MICHAEL SIVAN v. KWOK CHI KEUNG PAUL AND ANOTHER

HCA8228/96

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.A8228 OF 1996

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J U D G M E N T

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1. There is before the Court a monetary dispute between the Plaintiff, Mr Michael Sivan, and Mr Paul Kwok Chi Keung, the 1st Defendant. The 2nd Defendant, Leason Enterprises Limited ("Leason"), is not represented before me. However, whilst not represented, Leason plays a significant role in the facts of this case. But let me start at the beginning.

2. Mr Sivan and Mr Kwok were formerly shareholders in a Hong Kong corporation called Step Ahead Limited. This carried on business in the provision of recreational facilities. One of the things that both of them were interested in - Mr Sivan particularly has given his background as an electronics engineer - was the use of what are called "virtual reality games machines" ("VR machines"), which induce in the user, via a headset, a sense of total displacement from his immediate physical surroundings and an immersion in the virtual reality which is so created. In any event, Mr Sivan and Mr Kwok wanted to sell Step Ahead. I understand that amongst its assets were not only some 8 such VR machines, but also the licence to run an amusement game parlour, which itself has considerable commercial value.

3. However, when this sale went ahead, the purchaser of Step Ahead did not require the eight VR machines hitherto owned by Step Ahead. I suspect, and this is another aspect of these machines, that the obsolescence factor loomed large. I do not know. What I do know, however, is that these eight machines were in fact taken out of Step Ahead and put into a warehouse. They were stored in a warehouse under the name of Leason, the 2nd Defendant herein, which was also the company which had been acquired by Mr Sivan and Mr Kwok in succession to Step Ahead. There is some dispute on the evidence, although I do not think the precise purpose of Leason greatly matters. Perhaps there is here a distinction without a practical difference. Mr Kwok, for example, says that Leason was formed to receive the proceeds of the Step Ahead sale, whereas I believe that Mr Sivan's evidence was it was really no more than a vehicle for the disposition of these eight VR machines.

4. Be that as it may. What appears to be common ground between the parties is that the eight VR machines in question were not formally injected into the assets of Leason. The way Mr Kwok put it to me in his evidence was that they were "not entered into the books". This, I think, was because there had been a disagreement between Mr Sivan and Mr Kwok about the most appropriate disposition of these machines. Mr Sivan wanted a higher price and was prepared to concede rather more generous payment terms; to the contrary, Mr Kwok wanted money on the nail, so to speak, without worrying about whether instalment payments were to be met.

5. Both Mr Sivan and Mr Kwok were directors and shareholders of Leason, as indeed they had been of Step Ahead. In broad terms, Mr Kwok held 55% of the shares and Mr Sivan held 45%. There is a slight numerical difference, but that was the overall picture.

6. The case is larded with considerable background detail and I shall attempt, in this brief extemporary judgment, simply to isolate the key events as they transpired.

7. The next milestone, if I can call it that, occurred on 18th August 1994. This is an Agreement under the heading of "Leason Enterprises Limited" which is on its face said to be between the two shareholders of Leason, namely Mr Kwok and Mr Sivan. Rather than paraphrase it, it would perhaps be helpful if I set out the two provisions thereof :-

"1. MR KWOK CHI KEUNG, PAUL AND MR MICHAEL SIVAN BOTH AGREE TO TAKE WITH EACH OF THEM FOUR (4) VIRTUAL REALITY MACHINE WITH ACCESSORIES FROM THE COMPANY AS AT TODAY AND THEREAFTER, SINCE MR MICHAEL SIVAN OWNS ONLY 45% OF THE COMPANY, MR MICHAEL SIVAN AGREES TO PAY MR KWOK CHI KEUNG, PAUL US$3,500 UPON SIGNING THIS AGREEMENT WITH A POST-DATED CHEQUE DATED 28.2.95 BEING COMPENSATION OF THE BALANCE OF THE ASSET HE OBTAINS FROM THE COMPANY.

2. MR MICHAEL SIVAN, BEING THE CURRENT LICENSEE OF THE GAME CENTRE SITUATED AT SHOP B5, STAR HOUSE PLAZA, 3 SALISBURY ROAD, TSIM SHA TSUI, KOWLOON, UNDERTAKES AND AGREES NOT TO SURRENDER THIS LICENCE."

8. As such, paragraph 2 has little to do with the current dispute; what does have a great deal to do with it, however, is the division of the machines between the two men, and at the foot of this Agreement the machines respectively taken by Mr Sivan and Mr Kwok are detailed in terms of the specific type of machines allocated to each. Both took four machines.

9. Now, pursuant to their differing philosophies in terms of obtaining the best sale price for the machines, Mr Sivan had got in touch with the manufacturers of the machines, and had duly been referred to a Ms Laurie Imler in Canada. He had reached an agreement with Ms Imler for the sale of 'his' four machines for the sum of US$75,000; such sale was to be by way of post-dated cheques, although again the precise details do not matter. For his part, Mr Kwok had got in touch with a company which again, in the context of this case, has a good deal of importance, and this was a Canadian company called Cybermind Virtual Reality Centres ("Cybermind"). So pursuant to the division of the machines which now had taken place, machines which I accept had only ever been held by Leason either as bailee and/or as bare trustee, arrangements were made to ship these machines to the respective purchasers. But here the problems began.

10. It was decided to ship the machines under the name of Leason Enterprises Limited. Mr Sivan told me in evidence, and I accept, that this was done as a means of avoiding confusing the respective purchasers, namely Ms Imler and Cybermind. For this purpose, a freight forwarding company called Pilot Freight Forwarding Systems Company ("Pilot") was contacted. They were to ship the machines to Canada wherein, on delivery, the original plan was for Pilot to arrange for a cheque to be given to them by Cybermind for the four "Kwok machines", if I may call them that, and for the other four "Sivan machines" to be put in bond for collection by Ms Imler. Thus far, well and good. However, the difficulty was this. As Mr Sivan told me in evidence, and as I accept, Cybermind began to cut up rough in terms of freight and storage charges which it had an obligation, or at least a partial obligation, to pay. I can quite understand how commercial pressure began to be inflicted. As a result of this, Mr Kwok took himself to Canada, in particular to Toronto. He went to sort matters out. Again, the precise detail is not greatly significant given what subsequently transpired, but I understand that Mr Kwok's intention was to remove the obligation of Pilot to obtain cash on delivery, so to speak, and to arrange for the delivery of the machines to his order, from where he could arrange for the delivery both to Cybermind and to Ms Imler; in this way, I suppose, he would ensure that the machines would not reach their respective purchasers before payment - at that stage, certainly, of the Cybermind cheque - had been received.

11. But, like the best laid plans, this scheme did not work. I do not know exactly what the time sequence was, but by the time he got to Canada he found that Pilot, which of course had been responsible for shipping all eight machines the subject of the respective sale and purchase contracts with Ms Imler and Cybermind, had made a mistake of the type beloved of freight forwarders, and had released all eight machines to the consignee Cybermind without (and again I do not know the details) production of the bills of lading or other appropriate authorisation. Again, it does not matter. The point is that Cybermind got the machines and that no money was forthcoming on delivery; more to the point, Cybermind now had possession of all eight machines. Then the real problems started. Because Cybermind refused to pay for them. It refused to pay Mr Kwok under the Cybermind/Kwok Contract for four of the machines, and it refused to release the four machines that had been intended to be put in bond and which would, in due course, have found their way to Ms Imler to fulfill the Sivan/Imler Contract.

12. There is a dispute of fact between these parties as to what in fact ultimately happened to these machines. Only one thing is certain. Cybermind has still not paid for anything, whilst in documents which had been placed before me there are hearsay reports of some of the machines being sighted in the CNN Tower in Toronto, albeit under different livery. I do not know. No evidence has been placed before me in this trial as to precisely where these machines currently are, or under whose control, which could begin to satisfy me upon a balance of probabilities.

13. The next milestone in this saga appears to have been litigation commenced in Canada by Leason against Cybermind. At the same time, or certainly within the same period, Ms Imler, who of course had not received her machines either, had started her own action against Cybermind, whom the parties before me agree is clearly the villain of the piece. A number of documents have been put before me purporting to emanate from the various Canadian proceedings. I simply record the fact that in the Leason litigation against Cybermind, a judgment was obtained against Cybermind, and that in the Imler against Cybermind litigation, Ms Imler also obtained judgment, and an order for the delivery of her four machines to her. Again, there does not seem to be any real difference between Mr Sivan and Mr Kwok as to what happened in terms of the litigation in Canada although there is, I am afraid, a difference between them as to the implications which should be drawn from these facts. Because what Mr Kwok argues, both in this Court and also earlier to Mr Sivan, by a fax dated 26th October 1995, was that upon Ms Imler successfully obtaining judgment against Cybermind, that such event, so far as Mr Sivan was concerned, effectively took care of and concluded his interest in 'his' four machines pursuant to their Agreement of 18th August 1994. The fax which I have referred of 26th October 1995 says as follows :-

"DEAR MIKI,

CONGRATULATIONS!!! ATTACHED PLEASE FIND COPY OF A LETTER FROM OUR LAWYER IN TORONTO, CONTENT OF WHICH IS SELF-EXPLANATORY.

AS YOU, (LAURIE IMLER) HAVE SUCCESSFULLY CLAIMED BACK YOUR 4 VR MACHINE FROM CYBERMIND, PLEASE LET ME HAVE YOUR CHEQUE FOR US$3,500 PAYABLE TO KWOK CHI KEUNG, PAUL ACCORDING TO OUR AGREEMENT SIGNED LAST YEAR. (COPY OF THE SAID AGREEMENT IS ALSO ENCLOSED HEREWITH FOR YOUR QUICK REFERENCE.)"

The latter, of course, was a reference to the August Agreement.

14. There is a further disputed fact central to the case, or at least central to the way the Defendant has put his case, to the effect that Ms Imler has not only obtained judgment but indeed has actually received her four machines the subject of her suit against Cybermind. No evidence of any substance has been put before me in this regard. Mr Sivan says that as a result of his conversations with Ms Imler, that what she ultimately received from Cybermind was just parts or junk. Mr Kwok says, relying in part upon a fax dated 14th December 1995 from himself to Mr Sivan, that, and here I quote from his fax :-

"I WAS INFORMED BY OUR SOLICITORS IN TORONTO, THAT LAURIE IMLER HAS ALREADY TAKEN DELIVERY OF HER 4 VR MACHINES FROM CYBER YOU CAN CONTACT LAURIE IMLER FOR FURTHER DETAILS."

15. As Mr Christopher Lam, who appears for the 1st Defendant, accepts, the information in this document is double if not triple hearsay, but Mr Lam urges upon me, when looking at the matter as a whole, to conclude that indeed Ms Imler indeed has received her four machines. If I am with him on this, he says, then clearly Mr Sivan's interests are taken care of, and he has and can have no further quarrel with Mr Kwok, and no interest in the monies the subject of this present dispute. In so far as the receipt or otherwise by Ms Imler of her four machines is relevant, Mr Lam undoubtedly bears the burden of establishing such receipt as a matter of fact. I do not accept, however, that on the evidence that the 1st Defendant has discharged this burden. In any event, it appears to be common ground by both parties that upon receipt by Cybermind, the eight machines were themselves cannibalized to make six so that, on any view, it is difficult to see how it could be said that Ms Imler could have received the four machines she had contracted for with Mr Sivan even if this fact could otherwise be established.

16. But I digress. Why was the receipt by Ms Imler or otherwise so important? As matters stand at the moment, Mr Kwok remains unpaid by Cybermind and Mr Sivan, whose evidence on this point I accept, remains unpaid by Ms Imler. Indeed I note in passing that Mr Kwok has got a judgment against Cybermind in the name of Leason for some US$48,000, and unsurprisingly has had no success in executing it. But what is it precisely that the two parties are now arguing about? And it is here that we come to the nub of the present dispute, that is, a fight over monies which have resulted from what I shall call 'the Pilot litigation'.

17. Perhaps unsurprisingly it was decided by Mr Kwok, I think it fair to say after consulting Mr Sivan, to bring a case against the defaulting carrier, Pilot, whose negligence had caused the wrongful delivery of the eight VR machines to Cybermind in the first place. Accordingly, this case was brought by Leason in Hong Kong in High Court Action No.A11029 of 1994. The action was brought by Leason because, of course, in contractual terms Leason had dealt with Pilot - Leason had been, and had been named as, the shipper. I have not seen the pleadings in this action, but I have no doubt that the action against Pilot by Leason was aimed at recovering a sum which represented the invoice value of the eight VR machines which were being so shipped. Unsurprisingly again, in the circumstances a summary judgment application was taken out by Leason. This matter was dealt with by Cheung J. on 29th March 1995, the learned judge delivering his judgment on 4th May 1995. The Judgment is extensive and it has been placed in the bundle before me. For present purposes, the material part is at page 13 of the Judgment where Cheung J., whom I see in this instance was sitting on a Master's appeal, allowed the appeal and ordered judgment to be entered for the Plaintiff for the sum of US$150,000 and $12,000, the figure of $12,000, I understand, representing the costs of Mr Kwok's trip to Toronto. In addition, the learned Judge ordered interest at the judgment rate on these two sums from the date of the service of the writ until payment, and gave the Plaintiff the costs nisi of this action, both below and of the appeal.

18. As I understand the evidence from Mr Kwok, who was dealing with the matter on behalf of Leason with Mr Sivan's consent, the judgment against Pilot, which is unincorporated and appears to be a partnership of some three persons, was going to be appealed by Pilot. Mr Kwok then had to make a decision. Should he run the appeal and try and hold the Judgment in its full amount, or should he agree to reduce it? He chose the latter course. By a Consent Order dated 22nd June 1995, the judgment sum of US$150,000 was reduced to US$90,000, the $12,000 figure stood, and the legal costs were agreed at $300,000, this being stated to be in full and final settlement of the Judgment. I note in passing that my attention was originally specifically drawn to paragraph 5 of this Consent Order wherein reference is made to what would happen in the event that there was any recovery in the Leason proceedings in Canada, but since in fact there was no such recovery, this does not seem to me to be worth further pursuing.

19. I understand that even after this settlement and Consent Order that there were difficulties actually in getting any money out of Pilot. I am told, although again the details are not of great relevance, that there were a number of dishonoured cheques. And in fact this figure of US$90,000 as an amended judgment debt was again reduced in the fullness of time, within Mr Kwok's discretion, to a figure of US$75,000, although I understand that the figure for the costs of $300,000, and the $12,000 remained unaltered.

20. Mr Kwok has told me in evidence, and there have been a number of statements of account which he has rendered to Mr Sivan, his co-director and co-shareholder, that in all a total of about $789,000 has to-date been received from Pilot. After deduction of expenses, I understand that there were residual funds at least in the sum of in or around $320,000. The problem, or at least the accounting problem, is exacerbated by the fact that when Mr Kwok received funds from Leason which had emanated from Pilot, some of these funds were used by him to repay outstanding loans that he had originally made to the company. Although there is a good deal of documentation available, it has not been fully explored in this Court. What is apparent, however, and that which Mr Kwok does not in any sense try to hide, is that he is of the view that Mr Sivan is not entitled to any of the monies that have come through Leason to him in settlement, or in part settlement at least, of the Pilot judgment debt. And it is this contention which has been at the heart of this case over the past four days. I am bound to observe, as mildly as I may, that this case has been long on paper, long on detail and short on hard analysis. But it is not my present function to allocate blame for this state of affairs. My function is solely to decide whether Mr Sivan has, as he says he has, and as Mr Neil Thomson, his Counsel, says he has, a claim to what I will, for shorthand purposes, call "the Pilot monies", that is, the monies accruing to Leason emanating from the Pilot judgment.

21. After considering all the evidence, in my judgment Mr Sivan does indeed have such an entitlement. I agree with the argument of Mr Thomson, after some reflection, that such funds as were received by Leason pursuant to the judgment against Pilot were, in all the circumstances, beneficially funds belonging to Mr Kwok and Mr Sivan. As both Counsel are aware, I had wondered for some time during this case whether such monies properly should be categorized as company assets, but I am satisfied that in these very particular circumstances that Leason was simply holding the fruits of the Pilot judgment for and on behalf of Mr Sivan and Mr Kwok. As Mr Thomson pointed out to the Court, although Leason was named as the Plaintiff in the suit against Pilot because it was the shipper, in real terms Leason itself had suffered no damage; in this regard I accept, and so find, that at the time of such shipment, the eight machines were respectively owned in lots of four machines each by Mr Kwok and Mr Sivan.

22. If this analysis be correct, and interestingly it coincides with the case of both parties as to the status of the Pilot monies, then I can see no reason why Mr Kwok should not account to Mr Sivan for his share of those monies accruing to Leason from the Pilot judgment, a share of which accrues to Mr Sivan - and I think Mr Thomson is right in this submission - by reason of Mr Sivan's 45% beneficial interest in the machines, and not solely by reason of his 45% shareholding in Leason. And with the best will in the world, and with respect to Mr Lam's arguments, I find it difficult to see how the fact that Ms Imler has obtained a judgment in Canada in her suit against Cybermind can effectively deprive Mr Sivan of any interest in the judgment monies obtained as a result of the Leason suit against Pilot.

23. In reaching this conclusion I wish to make it quite clear that in considering the correctness or otherwise of the action taken by Mr Kwok in refusing to distribute to Mr Sivan Pilot monies as he had received them through Leason, that in no sense do I regard him as anything but an honest man. He struck me as well intentioned, well meaning and honest. Equally, Mr Sivan struck me as honest. This is not a case, therefore, which in my view depends on the Court's evaluation of the demeanour or the probity of the two witnesses. In a nutshell, although I am in the course of finding that Mr Sivan is entitled to his share of the Pilot monies, in my view Mr Kwok, in acting as he has, has simply been ill-advised.

24. At one stage I was very concerned about two other matters. I was concerned about the issue of Mr Sivan's locus, a point raised at the outset of this trial with Mr Thomson; in particular I wondered whether this should have been an action conducted in derivative form. After hearing Counsel, I am satisfied, in these somewhat unusual circumstances, that Mr Sivan indeed does have locus. The other matter that concerned me was one of possible election. I wondered whether the Plaintiff, Mr Sivan, could have been said to have elected so as to exclude any rights against Mr Kwok as a result of interlocutory and final judgment having been entered against the 2nd Defendant in default of notice of intention to defend on 9th April 1997, whereby it was adjudged that the 2nd Defendant do pay the Plaintiff damages to be assessed and costs and an account of all proceeds of sale of machines received by the 2nd Defendant, together with interest. I am satisfied on reflection that there is no such election which would serve to preclude this action against the 1st Defendant.

25. This then leaves the final point, raised by Mr Christopher Lam today in argument, namely that when one looks at the entire matrix of the facts, the distribution of company assets was illegal pursuant to section 79B of the Companies Ordinance. To be fair to Mr Lam, he puts this in the alternative because his primary case is of course that these are not company assets as such, but he said that if I am against him on this (which in the event I am not) and find that they were, then the entire transaction would be tainted. I do not think this is right even on the hypothesis upon which the argument is based, because as Mr Thomson points out, the Agreement of August 1994 would suffice to be a sufficient resolution for the purposes of section 116B of the Companies Ordinance, and I mention the point at this stage solely in the event that the matter should go further, and should I be held to be incorrect in finding that these machines, and the Pilot monies, do not represent company assets in the accepted sense.

26. Looking at the matter in the round, the position as I see it is clear cut. Neither Mr Kwok, in his relationship with Cybermind, nor Mr Sivan, in his relationship with Imler, have been paid. Mr Kwok has a judgment, via Leason, against Cybermind, and Ms Imler has a judgment against Cybermind, but ultimately I do not think that these matters are of great significance in this case, despite the detailed attention accorded them. In particular, I do not think that these matters impact upon the rights of both Mr Kwok and Mr Sivan to participate in the Pilot monies. Mr Kwok has of course already so participated, and the effect of this judgment is to establish that, in my judgment, his refusal to permit Mr Sivan so to participate in terms of a 45% share is wrongful and is in error.

27. What relief, therefore, does the Plaintiff want in this case? As both Counsel will attest, a good deal of time has been spent during this trial in trying to classify the facts, and in the course of such efforts, it may be said with some justification at the instigation of the Bench, Mr Thomson sought to amend his Statement of Claim. One of those amendments involved the addition of a new paragraph 7 to the prayer. What has happened is that he has now, at the end of his closing submission, in effect sought to divide the amended paragraph 7 into two parts. The relief that he now asks for is as follows :-

1. That an account be taken of monies received by the 1st Defendant from the 2nd Defendant arising out of the judgment in High Court Action No.A11029/94;

2. That there be an order for payment for 45% of such amount less expenses properly incurred in the aforesaid action in the prosecution of such action; and

3. Interest and costs.

I am prepared to give him the relief in the terms now requested. I do not think that Mr Lam, who has argued this case vigorously and fairly on behalf of the 1st Defendant, is taken by surprise. What it does mean, however, is that further proceedings will be required wherein an account will formally be taken before a Master of the High Court.

28. I give liberty to apply also for further directions in so far as may be necessary.

29. I will hear the parties on costs.

[Submissions from Counsel]

30. I have now had the advantage of hearing from Counsel.

31. Mr Lam thoughtfully reminds me that I have omitted to formally deal with the Defendant's Counterclaim. This Counterclaim was put on the basis of US$3,500, which was going to be the financial accommodation due from Mr Sivan to Mr Kwok upon the successful sale of the machines to respectively Messrs Imler and Cybermind. In light of the judgment herein I do not think that this is any longer of relevance. I dismiss the Counterclaim.

32. This leaves outstanding the question of costs. With all due respect, I have been unimpressed by the blurred thinking and lack of analysis that to-date this case had attracted. Indeed had the Bench not been proactive (possibly more than it should have been), I wonder how long we would have taken. Mr Lam now submits that the case should have taken considerably less time than it did, and he also says that Mr Kwok has been at all times ready and willing to furnish accounts. That may be so. But, of course, the problem has always been that up to now Mr Kwok has been disinclined to share with Mr Sivan any of the Pilot monies, and it is this which has formed the central theme and the subject-matter of this trial.

33. Having said that, I am not at all sure that this is an appropriate case for costs simply to follow the event in the normal course. Possibly costs are as much a matter of stomach as cerebrum, and in this case I am disinclined to give Mr Sivan all his costs, although ultimately he has been successful in this action. I do not know, of course, upon the taking of an account, exactly how much money will be ordered to be paid to Mr Sivan. This will depend upon what is revealed when an account is taken before the learned Master. On the available figures, that is the figures furnished by Mr Kwok, I think that he produced a figure for residual monies of almost exactly $320,411, so that 45% of that, even if that were to be the true figure, would be in the region of $144,000, albeit it is true, of course, as Mr Thomson has pointed out, that the District Court limit presently stands at what in my view is the absurdly low figure of $120,000. In any event, looking at the matter in the round, in my judgment Mr Sivan is to have 75% of his costs of this action, to be taxed if not agreed, and I so order.

34. I thank Counsel for their assistance.