,085 represented, the defendant was not able to give a satisfactory answer and ultimately never quite answered the question. She was also unable to give a satisfactory answer in relation to the figure of $42,809 in D7 which turned out to be an exact amount deposited by the plaintiff into the defendant's account thereafter.

27. The defendant again could not explain the figure of $62,277.1 in D24. This was admittedly the only figure written by the plaintiff herself on the document.

28. On the contrary, the plaintiff, even without the discovery of the Bundle D, asserted at the outset this rough figure of about $260,000 as pleaded in the Statement of Claim as the start-up capital of the business.

29. The total amount paid by the plaintiff by way of actual expenditure was $103,171 which was made up by the rental deposit and stamp duty of $40,894 and the miscellaneous expenditure of $62,277.1.

30. On D7, the calculation clearly shows that the stock amount from the defendant was $159,000 and the amount paid by the plaintiff was $103,171 and the total would be $262,171. Half of this total amount would be $131,085. Thus the difference between $131,085 and $103,171 would be $27,915 which was another figure which appeared on D7.

31. However the actual amount later on deposited by the plaintiff to the defendant's account was $42,809. There was therefore a difference of $14,894 more. This figure also appeared on D7 which was added to $27,915 reaching the exact figure of $42,809. The plaintiff simply could not remember what this amount of $14,894 was.

32. I could not accept the defendant's version. On the contrary, I came to the conclusion that the plaintiff's version was consistent with the fact that they were equal partners each contributed equally to the business by way of these payments. I shall now consider other points raised by the defendant which I also find to be incredible.

Tak Shing invoice

33. The defendant asserted that there was an additional item of decoration expenses as evidence by this Tak Shing invoice (Exhibit D1) amounting to $290,000. The plaintiff contended that there was never any substantial decoration for the shop premises. They just re-varnished the existing shelves themselves and bought a few items.

34. The defendant was hesitant and evasive when she was asked about this invoice. She said that the decoration was done through an "acquaintance" when she was examined in chief. Under cross-examination, she said that it was done by her "brother-in-law's (with a long pause) wife". When asked of the identity of the decorator or the contact person at Tak Shing the defendant could not even recall the name of that person, despite her alleged familiarity with the people at Tak Shing. When she was asked what items were involved in this substantial amount of decoration in the sum of $290,000, the defendant could only recall a few items and these items grew when more questions were asked of her. The defendant in my view was making up the story as she went along and she even had to look at the photographs in order to make up the list of items.

35. When the defendant was asked how this $290,000 was paid she said it was paid in two to three installments. There was no such substantial payment from her only Hang Seng Bank account. She then made up the story about payments in Renmenbi and that it was her husband who paid on her behalf.

36. Further this amount of $290,000 was never mentioned in any of her pleadings, witness statement nor the documents at D7 and D24. There was never such sum mentioned in the start-up capital of the business in the calculation between the two partners.

37. I accept the plaintiff's submission that this major re-decoration amount alleged by the defendant never took place and her assertion that she has spent $290,000 is false. In all likelihood, the invoice was probably used for tax purposes so as to reduce the tax for the first year of the business.

Salaries of the parties

38. As mentioned hereinbefore, it was consistently the situation that both parties would take equal amount of money from the profit in the shop without an exception in all these years of the partnership. The defendant's story is that the parties took equal salaries because that was how her mentor taught her. This method supposedly would prevent the employees from wanting any salary increases if they see that the employer's salary is higher. However there is no evidence given by the defendant to show that she took profit in any other way from the business. In any event, the employee Ah Ling had a lower salary.

39. The plaintiff said that other than these salaries, any profits were then re-invested back into the business by the purchasing of more crystals. The initial salary was about $10,000. It was then increased to about $15,000 in March 2001 (see B319). There was one true employee Ah Ling and her salary was only around $8,000 (see B320). Thus it is quite clear to me that the parties were partners and there were taking their profits by a way of salaries equally.

Return of $130,000

40. The defendant contended that she had paid back the plaintiff's "investment" in the sum of $130,000. In the recently discovered document in Bundle D, it can be seen from the bank's statement at D5 that there was a withdrawal of $130,000 on 2 January 2001 from the defendant's account. It was a cash withdrawal. The defendant said that the bank staff put the stack of notes into an envelope and she did not even count the notes as she trusted the bank. This, in my view, was just to explain why she did not remember the denomination of the notes.

41. However when the defendant repaid the plaintiff of her investment in the business, the plaintiff continued to be employed until 9 August 2001 and there was no explanation as to why after such a withdrawal and supposed repayment, the plaintiff still remained in the employment. Further, the date of the repayment did not tie in with the date of withdrawal of the plaintiff's sister Hau Mei Kee from the partnership earlier on or about 10 October 2000.

42. When the defendant was asked how this figure of $130,000 was arrived at, the defendant said it was after discussion and she added that it was the plaintiff who had suggested this sum of $130,000. When she was further asked why after the plaintiff had only invested $80,000 as the defendant has contended in her version but the plaintiff eventually got $50,000 more, the defendant could merely say that she did not see anything wrong with that as the plaintiff had helped her out.

43. It should also be noted that this sum of $130,000 was changed from the originally pleaded sum of $120,000 on the first day of the trial. There was no explanation why the defendant at first pleaded $120,000. The amendment was necessary simply because D5 shows a withdrawal of $130,000. I do not accept that the plaintiff was repaid by the defendant this sum of $130,000.

Loan of $15,000 to the partnership

44. As aforesaid the plaintiff contended that she had lent $15,000 to the business to pay off some outstanding amounts and the defendant admitted the loan but she said she had repaid the plaintiff back in cash from the money of the shop. There was no documentary proof from the account of the shop. Since I do not accept the defendant is a credible witness, I would prefer the plaintiff's version that this sum has not been repaid.

The partnership

45. From the compelling and convincing evidence of the plaintiff, I have no doubt that the state of affair between the two parties was a partnership and each of them was an equal partner of this business. I do not accept the defendant's evidence. The defendant was evasive and hesitate in her answer. She also rambled a lot when she was answering questions. I consider that it has nothing to do with her alleged inability to speak Cantonese. I find that at times she could be very articulate in Cantonese (albeit with some Fukienese accents) and could answer a question at length although some of her answers were evasive and irrelevant.

46. The defendant was clearly upset about the incident of stock-taking on 9 August 2001. She might have felt that the plaintiff had let her down in taking such a drastic measure. After all, it was her who had helped the plaintiff to enter this crystal business. But she had forgotten how she had treated the plaintiff by refusing to register her partnership status in the Business Registration. When she was sued in this partnership action, she had to resort to lies and deceit. She had done all these just to deny the plaintiff of her entitlement. When it comes to money, the defendant herself has forgotten about the friendship between the two of them and the trust the plaintiff had placed on her all along. She can blame no one for the protective measure taken by the plaintiff which is entirely lawful and legitimate.

The Wanchai shop and breach of fiduciary duties

47. Admittedly, the defendant said that the Wanchai shop was opened by her husband or in her husband's name but at least some of the capital came from the shop in Admiralty which was the partnership business of the two parties. (I noted that the defendant had some regrets after she had made such an admission). It was in exactly the same name as the business. The defendant did not tell the plaintiff about it and the plaintiff happened to be the last one to know of it. Under section 31 of the Partnership Ordinance, Cap.38, it is the duty of each partner to :

"account to the firm for any benefit derived by him, without the consent of the other partners, from any transaction concerning the partnership or from any use by him of the partnership property, name, or business connexion."

48. Thus the defendant had opened the Wanchai shop without the consent of the plaintiff and had used the same name in the Wanchai shop together with certain capital from the Admiralty shop. I accept that the defendant's acts in this regard has blatantly breached her fiduciary duties towards the plaintiff who was her partner in the Fortune Nature Crystal business and she must account to her for any benefit derived by her therefrom. A discovery of documents is necessary in the taking of the account between the two parties.

Dissolution

49. The plaintiff eventually accepted that the partnership came to an end by 9 August 2001 when she walked out of the shop. Thus the account should be taken until that day as to her entitlement of the business up till then. As the defendant refused to accept the valuer's report when there was no previous direction for expert's report, it is inevitable that an account and enquiry will have to be taken and made before a Master of the Court.

Conclusion

50. I find that there was a partnership between the plaintiff and the defendant in this business of Fortune Nature Crystal. Accordingly I would make the following orders :

(1) A declaration that the plaintiff was a partner in the Fortune Nature Crystal business in equal share with the defendant and the partnership was dissolved between the two of them on 9 August 2001.

(2) An order that an account shall be taken as to the plaintiff's entitlement upon the dissolution of the partnership by a Master of the High Court including the amount of $15,000 loan given by the plaintiff on 30 June 2001 and the benefits derived by the defendant and/or the plaintiff's entitlement in the opening of the Wanchai shop in the name of the partnership and all necessary enquires shall be made therefor.

(3) There shall also be an order nisi that the costs of this action shall be to the plaintiff, to be taxed if not agreed.

(4) Liberty to apply before me for further direction by either party.