HUMMINGBIRD MUSIC LTD v. DINO ACCONCI AND ANOTHER

HCA 836/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 836 OF 2007

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R U L I N G

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1.  This aspect of the case has taken a disappointing turn.  The matter now stands part-heard and is due to resume in April next year with 10 days set aside.  Pending the trial of the action, Andrew Cheung J. to whom the Plaintiff had applied for an interlocutory injunction, dismissed the application but did so on the Defendants’ undertaking to:

(1)	pay 60% of the net income of the work that they undertook between the date of his judgment (the 18th June 2007) and the trial of the action or further order;
(2)	keep a proper account of all such work undertaken by them and the income obtained from that work; and
(3)	where so required in writing by the Plaintiff’s solicitors, appoint, jointly with the Plaintiff’s solicitors, an accountant to verify that account and the amount paid into court.

He then proceeded to order a speedy trial.  That started before me on 20 August with an eight-day estimate but, after seven days, it became necessary to adjourn the trial due to the need for further discovery.  That being so the interlocutory order of Andrew Cheung J. again took effect.  Within a few days of the adjournment, complaint was being made by the Plaintiff that the Defendants were not complying with their undertaking, it being said that they should already have paid into court a little over $43,000.  I heard the argument on 31 August and handed down a ruling on 4September to the effect that, based on the evidence at that point in time, no payment was due.

2.  As appears in that Ruling the Defendants had established a company, K-Town Music Limited, as their corporate persona through which they trade.  I held that this was unobjectionable in principle provided the expenses which the Defendants sought to claim as deductions from their gross income were reasonable.  At that stage, given that the Defendants had only recently started on their own account and on an indication by Miss Leung, their counsel, that they expected an upturn in their fortunes and therefore their income, the Plaintiff would be prepared to, albeit reluctantly, accept the situation that the net income as represented by the accounts showed a loss and therefore there was nothing to pay into court.

3.  Further accounts have now been submitted by the Defendants and these too show a negative position.  Fearing that this will be repeated notwithstanding the fact that the two Defendants are getting to be in demand as performers, the Plaintiff has come again.  Mr Chan, who appears for the Plaintiff, submits that on a true interpretation of the Judge’s order, and of the accounts on a faithful application of that order there is now over $100,000 to be paid into court.

4.  What Mr Chan complains of is that it is not permissible for the Defendants to rely on the company accounts which, although properly prepared, perhaps with a view to a reduction of liability for corporate tax, are not a proper reflection of what Andrew Cheung J. had in mind when he accepted an undertaking from the Defendants “to pay 60% of the net income of the work that they undertake”.

5.  In this regard, it is helpful to set out the Defendants’ justification for presenting the matter in this way.  Miss Leung submits that I have already held that it is acceptable for the Defendants to trade through a corporate alter ego and that provided the deductions claimed against income are proper and reasonable then the net figure thereby produced would be the figure from which 60% would need to be paid into court.  At present the accounts produced put the company in negative territory with no obvious sign of improvement.  Nevertheless, where these accounts have been professionally prepared and all necessary receipts for expenditure have been produced that should conclude the matter.  These accounts have all been checked by Miss Au-Yeung, a qualified accountant and been found to be in order.

6.  Mr Chan submits that this puts the matter on a false basis.  It needs to be remembered that the 60% percentage has come from the agreements between the parties under which the Plaintiff was the Defendants’ management company and agent.  In calculating the 60% net figure that it paid the Defendants, it did not deduct from their gross earnings the running costs of the Plaintiff company but deducted the expenses and costs which directly related to the Defendants’ performances, by which I mean not only live concert appearances but also the making of CD’s and promotional appearances.  In other words, expenses referable to the Defendants’ obligations to the Plaintiff as performing artistes.  As a result the Plaintiff did not deduct its costs of running its office including staff expenses but only expenses incurred for example, in putting on a concert including travel, costumes, musicians and so forth.

7.  Now that the Defendants have formed their own company what they are trying to do is to deduct all their artistic expenses, if I can so describe them, such as travel, costumes and additional musicians, to provide obvious examples, as well as the cost of running K-Town-Music such as office rent and rates, staff salaries and messing expenses.

8.  Miss Leung’s response to this is that the Defendants cannot be expected to practice their occupation without incurring these expenses, all of which have been properly verified by an accountant.

9.  My view is that a proper interpretation of the undertaking given to Andrew Cheung J is that the net income of the Defendants’ carries a more restrictive meaning than establishing a company and then deducting all the companies running expenses.  Whilst the Defendants are perfectly welcome and entitled to trade through a company, this may be an expensive way of doing things for the purposes of complying with their undertaking to the judge.  I am of the view that strictly corporate expenses such as rent, rates, electricity, staff salaries, messing and so forth are not allowable for these purposes although the cost of rehearsal rooms should be allowed.  In such circumstances, an element of the office rental which has a rehearsal room, and rates will need to be provided for.  What is allowable in order to arrive at a net figure are expenses referable to the Defendants as artistes and their performance work including recording CD’s, concerts and promotional appearances.

10.  At present, I do not see it as part of the court’s duty to go through each item of expenditure and say what is and what is not to be deducted for this purpose.  I have said enough to provide a guide.  For the avoidance of doubt, I will allow the payment of fees of $5,000 a month for each Defendant as well as $5,000 a month for Mr Gorton who is a permanent member of Soler as its drummer.  In the past, he has not been separately charged for and so it is only right that his fees should form part of the artistic expenses.  Miss Khan’s salary, as their agent, should also be provided for as an allowable expense.

11.  Mr Chan had suggested my taking a percentage of the gross for the expenses but it seems to me that this would be rather arbitrary, uncertain in the sense of being potentially inaccurate, and therefore work an injustice to both parties.  The formulation that I have attempted to provide is the one that should be adopted and fresh accounts will now need to be prepared on this basis to produce the net income figure from which 60% will be paid into court.  Now that I have provided this guide, there really should be no need to come back to court.  Questions of apportionment of rental to reflect the cost of a rehearsal room rather than a permanent office space can easily be dealt with by the accountants if the parties themselves cannot agree.

12.  As to costs, I will make an order nisi that the costs of this summons should be to the Plaintiff in any event, where Mr Chan’s approach has been substantially upheld by me.  If a different order is to be proposed by the Defendants, this can be done on paper in order to save further costs.