LIN HON YING v. CHAN SAU YING AND ANOTHER

HCA 9349/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9349 OF 2000

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J U D G M E N T

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Account for Profit

1. The hearing before me was a trial of account for profit. On 25 May 2001, upon the Plaintiff's application under Order 14 rule 3, Master Lung granted a judgment in favour of the Plaintiff against the 1st Defendant. In paragraph 1 of that Judgment, it is ordered that the 1st Defendant do "render a proper statement of account in respect of the 1st Property, account for the profits made in respect thereof and upon assessment thereof the 1st Defendant shall pay over the trust money to the Plaintiff". The 1st Property referred to in the Judgment is "All That the property being the whole of 4th Floor and Car port or Parking Space No.10, No. 11B La Salle Road, Kowloon, Hong Kong". As there is another property involved in the main action, I shall continue to refer this property as "the 1st Property" below.

2. In compliance with the Judgment, the 1st Defendant has rendered statements of account in relation to the 1st Property. At the hearing, the Plaintiff challenged their contents. In her opening, Mrs. Dora Chan, Counsel for the Plaintiff submitted that there were three areas in dispute: (1) whether the Plaintiff is beneficially interested in one-half of the undivided shares of the 1st Property; (2) whether the 1st Defendant is entitled to charge the Plaintiff (i) expenses incurred by the 1st Defendant in the renovation of the 1st Property and (ii) rents for the room that the Plaintiff occupied previously and management expenses, living expenses such as food and service of the maid of the 1st Defendant's family that the 1st Defendant had paid; and (3) whether the money paid in redemption of the legal charge of the 1st Property upon its sale should be deducted from the money payable to the Plaintiff. It is the Plaintiff's position that the Plaintiff does not ask for account for further profit that the 1st Defendant may have derived from the use of the Plaintiff's share of the sale proceeds.

Facts not in dispute

3. First I set out in the following paragraphs relevant facts which are not in dispute.

4. The Plaintiff is 86 years of age. She was the former teacher of the 1st Defendant and they were very close friends. According to paragraph 2 of the Amended Statement of Claim:

"On or about 26 February 1992, the Plaintiff and the 1st Defendant agreed to purchase the 1st Property ... as follows:-

(a)	The 1st Property was to be purchased subject to existing tenancy for investment purpose at the purchase price of HK$2,390,000.00, to be held by the Plaintiff and the 1st Defendant as Tenants-in-common in equal shares;
(b)	The Plaintiff and the Defendant were to contribute the capital and to share the profit and loss and net proceeds of sale in equal shares."

5. The price of the 1st Property was HK$2,390,000.00. The stamp duty was HK$65,725.00. The legal costs were HK$12,890.00. The mortgage handling fee was HK$12,000.00. Adding up the four amounts, the total capital outlay for the purchase was therefore HK$2,480,615.00. I shall refer this sum of HK$2,480,615.00 as "the Total Capital" below.

6. Towards the Total Capital of HK$2,480,615.00, the Plaintiff contributed HK$720,000.00, whereas the 1st Defendant contributed HK$560,615.00. The remaining balance of HK$1,200,000.00 was settled by a mortgage loan from Bank of Communications.

7. The purchase was subject to tenancy and completed on 31 March 1992. After the completion, the tenant occupied the 1st Property from April 1992 through June 1993 (15 months). The rents were collected by the 1st Defendant at the rate of HK$9,640 per month. The total amount of rents collected was therefore HK$144,600.00 (HK$9,640 x 15). The Plaintiff and the 1st Defendant agreed that the rents received were to be applied to discharge the monthly mortgage repayments. I shall refer this sum of HK$144,600.00 as "the Rental Income" below.

8. After the tenant left the 1st Property, the 1st Defendant demolished the partition wall between the 1st Property and the adjoining flat at 4th Floor, No.11A La Salle Road, Kowloon, Hong Kong where the 1st Defendant and her family resided ("the 2nd Property") and carried out renovation for both the 1st Property and the 2nd Property. Expenses were incurred by the 1st Defendant. I shall refer these expenses as "the Renovation Expenses" below.

9. After the renovation, the Plaintiff moved into the 1st Property and occupied a room. The 1st Defendant and her family occupied the rest of the 1st Property and the 2nd Property.

10. In 1995, the 1st Defendant had great financial difficulties. She requested to sell the 1st Property. The Plaintiff agreed. After the 1st Defendant and the Plaintiff signed the Formal Agreement for Sale and Purchase dated 24 March 1995, in about July 1995, the Plaintiff went to Canada and would not come back to Hong Kong before completion of the sale. So the Plaintiff agreed with the 1st Defendant that the 1st Defendant would handle the sale of the 1st Property on behalf of the Plaintiff while the Plaintiff was away from Hong Kong. The Plaintiff then executed a Power of Attorney in favour of the 1st Defendant for sale of the 1st Property. The completion of the sale took place on 31 July 1995. The 1st Defendant executed the Assignment on her own behalf and also on behalf of the Plaintiff.

11. The sale price was HK$5,000,000.00. The legal costs and expenses paid by the 1st Defendant for the sale and the discharge of legal charge were HK$19,360.00. The estate agent commission paid by the 1st Defendant was HK$53,900.00. Therefore, the net proceeds of the sale were HK$4,926,740.00 (being HK$5,000,000.00 - HK$19,360.00 - HK$53,900.00). I shall refer this sum as "the Net Proceeds" below.

12. However, after the completion of the sale the 1st Defendant did not account to the Plaintiff for any profit that the Plaintiff was entitled to share.

13. Subsequently, the 1st Defendant paid by installments a sum of HK$720,000.00 in total to the Plaintiff in partial settlement of the money for which the 1st Defendant should have accounted.

The Plaintiff's beneficial interest in the 1st Property

14. Mrs. Dora Chan has drawn my attention to a paragraph at page 2 of the 1st Defendant's witness statement. In Mrs. Chan's reading, the 1st Defendant seemed to suggest that the Plaintiff's interest in the 1st Property should be limited to the proportion of HK$720,000.00 that the Plaintiff had contributed in the purchase of the 1st Property. This amount was substantially less than half of the purchase price of HK$2,390,000.00. However, during cross-examination, the 1st Defendant made her position clear to the Court that she agreed that the ownership of the 1st Property was half and half with the Plaintiff.

15. In her final submission, Mrs. Chan went further to argue that there was an express and binding agreement entered between the Plaintiff and the 1st Defendant that other than HK$720,000.00 that the Plaintiff had contributed, there was no contribution that the Plaintiff was required to make. Hence, in Mrs. Chan's submission, the mortgage loan repaid to the bank should not be deducted from the Plaintiff's share of profit to be repaid by the 1st Defendant. She relied on one of the 1st Defendant's answers to her question during cross-examination, that the 1st Defendant agreed that the Plaintiff was only needed to pay $720,000 and the 1st Defendant would cover all the rest of the things. I reject Mrs. Chan's suggestion for the following reasons:

(1)	It is common ground that the Plaintiff owned half of the beneficial interest in the 1st Property. As such, the burden is on the Plaintiff to prove that despite the Plaintiff was entitled to half of the interest, benefit and income of the 1st Property, she was only required to contribute less than half of the purchase price and other expenses paid.
(2)	Looking at the totality of the evidence, the said answer that Mrs. Chan relied on seems to be taken out of context. Firstly, the meaning of the 1st Defendant's mentioning that she would cover all the rest of the things was unclear. It does not necessarily mean that the 1st Defendant agreed or undertook to bear all the responsibility to repay the whole mortgage loan and in effect to abandon her right to ask the Plaintiff to contribute the Plaintiff's share, notwithstanding that the Plaintiff was a co-owner who was entitled to half of the proceeds if the 1st Property was sold in the future. Secondly, in answering to my questions, the Plaintiff told me that there was no agreement on how the sale proceeds were to be divided. She said on oath that this was not discussed beforehand and in fact, at the time of purchasing the 1st Property, she had never thought about sale of the 1st Property in the future.
(3)	Mrs. Chan's suggestion was contrary to paragraph 7(b) of the Plaintiff's witness statement dated 22nd April 2003, the veracity of which was confirmed by the Plaintiff under oath at the beginning of her evidence. In that paragraph, the Plaintiff stated that each of the parties contributed half of the capital fund and the 1st Defendant would arrange the application for mortgage of the 1st Property and would also be responsible for collecting rents and applying them for monthly mortgage installments.
(4)	Finally, this suggestion was contradicted by the Plaintiff's own pleading. In paragraph 2 of the Amended Statement of Claim that I have quoted above, the Plaintiff had expressly pleaded that the Plaintiff and the 1st Defendant purchased the 1st Property for investment purpose and they were to contribute the capital and to share the profit and loss and net proceeds of sale in equal shares. I have given leave to the Plaintiff to amend her Statement of Claim during the course of this hearing but the amendment did not concern this paragraph. I do not see how the Plaintiff could depart from her own pleaded case.

16. Therefore, in my view, in accounting for the Plaintiff's profit, the Court should deduct the amount of capital that should have been (but was not) contributed by the Plaintiff to the purchase of the 1st Property from the Plaintiff's share of the Net Proceeds.

No deduction of renovation and other expenses

17. I do not think the 1st Defendant is entitled to deduct the Renovation Expenses incurred by the 1st Defendant in the renovation of the 1st Property, rents for the room that the Plaintiff occupied previously and management expenses, living expenses such as food and service of the maid of the 1st Defendant's family that the 1st Defendant had allegedly paid. All these expenses do not relate to the sale and purchase of the 1st Property but are in effect a claim of equitable set-off. This is a question that requires separate consideration in other occasions and the burden is on the 1st Defendant to prove her entitlement to each of the heads claimed. The 1st Defendant is at liberty to plead the defence of set-off and lodge the corresponding counterclaim. However, so far as the present hearing is concerned, judgment has been entered against the 1st Defendant and under the Judgment the present hearing is confined to account for profit made in the sale and purchase of the 1st Property. Therefore, in my judgment, there shall be no deduction of such expenses from the Plaintiff's share of the Net Proceeds.

Mortgage loan

18. The mortgage loan of HK$1,200,000.00 was part of the capital outlay in the purchase of the 1st Property. As I have held above, the Plaintiff should contribute her share. If I could, I would have also taken into account the interest accrued on the principal of the loan and paid by the 1st Defendant. However, the Plaintiff pointed out that in June 1993, the 1st Defendant discharged the legal charge with the Bank of Communications and created another legal charge in favour of HSBC as chargee as security for general banking facilities to an unlimited extent. Parties were different in their evidence on the reasons of switching the legal charge from the Bank of Communications to HSBC. However, 1st Defendant admitted that she had used the facilities secured under the new legal charge for her own business. Nonetheless, she said she was not able to produce any bank records which could help segregating those parts of the interests attributable to the 1st Defendant's business. She said she had lost all these records. In my view, since it is the 1st Defendant's burden to prove the amounts that should be deducted from the share of profit payable to the Plaintiff by the 1st Defendant, the 1st Defendant has failed to discharge this burden and hence I can only take the principal sum of the mortgage loan, i.e. HK$1,200,000.00 into account. This sum has already been included in the amount of the Total Capital mentioned above.

Assessment of the Plaintiff's entitlement

19. I shall then proceed with dollars and cents. The starting point of calculating the Plaintiff's entitlement is the Net Proceeds, i.e. HK$4,926,740.00. The Plaintiff is entitled to half of the Net Proceeds, i.e. HK$2,463,370.00.

20. As explained above, I have held that I should take into account the amount of capital that should have been (but was not) paid by the Plaintiff in the purchase of the 1st Property. The Total Capital is HK$2,480,615.00. On the other hand, it is the undisputed evidence that the Plaintiff agreed that the 1st Defendant applied the Rental Income to repay the monthly mortgage repayments. Hence I should deduct the Rental Income from the Total Capital of HK$2,480,615.00. The net capital paid is therefore HK$2,336,015.00 (i.e. HK$2,480,615.00 - HK$144,600.00). The Plaintiff should have contributed half of the net capital paid, i.e. HK$1,168,007.50.

21. Although I should take into account HK$720,000.00 that the Plaintiff had contributed in the beginning, the 1st Defendant has, as mentioned above, subsequently made partial repayments in the total sum of HK$720,000.00 for the money that may be found due to the Plaintiff in the present hearing. Therefore, the two sums can be cancelled out and there is no need to make adjustment for these two sums.

22. Then the said half of the Net Proceeds, i.e. HK$2,463,370.00 is to be deducted by the said half of the net capital that should have been contributed by the Plaintiff, i.e. HK$1,168,007.50. The final figure is therefore HK$1,295,362.50.

Conclusion

23. I therefore order that the 1st Defendant do pay HK$1,295,362.50 to the Plaintiff.

24. I also make an order nisi that the 1st Defendant do pay the Plaintiff costs of the account for profit including the costs of today's hearing, the amount of which is to be taxed if not agreed. I should also mention that I do not think that the complexity of this hearing warrants a certificate for counsel.