RONALD LI-KAI CHU AND ANOTHER v. DEACON TE-KEN CHIU AND OTHERS

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. The 4th defendant ("Asia") is a private company with an issued share capital of HK$2,000,000 divided into 20,000 shares of $100 each of which, at all material times, the plaintiffs Ronald Li-kai Chu ("Ronald Chu") and his wife Sun Chik Ming have held 9,200 and 600 shares respectively, and the 1st defendant ("Deacon Chiu") and his wife, the 2nd defendant, have held 9,300 and 700 shares respectively. The remaining 200 shares have been held equally by Ronald Chu's deceased father and his mother.

2. By the terms of an agreement dated 31st May 1973 between Ronald Chu and Deacon Chiu it was agreed that Asia should be managed by both men as Joint Managing Directors and should not have a chairman.

3. They also agreed that an extraordinary meeting of Asia should be held to give effect to this agreement. However, no such meeting was ever held.

4. The 3rd defendant ("Far East") is a private company with an issued share capital of H.K$50,000 divided into 500 shares of $100 each. Deacon Chiu and his wife each hold 250 shares and together with their sons Dick and David Chiu are directors of Far East.

5. Ronald Chu and Deacon Chiu were at all relevant times the co-owners of the Yuen Long Theatre, being tenants in common in equal undivided shares.

6. The plaintiffs allege that at all material times prior to July 1975 Asia was the monthly tenant of the co-owners in respect of Yuen Long Theatre ("YLT") and there conducted the business of a cinema operator exhibiting films to the public.

7. In both their original defence and amended defence the 1st and 2nd defendants admitted that this was so. It is curious, however, that the 3rd defendant, being the 1st and 2nd defendants wearing their corporate hat, made no such admission. It also made no admission to several uncontestable allegations in the statement of claim that the 1st and 2nd defendants had specifically admitted. Five days after the commencement of the trial the 1st and 2nd defendants indicated through their counsel that they proposed to seek leave to amend their amended defence, and on the following day made a formal application to amend it so as to withdraw these admissions.

8. The 1st and 2nd defendants also sought and obtained leave to further amend the same paragraph of their amended defence which, in addition to the admissions, contained a denial that the film projection equipment and cinema seats in YLT were and are the property of Asia. This amendment resulted in the insertion of the word "expressly" before the word "denied". It appears therefore, that although they had changed their, minds about their admissiona as to Asia having been the monthly tenant of the co-owners and having con-ducted the business of cinema operator in YLT, the 1st and 2nd defendants did not feel sufficiently strongly to make these matters the subject of a denial, let alone an express denial, as they obviously considered to be necessary in respect of the other allegation in the same para-graph of the amended statement of claim.

9. The amendment which withdraw the admission as to the existence of a tenancy thus brought the defence of the 1st and 2nd defendants into line with that of their company, Far East, in this regard. Despite the unemphatic nature of their pleadings on this aspect of the plaintiff's case, it became vary clear during the course of the trial that Deacon Chiu, his wife and their company Far East were strenuously asserting that the alleged tenancy did not exist and that Asia had merely occupied YLT as the licensor of the co-owners Ronalb Chu and Deacon Chiu. The question as to whether ,a tenancy had in fact existed is, as will be seen, a matter of great importance.

10. On 16th July 1975 Asia and Far East entered into a written agreement, signed by Roanld Chu and Chiu for Asia, and by Deacon Chiu for Far East, which states that Asia "licenses (Far East) to enter upon and use the cinema premises (of YLT) save and except the sweet shops and other shops" in the building, for a period of three years from 1st June 1975 at a fee of $60,000 per calendar month. Having entered into occupancy of the cinema in pursuance of this agreement Far East remained there until 31st December 1984.

11. The plaintiffs allege, and the 1st, 2nd, and 3rd defendants admit that Far East failed to pay the sum of $30,000 for its occupation of YLT for the last half of the last month of the three year period, namely May 1978 that it continued to occupy the theatre and use the fittings and equipment belonging to Asia therein after the expiration of the last day of the period stated in the agreement namely 31st May 1978 without having paid any licence fee or other consideration in respect of that occupation and use.

12. Although the 1st and 2nd defendants have pleaded that they admit that Far East entered into occupation of YLT on or about 1st June 1975 pursuant to the terms of an agreement dated 16th July 1975 made between Asia acting on behalf of Ronald Chu and Deacon Chiu of the one part and Far East acting through its director Deacon Chiu of the other part they make no admission as to whether this agreement is a licence as alleged by the plaintiffs. Moreover they deny the plaintiffs, allegation that Far East's occupation of YLT after 31st May 1978 was unlawful.

13. In its original defence Far East pleaded that the written agreement of 16th July 1975 was a tenancy agreement made between Asia as landlord and Far East as tenant. In its amended defence, however, it claimed, and continues to claim, that the agreement was a licence authorising Far East to enter upon and use the cinema premises of YLT for the purpose of showing films for a period of three years from 1st June 1975 at a monthly licence fee of $60,000.

14. Far East claims that, by virtue of a written agreement dated 31st May 1973, Ronald Chu and Deacon Chiu agreed that Asia would be appointed as their agent to collect rents or income from the tenants or occupiers of properties held by them as tenants in common and to disburse all proceeds from such rents or income in accordance with, article 11 of the agreement. In the light of such agreement, Far East contends that Asia was entitled only in its capacity as agent for Ronald Chu and Deacon Chiu as co-owners of YLT to collect the licence fees payable by Far East under the agreement of 16th July 1975 and that, accordingly, Asia had not been the tenant of the co-owners in respect of YLT.

15. Far East also contends that Asia's alleged agency in respect of the cinema premises of YLT terminated at or short by prior to 31st May 1978 when the licence agreement expired, or alternatively when Ronald Chu and Deacon Chiu in an exchange of letters in the months of February, March and April 1980 agreed to terminate it. Far East concedes, however, that it is liable to pay to Ronald Chu "reasonable and fair damages" for its use and occupation of Ronald Chu's interest in the cinema premises from 1st June 1978 to 31st December 1984. What are "reasonable and fair damages" is left to the court to assess.

16. I have no doubt that the agreement of 16th July 1975 is a licence agreement. The preamble to the agreement states that Asia had agreed to give to Far East a licence for the showing of films in YLT, and in the body of the agreement Asia expressly licences and authorises Far East to enter upon and use the theatre for the purpose of showing films for a three year period from 1st June 1975 between the hours of 8 a.m. and 2 p.m. the next morning on every day during that term.

17. Not only does clause 17 of the agreement impose a strict limitation as to the hours during which Far East is permitted to enter and use the cinema, but it stipulates that possession of the premises is to remain at all times in Asia.

18. Furthermore, clause 18 of the agreement specifically provides:

"Nothing herein contained shall create or be deemed to create any tenancy as between the parties hereto or to confer upon (Far East) any right or interest in the cinema premises but its presence in and upon the cinema premises shall be only that of a licensee and (Far East) shall not be entitled to claim any right under any existing or future legislation which may offer protection to tenants."

19. It is also clear from correspondence sent to Asia that Far East regarded the relationship between itself and Asia as being one of "licensee and grantor". It is therefore surprising that in its original defence Far East pleaded that the agreement is a tenancy agreement, and that the 1st and 2nd defendants in their defence plead that they make no admission as to whether the agreement constitutes a licence as alleged by the plaintiffs.

20. Before turning to a consideration of whether Asia was at all material times the tenant of Ronald Chu and Deacon Chiu in respect of YLT, it is convenient to continue to relate the events with which this action is concerned.

21. On 30th May 1978, the day before the licence agreement expired, Ronald Chu wrote on behalf of Asia to Far East noting that the licence was due to expire and requesting that it deliver up vacant possession of the theatre premises on 31st May. By reply letter David Chiu, a son of Deacon Chiu and a director of Far East, confirmed that, in accordance with an alleged discussion with Ronald Chu, the matter would be left in abeyance until Deacon Chin returned to Hong Kong on or about 10th June. He went on to observe that he had been advised by his solicitor that Ronald Chu could not solely act for Asia since it was a partnership (sic). Apparently, Deacon Chiu was content to let matters rest on that basis and Far East remained in occupancy until 31st December 1984 without payment of any licence fee or other consideration.

22. Apart from YLT, Ronald Chu was also the co-owner of the Waldorf Theatre in Tsuen Wan. The other co-owner was a public company named Far East Consortium Ltd of which the 1st and 2nd defendants, their three sons Dick, David and Dennis and three other persons were the directors. Originally, Asia had operated the Waldorf Theatre but in 1977 it granted a licence to Victory Motion Picture Company Limited to operate it as a cinema. After this licence expired in January 1980 a company called Hong Kong Riviera Limited ("Riviera") indicated that it was interested in licensing the theatre and on 29th January of that year Far East Consortium Limited and Ronald Chu licensed it to Riviera for a period of two years at a licence fee of $3,000 per day for the first year and $3,500 per day for the following year. Under the agreement, Riviera was also obliged to pay 50% of its net profit, if any, derived from the annual ticket sales of the cinema. David Chin signed this agreement on behalf of Far East Consortium Limited, and Ronald Chu and Riviera's representative each signed on his own behalf. Asia was not involved in the agreement.

23. Shortly afterwards, on 21st March 1980, Ronald Chu wrote to Deacon Chiu and informed him that Riviera had indicated to him that it also wished to operate YLT and was prepared to pay a higher licence fee than that which it was paying for the Waldorf Theatre. The sum that it had offered to pay was $5,800 per day including a bonus. He indicated to Deacon Chiu that he considered these to be favourable terms and requested him to agree to accept the offer. In the letter he also mentioned that if, as in the case of the licence agreement for the Waldorf Theatre, Deacon Chiu required the agreement to be signed by the co-owners of the property, thus by passing Asia, Ronald Chu would be prepared to agree to the same procedure being followed on this occasion. He enclosed in the letter a  copy of the proposed Chinese agreement for Deacon Chiu's perusal and a photocopy of a cheque for $100,000 that Riviera had paid as a deposit to Asia as stakeholder for the proposed licence transaction.

24. If, as the plaintiffs maintain, Asia at that time enjoyed a monthly tenancy of YLT there is no dispute that it was capable of granting a licence to Riviera to operate it as a cinema. If on the other hand the co-owners wished to by pass Asia and grant a licence to Riviera in their own names no obstacle lay in the way to prevent them from so doing. Since they controlled Asia there would be no necessity for them to serve on Asia a notice to quit; and as the grant of a licence to Riviera was inconsistent with exclusive possession in YLT being vested in Asia the tenancy would be extinguished by operation of law.

25. It is as well to recall that at this point of time Far East was not only $720,000 in arrears in its payments to Asia in respect of its licence agreement relating to YLT but had continued in occupation of the cinema without payment for almost 22 months. Plainly the longer Far East could continue in occupation the greater would be the financial benefit to it. It is equally plain that because of their voting power in Asia Deacon Chiu and his wife could frustrate any attempt by Ronald Chu and his wife to evict Far East from the cinema. The situation was thus in a state of deadlock and for as long as it remained so it was to the advantage of Deacon Chiu and his wife.

26. On 25th March 1980 Ronald Chu again wrote to Deacon Chiu and urged him to give the matter of the proposed licence to Riviera his immediate attention so that an agreement could be executed in good time. This sense of urgency was no doubt due to the fact that the Chinese copy of the proposed agreement stated that the licence period would commence on 1st April 1980. On 29th March Deacon Chiu replied to both letters. He admitted that the first letter had been handed to him personally by Ronald Chu on the afternoon of 22nd March, and con-firmed a conversation that he had held with Ronald Chu over the telephone on 28th March in which he had agreed to accept Riviera's terms. On the same day Ronald Chu wrote to Deacon Chiu, and acknowledged receipt of his letter of 29th March. He proposed that, as Mr. William Kwok of Fairbairn and Kwok had prepared the licence agreement with Riviera for the Waldorf Theatre he would likewise ask him to prepare the proposed agreement for YLT and expressed the hope that this would meet with Deacon Chiu's approval.

27. On the following day, 2nd April having just received a letter dated 1st April from Riviera in which it had indicated its willingness to extend the time for execution to 5th April Ronald Chu wrote to Riviera and requested that, as the 4th and 5th April were public holidays, the parties attend at the office of Fairbairn and Kwok on 3rd April to sign the agreement. On the same day he wrote to Mr. William Kwok and requested him to ask Deacon Chiu to attend at Mr. Kwok's office on 3rd April for that purpose.

28. On the same day Ronald Chu sent an urgent letter by special messenger to Deacon Chiu in which he protested his horror at having been told by Mr. Kwok that when he had called Deacon Chiu to make arrangements for him to sign the agreement Deacon Chiu had suddenly and without any explanation refused to sign it. Ronald Chu requested Deacon Chiu to explain why he had done so and urged him to attend at Mr. Kwok's office on 3rd April to sign the agreement.

29. Ronald Chu not only confirmed the agreed correspondence between the parties but gave evidence that Deacon Chiu had verbally informed him that he was willing to accept Riviera's offer. He explained that it had been because William Kwok had told him on 2nd April that Deacon Chiu had refused to sign the agreement that he had written the letter of the same date to Deacon Chiu to personally request him to attend at Mr. Kwok's office on 3rd April. He also told the court that he and Mr. Yuen Man, who represented Riviera, had gone Mr. Kwok's office on the afternoon of both 2nd and 3rd April and that it was on one or other of those two occasions that Mr. Kwok had telephoned Deacon Chiu. This matter was not pursued by counsel for any of the parties, but it seems that it is quite possible that the information that Ronald Chu said that he had obtained from William Kwok on 2nd April as to Deacon Chiu's refusal to sign the agreement coincided with the telephone call that Ronald Chu said William Kwok had made to Deacon Chiu on that date.

30. Although what Deacon Chiu is alleged to have told William Kwok about refusing to sign the agreement is hearsay, and William Kwok himself was unable to recall the conversation it is significant that nowhere in the correspondence between the parties does. Deacon Chiu deny the allegation in Ronald Chiu's letter that he had refused to sign the agreement. Bearing in mind the importance of the matter of consent I would have expected Deacon Chiu to have made a point of denying that he had refused to sign the agreement if in fact such had not been true. A study of his correspondence clearly shows that he is extremely quick to challenge any allegation with which he disagrees.

31. Ronald Chu also testified that he and Yuen Man had waited in Mr. Kwok's office until after 6 p.m. on April 3rd in the hope that Deacon Chiu would attend and sign the agreement but that he failed to appear. It was suggested to Ronald Chu in cross-examination by counsel for Far East that Deacon Chiu had left Hong Kong for Japan on April 3rd and would therefore have been unable to attend at William Kwok's office. The implication seems to have been that Ronald Chu knew that Deacon Chiu would be absent and that by attending with Yuen Man at Mr. Kwok's office Ronald Chu had simply been playing a charade. What purpose he would have had in mind in resorting to such devious behaviour was not made clear. However, Ronald Chu denied any knowledge of Deacon Chu having gone to Japan that day and since Deacon Chiu did . not testify at the trial, there is no evidence to support counsels suggestion.

32. William Kwok was clearly embarrassed by being requested to give evidence as he had known both Ronald Chu and Deacon Chiu from his boyhood and addressed both of them as "uncle". Although quite understandably he was unable to recollect the events of 2nd and 3rd of April 1980 with clarity he was able to say that his diary would reveal whether Ronald Chu had attended, at his office on those days. Having been requested to do so he returned to his office during an adjournment and reported that having checked his diary for 1980 he found an entry for 5 p.m. on 2nd April which read "Ronald Chu - sign contract", and that for 3rd April there was a 5.30 p.m. entry which read "Chu Lap-hoi". It is common ground that Chu Iap-hoi is the transliteration from the Cantonese pronounciation of Ronald Chu's name. He also agreed that he had been introduced to Mr. Yuen Man as a director of Riviera and that Mr. Yuen had attended at his office on more than one occasion,

33. I found Ronald Chu to be an honest witness and I accept his testimony. He made no attempt to bolster his evidence surrounding the unsuccessful Riviera offer or to place a more favourable interpretation on the correspondence by claiming when it would have been quite easy to do so without fear of contradiction from any source other than Deacon Chiu himself that Deacon Chiu had made damaging admissions or assertions to him.

34. It is not in dispute that Deacon Chiu, despite his stated agreement to the terms offered by Riviera, did not sign the licence agreement that had been prepared by William Kwok. However, the correspondence gives no indication that he was unwilling to execute the agreement. Indeed, in a letter dated 2nd April written to Ronald Chu, he re-confirmed that he had no objection to leasing YLT to Riviera and notified his acceptance of the appointment of William Kwok to handle the documentation.

35. On 3rd April he wrote to Ronald Chu and having acknowledged that at 11.55 a.m. of the same day he had received Ronald Chu's letter of 2nd April explained that before he could sign the agreement he must examine it and study its terms. If he had really been willing as he professed to be to enter into the agreement with Riviera there seems to me to have been no reason why Deacon Chiu, knowing as he must have done that the matter was urgent, could not have made an appointment to discuss the proposed terms with William Kwok in order to satisfy himself that they satisfied his requirements. Indeed Mr. Kwok had prepared the earlier licence agreement relating to Riviera and the Waldorf Theatre and it is reasonable to assume that Deacon Chiu would have realised that apart from the obvious necessary alterations to times, amounts and parties the terms of the proposed agreement would closely follow those in the Waldorf agreement. Indeed a comparison of the terms of the proposed agreement with those of the Waldorf agreement reveals that other than the necessary changes the documents are almost identical. If he had genuinely been interested in Riviera's offer it would have taken him very little time to peruse the terms of the document.

36. On 10th April, presumably hoping that Riviera would still hold open its offer, Ronald Chu again wrote to Deacon Chiu and requested him to indicate whether he was willing to execute the agreement. Six days later, on 16th April Deacon Chiu sent a strangely oblique reply to Ronald Chu and informed him that he had communicated  his intentions to William Kwok directly. Indeed, on the very same day he did in fact write a letter to William Kwok in which he acknowledged that he had received a copy of the license agreement from him on 10th April and stated that he had no objection to signing it.

37. Since Ronald Chu had received his copy of the agreement on 2nd April, it is reasonable to assume that Deacon Chiu's copy was also available on the same day. Bearing in mind the urgency of the situation, it is surprising that Deacon Chiu, who had earlier professed to be willing to accept the Riviera offer, did not arrange with William Kwok for his copy of the agreement to be sent to him promptly instead of simply waiting until 10th April for it to arrive. Notwithstanding this renewed profession of willingness to sign the agreement he failed to do so and, finally on 17th April Riviera wrote to Ronald Chu and announced that due to the fact that he had been unable to come to any agreement with Deacon Chiu it had decided to withdraw its offer and requested the return of its deposit. The transaction therefore came to an abrupt end.

38. Completely unbeknown to Ronald Chu, however, a number of telexes had been passing between David Chiu and Riviera between 3rd and 8th April. These telexes were disclosed on discovery by the solicitors for Far East after the bundles of documents had been prepared for the trial.  Their contents are such that I propose to set them out in full.

39. The first telex is from Riviera to David Chill and is dated 3rd April:

A reply was sent on the sane day by Far East as follows:

"OK will pass the message to Mr. David Chiu + ?"

On the same day David Chill replied to Riviera as follows:

"Attn Mr. Yuen Man

 

Re: Yuen Long Theatre Licence Agreement

 

Urgent

 

The letter is ready for collection pls send your messenger to collect it at our office.

 

Regards,

 

David Chiu"

Riviera replied to this telex on the same day as follows:

"Mr. Yuen has already left the office to sign the agreement re Yuen Long Theatre as it is already past five o'clock and he has not yet received the letter which you have said that you will deliver to the office here."

The reply to Riviera on the same day reads:

"Pls pass the message to Mr Yuen when he returns."

Riviera then replied on the same day:

"Pls pass on our message to Mr David Chill."

To this telex came the following reply from Far East:

"Will do"

40. Finally on 8th April Riviera sent the following telex to Far East:

"Attn: Mr. David Chiu

 

This is to acknowledge receipt ur telex at 5.30 p.m. contents of which were addressed to Mr Yuen Man.

 

Regards

Kitty Tao

Executive Secretary"

41. Curiously the plaintiffs were never given discovery of the telex of which the final one is an acknowledgement. Counsel for the plaintiffs contends that it must have contained the indemnificiation referred to in the first telex sent by Riviera to David Chiu. He invites rile to draw the conclusion that Deacon Chiu through his son David had been at work attempting to sabotage the proposed transaction by persuading Riviera to withdraw its offer and that as a consequence of having been given an indemnification, Riviera finally did so. Counsel submits that this exchange of telexes clearly shows that Deacon Chiu had had no intention of entering into an agreement with Riviera for YLT and that his apparent willingness to sign an agreement as indicated by the correspondence was nothing more than a smokescreen sent up to convey the impression that he was being co-operative and had every intention of acting in Asia's best interests, whereas in reality he was deliberately playing for time and working behind the scene to ensure that no agreement would ever be signed.

42. In their joint defence Deacon Chiu and his wife aver that Deacon Chiu did not sign the agreement because at that time Riviera had been known by Deacon Chiu to be insolvent and therefore unable to pay the proposed licence fees. They further aver that Deacon Chiu had in fact notified Ronald Chu that Riviera was insolvent. In his testimony Ronald Chu denied this and claimed that in the months of April and May 1980 and, indeed for the rest of that year, Deacon Chiu and he had had no discussions concerning Riviera's financial health.

43. Notwithstanding, a vigorous attempt by counsel for Far East to impugn the financial standing of Riviera with a view to establishing that it would have been inadvisable for Deacon Chiu and Ronald Chu to have entered into an agreement with it at that time, there is not a shred of evidence in the correspondence or otherwise to indicate that Deacon Chiu had been unwilling to proceed with the agreement for any such reason. Had he entertained any doubts as to Riviera's financial standing I am sure that this highly articulate man, whose correspondence is replete with complaints on a variety of other matters, would most certainly have informed Ronald Chu of them. Not only is there a conspicuous absence of any mention of Riviera's insolvency or financial status in the extensive correspondence between Ronald Chu and Deacon Chiu at and around the time of the Riviera offer for YLT but, as I have already indicated, Deacon Chiu's own letters show that on 29th March he had expressed agreement to accept Riviera's terms and that even as late as 15th April he professed to have no objection to signing the agreement. It is plain however that notwithstanding what he said in this last letter he had already deliberately set out to ensure that no agreement would ever be signed.

44. It is of no avail at this stage for Deacon Chiu through counsel to engage in an ex post facto analysis of Riviera's financial standing at the relevant time. Moreover there is not the slightest reason to believe that the documents now referred to by counsel to cast doubt on Riviera's financial position would have been available to Deacon Chiu at the material time. I am entirely satisfied that Deacon Chiu had seen to it that the transaction would be frustrated so that Far East could remain in occupation of YLT for the personal enrichment of himself and his wife.

45. Although an attack had been made during the course of the trial on Riviera's financial standing Ronald Chu made it clear that Riviera had dicharged its financial responsibilities under the license agreement for the Waldorf Theatre. There does not appear to be any cogent reason why Riviera would not likewise have been able to meet its commitments under the proposed agreement for YLT since in the words of counsel for Far East when commenting on Asia's profit and loss accounts for the years from 1968 to 1975 (excluding 1971 and 1972 which were missing) YLT was "the flagship" of the cinemas in which Ronald Chu and Deacon Chiu had a financial interest. Indeed counsel was moved to comment in the following terms on the performance of YLT during the years 1970-71 and 1973-1975 of that period: "star performer", "magnificent effort", "even more magnificent effort" and "more magnificent than ever". If Riviera had been able to meet its financial commitments in respect of the Waldorf Theatre it seems reasonable to assume that it would have been able to do likewise in the case of YLT which, on all accounts was a more profitable enterprise. There can be little doubt therefore that Far East having entered into a license agreement to operate YLT from mid 1975 would not have been anxious to relinquish the control of such a "star performer".

46. It is also apparent from a letter written by Deacon Chiu on 9th November 1983 that his group of companies and Carrian had acquired the Bang Bang group of companies, to which Riviera belonged and that his company had paid $42 million for the purchase. He complained that he was still losing money as a consequence of that acquisition. It does not seem at all likely that Deacon Chiu would have considered acquiring the Bang Bang group unless he had been convinced that it was a sound investment. It seems more likely that his disappointment at the ultimate outcome of his purchase had convinced him with the benefit of hindsight that at the time of the proposed license agreement Riviera would have been unable to meet its obligations. He now seizes upon this after acquired knowledge to justify his failure to enter into that agreement.

47. Ultimately ,the plaintiffs in their capacity as shareholders in Asia by a notice dated 18th March 1982, called on the Board of Directors to convene an extraordinary general meeting in order to pass such resolutions as would be necessary to terminate Far East's occupation of YLT. The Board of Directors however, ignored the notice and no meeting was called within the 21 days required by the articles of association.

48. The plaintiffs then tried another tack. By a notice dated 13th April 1982 they requisitioned an extraordinary general meeting for 19th April to pass resolutions to end Far East's occupation of the theatre. This was met with a reply by Deacon Chiu who took objection to the holding of the meeting on the ground that the required notice of seven days had not been given. Notwithstanding his objection both Deacon Chiu and his wife attended the meeting and objected to all the resolutions proposed by the plaintiffs.

49. The plaintiffs then served a fresh notice on the 20th April for a meeting to be held on 28th April 1982 for the same purpose. On this occasion Deacon Chiu did not personally attend but his wife attended both on her own behalf and as proxy for him. She was accompanied by her son Dick who had no right to attend. The minutes of the meeting, which were recorded by Deacon Chiu's wife state that after an initial argument between Dick Chiu and Ronald Chu over Dick Chiu's right to be present and some dispute as to the use of a tape recorder, the meeting began and that it concluded when she objected on her own behalf as well as that of Deacon Chin to all the resolutions contained in the notice.

50. The situation remained in a state of deadlock until 31st December 1984 when Far East finally yielded up possession of YLT. Counsel for the plaintiffs submits that it is reasonable to infer that the reason why Far East had decided to surrender the theatre was that Deacon Chiu, having just opened a new theatre in Yuen Long called the Golden Dragon, had found that it no longer suited his purposes to remain in occupancy of YLT. The coincidence of these events does indeed strongly suggest that this is an entirely reasonable conclusion to draw.

51. This brings me to a consideration of the capacity in which the plaintiffs bring this action against the defendants. Ronald Chu sues as a minority shareholder in Asia for wrongs allegedly done to Asia by Deacon Chiu and by Far East. Alternatively he sues as a co-owner with Deacon Chin of YLT. Ronald Chu's wife, the 2nd plaintiff, sues in her capacity as a minority shareholder in Asia on behalf of Asia for wrongs allegedly done to Asia by Deacon Chiu and Far East.

52. In Wallersteiner v Moir (No.2) [1975] 1 Q.B. 373 at 390 Lord Denning MR had this to say about derivative actions:

"It is a fundamental principle of our law that a company is a legal person, with its own corporate identity, separate and distinct from the directors or shareholders, and with its own property rights and interests to which alone it is entitled. If it is defrauded by a wrongdoer, the company itself is the one person to sue for the damage. Such is the rule in Foss v. Harbottle (1843) 2 Hare 461. The rule is easy enough to apply when the company is defrauded by outsiders. The company itself is the only person who can sue. Likewise, when it is defrauded by insiders of a minor kind, once again the company is the only person who can sue. But suppose it is defrauded by insiders who control its affairs - by directors who hold a majority of the shares - who then can sue for damages? Those directors are themselves the wrongdoers. If a board meeting is held, they will not authorise the proceedings to be taken by the company against themselves. If a general meeting is called, they will vote down any suggestion that the company should sue them themselves. Yet the company is the one person who is damnified. It is the one person who should sue. In one way or another some means must be found for the company to sue. Otherwise the law would fail in its purpose. Injustice would be done without redress."

53. Lord Denning went on to say that the minority shareholders could bring an action in their own names, but in truth on behalf of the company, against the wrong-doing directors for the damage done by them to the company, provided always that it was impossible to get the company itself to sue them. He added that it is perfectly proper and in accordance with principle that the minority shareholders sue in their own names, although in reality on behalf of the company, just as an agent may contract in his own name but in reality on behalf. of his principal.

54. Although Deacon Chu and his wife held no more than 50% of the shares in Asia I see no reason why the principle stated by Lord Denning should not apply with equal force in such a situation. Deacon Chiu and his wife were in a position to vote down any suggestion that Asia should sue Far East. Their votes at the extraordinary general meeting held on 28th April 1982 clearly demonstrated that they would block any action by the plaintiffs to obtain redress against Far East through Asia.

55. It is plain that all attempts by Ronald Chu to get Deacon Chiu to remove Far East from YLT had proved fruitless. Indeed, Ronald Chu testified that on three or four occasions in 1978 he had held discussions with Deacon Chiu urging him to vacate YLT. Deacon Chiu's response to these requests was "Alright, alright, I'll work it out.". Nothing, however, was done. In 1979 Ronald Chu again requested Deacon Chiu on three, or four occasions to yield up the theatre. Again these requests were to no avail. I am left in no doubt that Deacon Chiu was content to engage in delaying tactics so as to extend Far East's occupation of YLT for as long as possible. It is clear from Ronald Chu's evidence that, when it suited him, Deacon Chiu was capable of making quick decisions. This is exemplified by the speed with which he acted on behalf of Far East Consortium Ltd. when Riviera had earlier sought to license the Waldorf Theatre. There had been no delay on that occasion, nor had Deacon Chiu queried Riviera's financial viability. Indeed, Ronald Chu had approached Deacon Chiu concerning the proposal to grant a licence to Riviera in respect of the Waldorf Theatre on 26th January 1980 and Deacon Chiu, having decided that he wanted William Kwok to draw up the agreement, was able to so expedite matters that it was signed on 29th January. This promptitude stands in stark contrast to his conduct during the course of the Riviera negotiations for the licensing of YLT.

56. Counsel for Deacon Chiu and his wife and counsel for Far East both contend that no derivative action can possibly arise because at all relevant times Asia was not a tenant of YLT but was acting as a mere agent for the co-owners of the theatre. Counsel for Far East concedes, however, that as Ronald Chu, as a co-owner, has a valid cause of action against Far East. Indeed, Far East has pleaded that it is willing to pay Ronald Chu reasonable and fair damages for its use and occupation of his interest in YLT from 1st June 1978 to 31st December 1984.

57. Counsel for the plaintiffs contends that Ronald Chu must succeed whatever view the court takes of Asia's status. If at the relevant time Asia had been a tenant of the co-owners then the derivative action is properly founded and both plaintiffs must succeed. Alternatively, if the court concludes that Asia had been merely an agent for the co-owners, then Ronald Chu must succeed in his personal capacity. Counsel observed that although it would be preferable for Ronald Chu to succeed in his personal capacity, the evidence discloses that since the parties had conferred a tenancy on Asia and there is no indication that that tenancy had ever been lawfully determined, the plaintiffs had no choice but to bring a derivative action. The action by Ronald Chu in his personal capacity was brought to circumvent any attempt by Deacon Chiu and Far East to escape liability by setting up that Asia had not been the tenant of the co-owners but the mere agent.

58. I have already observed, but I think it bears repetition, that until several days into the trial, Deacon Chiu and his wife had admitted in their defence and amended defence that at all material times prior to June 1975 Asia had been the monthly tenant of the co-owners in respect of YLT and had conducted in those premises the business of a cinema operator exhibiting films to the public. That admission was withdrawn and replaced by a non admission. It is also significant that until it amended its defence on 30th July, Far East had averred that the licensing agreement between Asia and Far East was a tenancy agreement made between Asia as landlord and Far East as tenant for a period of three years at a monthly rental of $60,000. Far East also stated in its amended defence that it was willing to pay to Asia reasonable and fair damages for its use of Asia's interest in furniture and equipment in YLT from 1st June 1978 to 31st December 1984.

59. Apart from the admissions that have now been withdrawn there is the positive evidence of Ronald Chu that the co-owners rented YLT to Asia and that Asia installed in the theatre its own equipment including seating, air conditioning plant, screen, stage curtain, all electrical facilities and sound and projection equipment, and operated it as a cinema from the time that the theatre building was erected until Far East entered under the licence agreement in mid 1975.  In his testimony he went through the accounts to indicate that rental had been paid by Asia for the use of the theatre. Furthermore, as a consequence of an order for discovery made on 15th October during the course of his testimony ,he conducted a search through numerous boxes of old documents and was able to produce a rent deposit dated 6th January 1981 in the sum of $200,000. It is clear from the signatures on this document that Ronald Chu and Deacon Chiu received that sum from Asia as guarantee money "for the leasing of YLT".

60. He also produced a payment voucher signed by Deacon Chiu for $12,000 rent for the month of April 1963 paid by Asia in respect of YLT. Attached to that voucher was another document which acknowledged that Asia had paid $12,000 rent for that month. It also contained a number of terms. One of these terms stated that rent was to be paid each month in advance. Another term prohibited the tenant from secretly transferring, assigning or subletting the premises without consent of the landlord. It further provided that in the event that the tenant committed a breach of this provision the landlord would be entitled to recover possession of the premises. There are various other provisions in this document relating to the duties of the tenant and the rights of the landlord including one which states that "if the tenant wants to quit he must give one month's notice in writing or he shall have to pay one month's rent as is the usual practice in Hong Kong".

61. An examination of the licence agreement itself is illuminating. Not only does the preamble recite that Asia is operating the cinema and has agreed to give a licence to Far East to show films in the premises, but clause 17 expressly declares that possession of the cinema premises "is and shall at all times be vested in [Asia] .....". If Asia had not been a tenant but a mere agent of the co-owners this is indeed a most surprising clause.

62. The correspondence from and on behalf of Far East also shows that it and Deacon Chiu conducted their dealings with Asia and not the co-owners. In particular, when Far East sought the return of the deposit paid under the licence agreement, it directed its request to Deacon Chiu and Ronald Chu as joint managing directors of Asia. Counsel for the plaintiffs submits that had Deacon Chiu and Ronald Chu been the principals for whom Asia had been acting as agent it would have been reasonable for Far East to expect that the deposit was in their hands and would therefore have written to them direct in their capacity as co-owners. There would have been no need, unless Far East accepted and recognised Asia to be the principal, to write to Ronald Chu and Deacon Chiu in their capacity as joint managing directors.

63. As I have already observed, if the co-owners had wished to by pass Asia they could simply have terminated Asia's tenancy and have entered into a licence agreement direct with Far East as co-owners. On the other hand, if Asia had not been the tenant of the theatre there does not seem to be any reason why the co-owners should have used it as their agent. They certainly did not think it necessary to employ Asia as their agent for the transaction with Riviera for the Waldorf Theatre.

64. Counsel or the defendants referred to a written agreement which had been entered into by Deacon Chiu and Ronald Chu on 31st May 1973 in order to settle their many grievances. Paragraph 1 of Article 11 of the agreement is as follows:

"It is agreed that the parties shall appoint Asia Motion Picture Development Ltd. as their agent to collect rents or income from the tenants or occupiers of Waldorf Theatre Building and all other properties held by the parties hereto as tenants-in-common and all moneys received by Asia Motion Picture Development Ltd. shall forthwith be deposited into a new current account to be opened by Ronald Chu and Deacon Chiu as joint-signatories with the FNCB Hong Kong Head Office and shall be applied first in payment of the costs and expenses of collection second in payment of Crown rents, rates, Property Tax and other out goings in respect of Waldorf Theatre Building and other properties held by the parties hereto as tenants-in-common thirdly in payment of interest payable under Mortgage Memorial No. relating to Waldorf Theatre Building and subject thereto pay one half of the balance thereof to Deacon Chiu and the remaining one half to Ronald Chu such payments to Deacon Chiu and Ronald Chu to be made monthly on the last day of each calendar month."

65. In the light of this provision counsel contend that, whatever might have been the situation prior to that date, the relationship of Asia with Ronald Chu and Deacon Chiu was henceforwards that of collection agent for the co-owners. I accept that the wording is so broad that it means that the co-owners had agreed that they would appoint Asia as their agent to collect rents and income from even YLT.

66. However, whatever may be the correct legal interpretation of the words of an agreement, it is always open to the parties to that agreement to ignore totally what they have agreed or to apply only such part of parts of it as they see fit. They may also apply it on the basis of their own understanding of its terms. Indeed, when cross-examined as to his understanding of paragraph 1 of Article 11, Ronald Chu firmly stated that it had no application to YLT. He explained that Asia had collected the rental from that theatre in its own right because it had rented it and had installed its own equipment in order to operate it, but that it had collected, as agent for the co-owners ,the rentals from the shop spaces and sweet shop which were attached to the theatre but were not operated by Asia.

67. I did not have the benefit of hearing what Deacon Chiu understood by this provision in the agreement but there is no doubt in my mind on the evidence before me that at all times he would have made it his business to receive, and did in fact receive, the annual profit and loss accounts and balance sheets for Asia and YLT and knew full well that Asia was paying rent for YLT after the 1973 agreement. I find it inconceivable that he would not have concerned himself with these accounts and that had there been any inaccuracies in them, particularly one which ran contrary to his conception of how the 1973 agreement should be operating, he would not have queried them with Ronald Chu.

68. Ronald Chu testified that the accounts had been sent to Deacon Chiu and that after Far East have entered YLT under the licence agreement, its own staff performed the tank of preparation of the accounts and had sent them to Ronald Chu for signature. I am satisfied that Deacon Chiu had access to and well knew the contents of the accounts. If he had not received or not had the accounts but had wanted to see them he would have had no difficulty, as joint managing director of Asia and co-owner of YLT, in obtaining them. I consider that has belated complaints in the correspondence that he had not received the accounts to be both self-serving and without justification. It is significant that having written to the auditors on 11th August 1980 complaining that he had not received copies of the statements of account for Asia for the previous three years and requesting that copies of those accounts together with the accompanying, auditors reports be supplied to him, Deacon Chiu received the following reply:

"In compliance with your request I now send you herewith extra copy of the audited accounts of (Asia) for the three years ended 31st March 1977, 31st March 1978 and 31st March 1979 for your reference. Please acknowledge receipt."

69. So it appears that, as far as the auditors were concerned, Deacon Chiu had already been sent copies of the accounts of Asia for those years.

70. Ronald Chu also told the court that in 1975 he and Deacon Chiu had agreed that the rental for YLT be increased to $360,000 per annum in order to take into account the payment of rates and the fact that the rental had remained static at $144,000 for a lengthy period of time and was therefore due for an increase. I am satisfied that Ronald Chu was a truthful witness I see no reason to accept counsel for Far East's invitation to disbelieve this piece of evidence. Moreover, had Deacon Chiu wished to contradict Ronald Chu he had the opportunity of expressly doing so from the witness box.

71. Counsel for Deacon Chiu and his wife referred me first to the alternative way in which the plaintiffs had pleaded the capacity in which Asia had entered into the licence agreement with Far East, namely, either as agents for the co-owners or in right of its status as monthly tenant, and secondly, to the fact that in an affirmation filed on 10th January 1983 Ronald Chu affirmed, and during the course of the trial confirmed as being correct, that:

"On the 16th of July 1975 the 1st defendant and I acting through Asia Motion Picture Development Ltd granted a licence to the 3rd defendant in respect of the property."

72. Although counsel concedes as indeed he must that the plaintiffs had pleaded in the alternative because there had been a dispute as to whether Asia had entered into the licence agreement as agent of the owners or in its own right he submits that it is clear from the affirmation that as far as Ronald Chu is concerned Asia entered into the agreement purely as agent for the co-owners.

73. Having heard Ronald Chu testify I have come to the view that in his affirmation he had been speaking of the reality of the situation as a layman might see it. There can be no doubt that the reality is that Deacon Chiu and Ronald Chu themselves had indeed made the decision to grant a licence to Far East notwithstanding that they chose to do so wearing their corporate Asia hats. Such imprecision of language is understandable from a layman. Indeed during the course of his evidence there were other instances of loose terminology. It is also evident in the correspondence. I have already mentioned that when Deacon Chiu's son David wrote as a director of Far East to Ronald Chu he observed that he had been advised by his solicitor that Ronald Chu could not solely act for Asia Motion Picture Development Ltd since it was a "partnership".

74. I am satisfied on all the evidence that at all material times the co-owners had rented YLT to Asia and that notwithstanding the strict legal interpretation of paragraph 1 of Article 11 of the 1973 agreement Ronald Chu did not understand it to mean that Asia was to be a mere agent for the co-owners for the collection of rent and income from YLT, and that neither of the co-owners ever treated Asia as being their agent in relation to YLT or regard Asia in any light other than as tenant in respect of the theatre.

75. There is no dispute that Deacon Chiu and his wife as directors of Asia owed a fiduciary duty to Asia to act in its best interests. As Astbury J observed in Transvaal lands Company v New Belgium (Transvaal) Land and Development Company [1914] 2 Ch. 488 at 503:

"Where a director of a company has an interest as shareholder in another company or is in a fiduciary position towards and owes a duty to another company which is proposing to enter into engagements with the company of which he is a director, he is in our opinion within this rule. He has a personal interest within this rule or owes a duty which conflicts with his duty to the company of which he is a director."

Lord Herschell in Bray v Ford [1896] AC 44 at page 51 Put the matter this way:

"It is an inflexible rule of a Court of Equity that a person in a fiduciary position such as the respondent's, is not, unless otherwise expressly provided entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is there is danger in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect."

I do not think that it is necessary to refer to any of the many other authorities that were cited to me concerning the duty of directors.

76. In her defence Deacon Chiu's wife pleaded that she had been made a shareholder and director of both Asia and Far East as a nominee for or on behalf of Deacon Chiu and that at all material times had acted as his nominee and took orders from him. She further pleaded that at no material time had she taken any active role in the running of the business or corporate affairs of either company but that insofar as she had participated in all the affairs of both companies she did so only as his nominee and that since he exercised full control over Asia she was neither interested in its affairs nor was in a position to act contrary to his wishes. She claims that therefore she has at no material time acted in breach of her fiduciary duties owed to Asia.

77. It is not clear what is meant by the averment that Deacon Chiu exercised full control over Asia. However that may be I find it difficult to imagine that she would not have known of Asia's affairs and took no interest in the company. In fact she recorded the minute;, of the extraordinary general meeting of Asia held on 28th April 1982 which disclose that she took an active part in the meeting and purported to be familiar with the internal workings of the company. Moreover, in a letter of 23rd April 1982 she wrote to Ronald Chu and among other matters asserted that "the genuine founders who possess half share of the company (Asia) and are equally joint managing directors as you yourself are completely in the dark". Apparently she considered herself to be a joint managing director of Asia even though in fact she was only a director. She then went on to state that she was prepared at any moment to appear in court and swear to the truth of the many allegations that she had made in the letter concerning Ronald Chu's activities in Asia. Quite clearly the fact that she made such a statement presupposes that she had interested herself in the affairs of the company and had direct personal knowledge of the various matters that she said she was prepared to testify to.

78. Mrs Chiu further pleaded in the alternative that i?she should be found to have acted in breach of the fiduciary duties which she owed to Asia she would seek relief from any liability on such terms as the court may think fit under the provisions of section 358 of the Companies Ordinance Cap 32 and that she had acted honestly and reasonably and in the circumstances, ought fairly to be excused from her breach of duty.

79. She has, however made no attempt to discharge the burden cast upon her under section 358. But even on the assumption that she had done so she is on her own averments, still fixed with liability. In this connexion I refer to the judgment of Ungoed-Thomas J in Selangor United Rubber Estates Ltd v Cradock & Ors (No.3) [1968] 1 WLR 1555 at 1613 where in reference to two directors of the company in question the learned judge said:

"It seems to me however that both Barlow-Lawson and Jacob were nominated as directors of the plaintiff to do exactly as they were told by Cradock, and that that is in fact what they did. They exercised no discretion or volition of their own and they behaved in utter disregard of their duties as directors to the general body of stockholders or creditors or anyone but Cradock. They put themselves in his hands not as their agent or adviser but as their controller. They were puppets which had no movement apart from the strings and those strings manipulated by Cradock. They, were voices without any mind but that of Cradock; and with that mind they are fixed in accordance with the view which I have already expressed on the law. They doubtless hoped for the best but risked the worst; and that worst has befallen them."

80. If one substitutes Mrs Chiu for Barlow-Lawson and Jacob and Deacon Chiu for Cradock, it is apparent that her averment that she had at all times acted as Deacon Chiu's nominee and had taken orders from him, does not excuse her.

81. It is plain that Deacon Chiu and his wife owed fiduciary duties to both Asia and Far East. These interests came into conflict when the licence expired and Far East unlawfully remained in occupation of YLT. Deacon Chiu and his wife clearly decided to resolve the conflict in favour of Far East; and their decision was made with a view to their own financial advantage. The obvious consequence was that Asia would suffer financial loss. They are therefore liable to account to Asia for the profits they made as a consequence of that lawful occupation.

82. The general rule of equity is that no one who has duties of a fiduciary nature to perform is permitted to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect (Regal (Hastings's) Ltd v Gulliver & Ors [1967] 2 AC 134 per Viscount Sankey at page 137)

83. Equally Far East is liable, on the application of equitable principles, to account for its profits on the basis that it was a constructive trustee. In this connexion I refer to the judgment of Ungoed-Thomas J in the Selangor Case at pages 1579-1591 and in particular to two passages therein. In the first passage which appears at page 1579 the learned judge referred to the two different kinds of constructive trustees. It is only those of the second kind with which we are here concerned. The learned judge defined them as:

"Those whom a court of equity will treat as trustees by reason of their action of which complaint is made. Distinguishing features are (a) that such trustees claim to act in their own right and not for beneficiaries and (b) no trusteeship arises before but only by reason of the action complained of."

84. In the second passage at page 1582 the learned judge had this to say.-

"It seems tome imperative to grasp and keep constantly in mind that the second category of constructive trusteeship (which is the only category with which we are concerned) is nothing more than a formula for equitable relief. The court of equity says that the defendant shall be liable in equity as though he were a trustee. He is made liable in equity as trustee by the imposition or construction of the court of equity. This is done because in accordance with equitable principles applied by the court of equity it is equitable that he should be held liable as though he were a trustee. Trusteeship and constructive trusteeship are equitable conceptions.

 

        The court of equity is not administering criminal law but equity. It is equity and not criminal law or even tort or contract that governs whether a person shall be liable in equity as constructive trustee. So, whether a misapplication of a company's funds for the purchase of its shares occasions the imposition of liability as constructive trustees depends not upon the statutory provision malting it a criminal offence or upon statue or criminal law or common law conceptions, but upon equity and its principles. As mentioned in argument there are criminal offences nowadays which are not morally reprehensible and are not even blameworthy. Indeed, it appears that nowadays, by Act of Parliament, a person is made criminal although he can unquestionably and conclusively prove that he did not even know the facts that establish the crime. If indeed this is so this is crime without guilt. It is to brand such proven innocents as convicted criminals. It may be convenient policing. It is not justice and it certainly is not equity. On the other hand there may be actions dishonest and fraudulent in the eyes of equity yet not punishable under the criminal law. Equity is not crime and this court is not the Old Bailey. And it is according to "the plain principles of a court of equity" which this court, in its administration of equitable relief, that what is "dishonest and fraudulent" has to be judged. And the language used by the courts of equity, in the authorities referred to must be similarly understood in accordance with their equitable principles and conceptions. This may all seem over emphatic emphasis of the obvious; but it is an emphasis that I have found essential if confusion is to be avoided."

85. The relief claimed by the plaintiffs against Deacon Chiu and his wife is first damages for breach of their fiduciary duties, secondly, an order for all necessary accounts and enquiries, including where necessary, all tracing orders and consequential directions and thirdly an account of profits made as a result of Far East's unlawful occupation of YLT from 1st June 1978 to 31st December 1984. They claim against Far East judgment in the sum of $30,000 in respect of licence fees due and owing to Asia for the period from 16th May 1978 to 31st May 1978 under the terms of the licence agreement of 16th July 1975, and damages for unlawful use and occupation of YLT for the period previously stated or alternatively an account of profits.

86. Counsel for the plaintiffs submits that on the evidence before it the court is in a position to quantify the profit which Far East has made as a consequence of its unlawful occupation. The method by which calculation is to be made is based on the actual figures extracted from Far East's audited accounts relative to the period for which it was in occupation of YLT after the expiration of the licence agreement but excluding the last nine months from 1st April to 31st December 1984. The reason why counsel excludes these last nine months from consideration is that he contends that the accounts for that period should be looked at with suspicion due to the fact that they were approved by Far East's board of directors some three months after it no longer had any interest in YLT. They also disclose that the item for salaries for no apparent reason, had leapt from $146,096 to $337,064.

87. Counsel's alternative contention is that if the court is not satisfied that the profit can adequately be quantified by this process of computation, it is possible to calculate damages on the basis of the agreement of 20th March 1980 proposed by Riviera in which there was an offer of a licence fee of $5,800 per day for the first year commencing 1st April 1980 and a licence fee of $6,300 per day for the second year, commencing 1st April 1981, and to make allowance for deductions in accordance with the terms of that agreement. From these figures the actual operating expenses incurred by Far East at that time would be deducted in order to produce net figures. The calculations for the periods before and. after that for which the agreement would have operated had it come to fruition, must necessarily be made in accordance with an estimate of licence fees and operating expenses based on their proportionate relationship to the increase or decrease of the box office receipts for the same periods.

88. In short counsel's submission is that nothing could be fairer than to adopt the first method and to take Far East's own audited accounts and to proceed to an account of profits on that basis. He also submits that apart from constituting an alternative basis on which the court can make a calculation, the evidence concerning the Riviera transaction for YLT is so cogent that it can be accepted with the utmost confidence and as such serves to reinforce the reliability of the first method.

89. By whichever method the calculation is performed there is no substantial difference in the final figures. The first method produces a figure of $12,521,633 and the second method a figure of $11,721,530.

90. In dealing with the plaintiffs' proposed methods of calculation of what sum is due by Far East to them, counsel for Far East centred his attack on the Riviera transaction. The gist of his contention is that because of Riviera's financial position at the relevant time its ill-fated offer is totally misleading and utterly unreliable. It is his submission that evidence given by Mr. Wilkinson, a chartered surveyor in the firm of A. G. Wilkinson and Associates forms the proper basis on which an assessment of profits should be made.

91. Mr. Wilkinson produced a report prepared on the basis of instructions given by Deacon Chiu. The instructions were to assess the rental value of YLT on the open market as at the periods 1st June 1978 to 31st March 1980, 1st April 1980 to 31st March 1982, 1st April 1982 to 31st March 1984 and 1st April 1984 to 31st December 1984. Having inspected the theatre Mr. Wilkinson assessed the monthly rental values for the relevant periods to be $42,000, $55,000 $72,000 and $50,000 respectively.

92. He reported that the theatre appeared to be in sound structural and decorative order at the date of inspection namely 22nd November 1984 and that, although he did not carry out a detailed inspection of all the furniture equipment fixtures and fittings, and was therefore unable to report on the standard and condition of each item, the general impression he formed was that they appeared to be old.

93. Mr. Wilkinson acknowledged that although the theatre is considered to be one of the oldest cinemas in Yuen Long it is situated within the early established and densely populated portion of Yuen Long town centre where all forms of facilities and amenities are readily available. He reported that the pedestrian and vehicular flow along the two streets from which access can be gained to the theatre lobby is moderate and that that part of the street on the western side of the theatre is a pedestrian precinct and rest garden which is a popular shopping area within the district with a high pedestrian flow.

94. In arriving at his valuation figures Mr. Wilkinson proceeded on the assumption that any renewal of the licence which Far East had earlier entered into concerning the theatre, would be from 1st June 1978 and be based on similar terms and conditions to those in the earlier agreement that the occupant would be responsible for the maintenance of the interior of the premises and payment of rates and that the landlord would carry out structural repairs maintain the exterior and. pay property tax and crown rent.

95. The basis on which Mr. Wilkinson made his valuation was that leases of new cinemas in Hong Kong are normally negotiated on a medium term of 7 to 14 years at a minimum rent and a percentage of takings including retail sales of confectionary and the like. According to him the percentage is usually of the whole takings but sometimes is related to takings over a certain level less entertainment tax.

96. Notwithstanding his comments on the pedestrian flow adjacent to the theatre Mr. Wilkinson's report went on to state that the cinema was not situated in "a good entertainment location". He conceded however that comparative tenancy agreements of similar cinema premises in the immediate locality are rare and that he had therefore taken the view that the most reliable basis of rental assessment would be accounts which show the amount of rent that an operator could afford to pay over the period in question, taking into consideration tenant's management maintenance burden improvement costs and the like.

97. In his testimony he expanded his findings concerning the interior of the theatre and said that the projection room was "very poor" and that the equipment being of the reel to reel type was obsolete. He also expressed the view that the rental paid by a cinema operator is a percentage of the net income. In his experience he had found it to vary from 30% to 70%. Using Far East's accounts for YLT as his base, he applied a percentage of 50% for the early years and, because of the change in situation due to the development of the new town, he applied one of 40% in respect of the later years. He stated that he had arrived at these percentages on the basis of his experience.

98. He agreed that there were very few cinemas in the same locality as YLT, that the assessment of a theatre's potential is not an exact science and that many factors have to be weighed in coming to an assessment. He also agreed that, provided that it comes from a totally independent source a very good pointer to the market rental would be a genuine offer for a theatre made by an prospective cinema operator. He also conceded that an offer or would make it his business to examine the accounts of the theatre and that an offer from an experienced operator who had access to such accounts would be an excellent indicator of the true valuation.

99. Moreover, Mr. Wilkinson agreed that until 1983 there had been only three cinemas in the Yuen Long area and that of these YLT was the newest and the biggest. He added however, that after he had inspected the surrounding area in order to find what would attract people to the cinemas he came to the conclusion that the bulk of the paying customers were on the opposite side of the main road to that on which YLT was situated. How he had been able to come to such a conclusion and why paying customers would be deterred from attending a cinema by the prospect of having to cross the main road was far from clear.

100. Essentially, Mr. Wilkinson said that he had arrived at his valuation on the statements of account provided by Far East but that although these accounts formed the background of the appraisal, he also took into consideration the nature of the locality and the element of competition in arriving at his conclusion that he should apply the percentages of 50% and 40%, rather than one closer to 70%, in determining his estimate of the appropriate rental figures. Apart from the rather unpersuasive reason that Mr. Wilkinson offered for suggesting why prospective patrons would be disinclined to attend YLT, he stated that in his view the cinema was in a poor area due to the multiplicity of hawkers and that their presence made access to the theatre difficult. When cross examined as to his conclusion that YLT was the worst maintained of the three cinemas in that area, it became clear that he had not entered the other two theatres but had merely taken an external view of the buildings including that portion of each which was open to the general public wishing to buy tickets. From his view of the exterior of a particular cinema he deduced that its interior condition would be in a similar state. He explained that he had not inspected the interior parts of these theatres because he had been unable to gain permission to do so. The fact that he had wanted to inspect the interiors does suggest, however that there would have been some purpose for so doing and that it does not follow that the standard of the facilities within each building must necessarily be judged by reference to its external appearance.

101. When questioned as to the reason why he had considered that an item for a management fee of $540,000 in Far East's accounts for the year of 1976 was warranted he replied that as this sum had been shown in the audited accounts it must have been a straightforward payment. Such an answer does not seem to me to offer an explanation as to why it should have been necessary for Far East to pay a management fee. Indeed throughout the trial Far East took the line that because of its experience in operating cinemas and the highly advantageous terms on which it could obtain films it would be able to run a cinema more efficiently and profitably than Riviera. I do not propose to deal with Mr. Wilkinson's non expert views on other matters.

102. Mr. Paul Varty of Collier Petty testified that he had been the auctioneer at the public auction held in February 1985 for the sale of YLT. He said that his firm had suggested a reserve price in the region of $4.5 million on the basis that a reserve price is normally set at around 15% to 25% below the anticipated sales price. There were approximately six bidders at the auction. Two developers dropped out of the bidding between $9.5 and $10.5 million. One other bidder withdrew at $11.5 million, leaving Ronald Chu and David Chu to bid progressively by units of $100,000 to $13.9 million. David Chiu dropped out of contention at this stage and Ronald Chu secured the cinema with a winning bid of $14 million.

103. The outcome of the auction illustrates the difficulty faced by experts in assessing values. Clearly Collier Petty's assessment had been wildly wide of the mark. The parties who were in perhaps the best position to know the value of the cinema demonstrated that they were prepared to pay $13.9 million and $14 million respectively for it.

104. Counsel for the plaintiffs submits that applying the rough rule of thumb that the capital value is one hundred times the net monthly rental of a premises if one bases the calculation on the highest price that David Chiu bid, and was therefore clearly prepared to pay for the theatre, the rental would be $139,000. He concedes however that this type of calculation merely gives the very broadest idea of the rental value of the theatre.

105. On the one hand I have before me Mr. Wilkinson's valuation which was substantially influenced by his personal judgment based on his experience as a quantity surveyor of the rental value calculated as a percentage of the net income. Against this there is, first the figure, to which Deacon Chiu clearly agreed of $60,000 per month in respect of the 1975 licence agreement secondly the positive and genuine offer by Riviera in 1980, thirdly, the net amount of $90,000 per month stated by Deacon Chiu himself in a letter dated 3rd June 1982 as being a reasonable sum at which to let the cinema to a third party in March 1980 and finally there is the evidence of the capital value of the theatre in 1985. Quite clearly the 1975 figure of $60,000 per month indicates that, after having taken into account the factor of inflation, the true figures from 1978 onwards would be substantially higher. This is also borne out by Deacon Chiu's own knowledgeable assessment of the rental value in March 1980.

106. I find these concrete pieces of evidence to be more reliable indicators of value than the assessment performed by Mr. Wilkinson. Accordingly, I accept counsel for the plaintiffs submission that I should base my award on the known figures in Far East's own accounts. The evidence concerning Riviera's offer and Deacon Chiu's own assessment of what the proper rental should have been in March 1980 lend valuable support to the legitimacy of the adoption of this method of calculation.

107. I do not propose to set out the full details of the calculation as these have been placed before the court and the parties are well aware of them. Suffice it to say that it is based on operating income less direct operation expenses. However as to the last nine months of Far East's occupancy of the theatre the calculation has been based on the accounts for the previous year. As counsel for the plaintiffs observed one must approach the accounts for the final year with a considerable degree of caution. In this connexion I have already observed that for the last complete financial year salaries not attributable to the running of the .theatre increased from $146,076 to $337,064 for no apparent reason. For the year ended 31st March 1983 the unaudited accounts disclose a figure of $437,241 for repairs and maintenance. An examination of the documents purporting to support this claim failed to disclose any justification for it. Indeed in the audited accounts the figure was reduced to $81,298. Moreover a management fee of $540,000 was paid to Rex Entertainment Ltd. in respect of management services provided during the year. One then finds that the directors of Far East were also the directors of Rex Entertainment Ltd. The report of the directors of Far East for that year also shows that Far East had assigned to Far East International Investment and Finance Ltd. and Rex Entertainment Ltd. certain advances totalling $3,147,514 made to related companies at net book value. The directors of the latter company are none other than Deacon Chiu, his wife and Dick David and Daniel Chiu.

108. I am satisfied that the figures extracted from the audited accounts by Mr. Lam are correct and that the net profits made by Far East during the period of its unlawful occupation of YLT namely 1st June 1978 to 31st December 1984, and on which judgment should be based, amount to $12,521,633. To this sum must of course be added $30,000 in respect of the arrears of unpaid licence fee to Asia at 31st May 1978.

109. This brings me to a consideration of the matter of interest. Being a case for equitable interest no question arises as to interest under section 48 of the Supreme Court Ordinance Cap. 4. In this connexion counsel for the plaintiff relied upon the approach taken in Wallersteiner v. Moir (No.2) [1975] 1 QB 373 at 388 - 397,399 and 406 and O'Sullivan & anor. v. Management Agency & Music Ltd. & Ors. [1985] 1 QB 428 at 461- 462, 469 and 474-474. He referred also to paragraph 27-13 of Gore-Brown on Companies 43rd edition.

110. The latter reference usefully summaries the matter thus:

"Where directors use or have the benefit of their company's funds the same principle will apply as in the case of a defaulting trustee using trust money. The principle of Burdick v Garrett(k) will apply to the effect that if it is shown that the defaulting trustee or director used the money "in trade" he may be charged compound interest. In Wallersteiner v Moir (No.2)(1) the Court of Appeal held that compound interest was to be charged with yearly rests and (having regard to the present high interest rates) not at the traditional 5 per cent. per annum but at 1 per cent. above the Bank England minimum lending rate from time to time. The fact that the money does not actually pass through the director's hands may be immaterial where it is established that he benefited at the company's expense through his power to dispose of company money. Further, even if there has been no investigation of the amount of profit a director receives if a transaction involving company funds is clearly of a commercial character, it will be assumed, in the absence of evidence to the contrary to be profitable for the purpose of awarding compound interest. (m) Buckley L. J. stated that the basis for awarding interest in cases of this kind was not to compensate the company but in order to ensure as far as possible that the defendant retains no profit for which he ought to account. He rejected the view that compound interest should be awarded on the ground that the monies were working capital of the companies affected. (n)

 

       In Belmont Finance Corp. Ltd. v Williams Furniture Ltd. (No.2) [1980] 1 All E. R. 393 discussed fully in 13-7 supra and 27-14, infra, the Court of Appeal declined to award compound interest on a judgment against a director for common law damages for conspiracy. The successful claim against the third party participant as constructive trustee of the company's money similarly did not attract compound interest as there was no evidence that any part of the money was used by the third party for its own commercial advantage.

In Wallersteiner v. Moir, Denning LJ said at page 383:

111. Counsel for the defendants submit that I should award simple interest and claim support for this contention from O'Sullivan v. Management Agency Ltd. In particular reliance is placed on the following passage from the judgment of Dunn LJ at page 461:

"It is only in cases of breaches of fiduciary duty that compound interest can be awarded since at common law the position is governed by section 3(1) of the Law Reform (Miscellaneous Provisions) Act 1934 which provides that interest cannot be charged on interest. But in equity compound interest can be charged where the profits made in breach of a fiduciary duty have been used in trade. It is noteworthy that in none of the cases cited in this judgment, some of which involved breaches of fiduciary duty, was compound interest ordered, although in some of them at least it seems likely that the money must have been used in trade. In Wallersteiner v. Moir (No.2) [1975] Q.B. 373, the evidence was that Wallersteiner was a financier operating through a complex structure of companies and that he used the moneys which he obtained or its capital equivalent in his operations. In those circumstances it was presumed that the money was worth to him the equivalent of compound interest at commercial rates with yearly rests at least. In the present case accepting that the money was used by the defendants for their business purposes part of it must have been used for the benefit of O'Sullivan himself."

112. Further reliance is placed on what Waller LJ said concerning interest at page 473:

"Should the interest be compound? When the question of compound interest was raised the judge was referred only to Wallersteiner v. Moir (No.2) [1975] Q.B. 373. This was a case of very special facts and quite different from the present case. It was also a case decided at a time of low steady rates of interest. The reason for awarding compound interest was that the interest which had not been paid must be taken to have been used by the defaulting party to make a profit for himself. We have not been referred to any other modern case where compound interest has been involved. In this case there is a joint venture and the effect of the joint venture would mean that in part at any rate the interest was being used to further the joint venture. Furthermore whilst compound interest is payable in equity matters it must be borne in mind that at common law it has been made unlawful and this indicates the nature of the circumstances required to justify it. I am of opinion therefore that this being a joint venture with one reservation I would not award compound interest. The reservation is with regard to the foreign royalties under the publishing agreement. In that case there were secret deductions which were not used in the joint interests of the plaintiff and the companies. As Dunn L.J. has explained in his judgment a substantial proportion of these royalties were diverted to foreign subsidiaries of the defendants without the knowledge of the plaintiff. Accordingly it is to be inferred that the defendants had the use of the money for commercial purposes and Mr. Miller has conceded that compound interest should be charged. In so far as it has been shown clearly that it was not used for commercial purposes then only simple interest should be charged: see Attorney-General v. Alford (1854) 4 De G. M. & G. 843. It is clear from this that the basis for ordering compound interest is that the defendant has actually used the money in trade. The principle therefore is that he must disgorge the profits which he has made."

113. It seems to me, however, that, as counsel for the plaintiffs contends the point of distinction made between the factual situation in the Wallersteiner case and that in the O'Sullivan case emerges from Dunn LJ's judgment where in comparing the two situations His Lordship observed that part of the money involved must have been used for the benefit of the injured party himself. Likewise Waller LJ stated that he would not award compound interest insofar as there was a joint venture, since the effect of the joint venture would mean that, at least in part, the interest had been used in its furtherance. It is significant, however, that the court ordered that compound interest be paid in respect of the money that had not been used to further the joint venture. I therefore do not understand Waller LJ's observation that Wallersteinder's case had been decided at a time of low, steady rates of interest to have been the reason why he considered that simple interest only should be paid in respect of part of the monies.

114. Counsel for the defendants also contend that the court should not make an order for the payment of compound interest because Far East's expertise and effort in generating the profit from YLT benefited the plaintiffs. This self proclaimed expertise is recited in the preamble to the licence agreement of 16th July 1975 which states that Far East held itself out to be an expert in the management and operation of a cinema. The preamble also recites that the management of Far East is closely connected with other cinemas in Hong Kong and is able to obtain beneficial terms for the booking and exhibition of films because of its connection.

115. I am unable to accept counsels' argument. The very essence of the plaintiff's claim is that Asia having been entitled to possession of YLT since the expiration of the licence agreement with Far East on 1st June 1978 has been totally deprived of any income from the cinema and has not received any of the profits reaped by Far East from it since its unlawful occupation. The O'Sullivan case is of no assistance to the defence. There the factual situation was entirely different from that in the present case. In O'Sullivan's case the defendants concerned took over the management of a young unknown composer and singer whose compositions and recordings had all been failures and, whilst recognising his potential had actually performed considerable work in promoting him to worldwide fame. Accordingly the court considered that it was just that an allowance be made for the skill and labour employed in promoting him.

116. I am satisfied that it is proper to award compound interest. Counsel for the plaintiffs submits that this interest should be calculated at the rate of 2% above the prime rate.   In support of this contention he referred me to International Military Services Ltd. v. Capital and Counties P L C [1982] 1 WLR 575 where Slade J said at page 587:

Slade J later went on to say:

"I think that on the facts which I know it is right to treat these particular plaintiffs as being plaintiffs of standing and prestige, who with the benefit of these attributes, would be able to borrow at a more favourable rate than smaller and less prestigious concerns.

117. He then proceeded to adopt 1 per cent over the minimum lending rate where such rate was in effect as the figure at which interest should be applied in that case.

118. I also observe from Wallersteiner's case that the court awarded interest at the rate of 1 per cent over the minimum lending rate. Although counsel for the plaintiff submits that it is likely that plaintiffs of the standing of those in the case with which Slade J was concerned would receive more favourable treatment from the banks than his own clients, there is no positive evidence before me to justify this conclusion. Accordingly, I award interest at the rate of 1 per cent per annum above the minimum bank lending rate in operation from time to time during the relevant period and with yearly rests.

119. The resultant figure must however be reduced by the amount of interest otherwise payable on the money paid into court by Far East by the order of Mantell J dated 1st August 1983.

120. The final matter to which I must direct my attention is the counterclaim of Deacon Chiu. In his re-amended counterclaim he averred that since about June 1973 Ronald Chu wrongfully ousted him from possession and enjoyment of his undivided half interest in the Yuen Long Theatre Building by collecting rental or profits, or both, from the tenants and occupiers of certain ground floor shops in the building, purportedly on behalf of himself and Deacon Chiu as co-owners, but had failed to account to Deacon Chiu his half share thereof. He therefore claims that Ronald Chu is liable to account to him for those monies.

121. Further or alternatively he claims that as co-owner he is entitled to a half share of the rentals and profits collected by Ronald Chu and, insofar as may be necessary, claims an account of the same and payment over by the plaintiffs of the monies held by Ronald Chu as a constructive trustee, or alternatively, as monies had and received to Deacon Chiu's use. No attempt was made during the trial to justify these claims. Indeed, in his closing address, counsel for Deacon Chiu expressly abandoned them.

122. Finally, Deacon Chiu pleaded in his counterclaim that if the Riviera offer had been made in good faith and of value, it had been lost through the fault of Ronald Chu and that therefore he claims damages or an account of the loss, including loss of profits or both, and seeks a consequential order that Ronald Chu pay to him his half share of such profits.

123. The impudence in making such a claim regarding this offer is breathtaking. Not only did the proposed transaction fail to come to fruition due to the fault and machinations of Deacon Chiu, but throughout the trial the defence strenuously protested that the Riviera offer had been worthless. The counterclaim is therefore dismissed with costs.

124. I gave judgment for the plaintiffs against 1st 2nd and 3rd defendants in the sum of $12,521,633 with interest as I have already indicated less (1) the amount of interest otherwise payable on the money paid into court by Far East on the order Mantell J dated 1st August 1983.

                (2)    the sum of $193,536 in respect of profits tax for YLT paid by Far East out of monies paid into court by it;

                (3)    the sum of $42,900 paid by Far East for rates due in respect of YLT for the period 1st October 1981 to 31st March 1983, and

                (4)    such amount of profits tax as is irrecoverable and was paid by Far East in respect of the profit it made from YLT during the period of its unlawful occupation.

125. I order that the judgment sum be paid to the 1st plaintiff Ronald Chu as trustee for the 4th defendant, Asia, and that all sums already paid into court be paid to Ronald Chu or his solicitors forthwith.

126. Counsel for the plaintiffs undertakes on their behalf that they will not draw up or perfect judgment for a period of 14 days to enable Far East to apply in the meantime for a variation of the judgment sum to take into account any provision for taxation that ought to have been made in this judgment.

127. I also grant the plaintiffs liberty to apply generally to submit to the court the figure for compound interest to be calculated in accordance with this judgment.

128. As counsel for the defendants had indicated at the conclusion of final addresses that they wished to address me in due course on the matter of costs, I will now hear their submissions.