CHEUNG YUK FUNG v. YIP CHI KEUNG AND ANOTHER

DCCJ 259 & 306/2019 (Consolidated)

[2022] HKDC 266

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 259 OF 2019

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BETWEEN

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IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 306 OF 2019

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BETWEEN

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(Consolidated by Order of Master Raymond Chow dated 4 March 2019)

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JUDGMENT

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BACKGROUND

1.  In May 2018, the plaintiff agreed with the 1^st defendant to form a joint venture company to carry out a property agency business to sell overseas real estate properties in Hong Kong. It was agreed that each of them would contribute HK$400,000 to the company as working capital, save HK$5,000 of which would be deducted for paying the share capital.

2.  As the 1^st defendant had acquired an off-the-shelf company, Blessing Construction Engineering Limited (“Blessing”), the parties agreed to adopt it as their joint venture vehicle. Shares of Blessing would be allotted to both the plaintiff and the 1^st defendant in equal shares. Name of the company would be changed to OOne Property Group Limited (“OOne” or “the Company”).

3.  It was agreed between the parties that the plaintiff would contribute his HK$400,000 in cash, and the 1^st defendant would contribute his share of HK$400,000 worth by renovating or providing the fitting-out works of the office premises, which they were going to rent for the Company. Since Blessing did not have a bank account at the time, the plaintiff, upon the 1^st defendant’s instruction, contributed his HK$400,000 by depositing it into the bank account of the 2^nd defendant, a company owned and controlled by the 1^st defendant.

4.  Two months after its grand opening in late July 2018, OOne (formerly Blessing) was forced to close down due to lack of funds in late September 2018. No business income was ever generated, except US$3,710 (HK$28,900) admission fees from a seminar. Although OOne had finally had its bank account set up right before the closing down, most of the HK$400,000 working capital contributed by the plaintiff, according to the 1^st defendant, had been exhausted, with only about HK$50,000 remaining for transferring into OOne’s bank account.

5.  This is pretty much the rise and fall of the Company.

THE PLAINTIFF’S CLAIM

6.  The plaintiff says that it was orally agreed between the plaintiff and the 1^st defendant on 29 May 2018 (“the Oral Agreement”) that,

(a) Both parties should be the equal shareholders and directors of the new company (ie the Company);

(b) Both parties should each contribute HK$400,000 to the new company as initial capital;

(c) HK$5,000 of the contribution from each party should be used as the share capital of the new company, while the remaining HK$395,000 would be used as working capital; and

(d) The new company would be named as “OOne Property Group Limited”.

7.  Pursuant to the Oral Agreement, the plaintiff deposited HK$400,000 cash into the 2^nd defendant’s bank account on 15 June 2018 upon the 1^st defendant’s instruction. It is the plaintiff’s case that the HK$400,000 was given to the 1^st defendant for the agreed purposes to apply it only as the share capital and working capital of OOne (“the Agreed Specific Purposes”), and it was agreed that it would not be at the free disposal of the 1^st defendant.

8.  It is not disputed that HK$5,000 out of the HK$400,000 contributed by the plaintiff was used to pay for the Company’s share capital, and equal shareholdings were allotted to the plaintiff on 20 June 2018. For convenience, I shall continue to refer to the whole deposited sum of HK$400,000 as the funds to be used for working capital since the amount deducted for the paid-up share capital is negligible.

9.  The plaintiff claims that a Quistclose trust arose over the funds with the 1^st defendant as trustee.

10.  The plaintiff contends that the 1^st defendant had never accounted to the plaintiff how the HK$400,000 was spent, and the HK$400,000 had never been applied by the 1^st defendant in accordance with the Agreed Specific Purposes, and thus the 1^st defendant was in breach of the Quistclose trust and/or the Oral Agreement.

11.  The plaintiff claims that the 2^nd defendant was a recipient for knowing or unconscionable receipt of the deposited funds.

12.  The plaintiff claims against the defendants for the return of the HK$400,000, damages or equitable compensation for the breach of trust, an account of profits, and/or an order for an account.

THE DEFENDANTS’ DEFENCE

13.  Although the Agreed Specific Purposes were denied in the Defence, evidence given by the parties at trial proceeded along the line that whether the funds were being used as the working capital of the Company as a common ground. The defendants did not really dispute that the funds contributed by the plaintiff were intended to be used as the Company’s working capital, save and except whether the funds were at the 1^st or 2^nd defendant's free disposal.

14.  The defendants’ position is that the plaintiff deposited the HK$400,000 into the 2^nd defendant’s bank account, which served as the Company’s receiving channel, under the instruction of the Company, and that the entire HK$400,000 had been defrayed for the purpose of paying costs and expenses of the Company, save the remaining HK$50,000 being later transferred to the Company’s bank account.

15.  In essence, the defendants are saying that the money was given to the Company, not to the 1^st or 2^nd defendant. The defendants say that any dispute as to the appropriateness of the expenditures should be resolved at the company level, namely between the Company and the director concerned, not between the two individual shareholders. They say that these proceedings should have been brought by the Company, not the plaintiff himself.

16.  Further, the 1^st defendant denies the existence of any Quistclose trust between the plaintiff and the 1^st defendant. It is the defendants’ case that the 2^nd defendant only acted as an agent in receiving the funds on behalf of the Company, and there was no reason why the plaintiff would have given the monies to the 1^st defendant personally. Hence there was no trust or any oral agreement.

17.  The defendants say that even if the court finds there is a Quistclose trust, the entire HK$400,000 less the said HK$50,000 had been spent, and the trust (if any) would have come to an end.

18.  On the other hand, the 1^st defendant says that the plaintiff could not walk away scot-free in a bad investment, namely the failure of OOne’s business.

DCCJ 306/2019

19.  The court is aware that the 1^st defendant had once taken out a separate action (DCCJ 306/2019) claiming for the deficit of HK$220,000 (being the total expenditures of $1,020,000 less the working capital of $800,000) incurred by the 1^st defendant for the setting up of the Company, plus an audit fee to be incurred at HK$40,000, after the commencement of the present action. In the action, the 1^st defendant claimed against the plaintiff for reimbursement or contribution for half of those expenses in the total sum of HK$130,000 (ie $220,000 + $40,000 = $260,000/2 = $130,000).

20.  However, such claim has been aborted by the 1^st defendant soon after the consolidation of the two actions. I shall deal with such part of costs at the end of this Judgment.

THE ISSUES

21.  Mr Tsui, counsel for the plaintiff, made it clear in opening that the plaintiff was not suggesting that the 1^st defendant had failed to contribute his share of HK$400,000 worth of renovation, nor was he claiming any deficiency of the renovation works done by the 1^st defendant. It was clarified that the dispute between the parties only concerned the HK$400,000 contributed by the plaintiff.

22.  The parties have agreed on the issues as follows:-

(1) Whether there was a Quistclose trust and/or the Oral Agreement between the plaintiff and the 1^st and/or 2^nd defendant(s)?

(2) Whether the defendants were in breach of the terms of the Quistclose trust (if any) and/or the terms of the Oral Agreement (if any)?

23.  As the evidence transpired, the real questions for the court to determine in this trial include:-

Whether the HK$400,000 contributed by the plaintiff in cash had been utilized or applied as the Company’s working capital?

24.  The essence of the plaintiff’s claim is that there was a breach of contract and/or breach of trust, in that the defendant failed to account for the HK$400,000 that the plaintiff had injected for the purposes of using as the working capital of the Company.

25.  In the course of the trial, the plaintiff accepted some monies were spent legitimately for the Company. For example, the plaintiff would not demand the 1^st defendant to return the monies spent on rent for the Company’s office premises. However, the plaintiff insisted that not all of the HK$400,000 had been exhausted by OOne’s business.

QUISTCLOSE TRUST

26.  Mr Tsui refers to Lewin on Trusts (20^th edn, 2020) vol 1, at para 9-046, which summarised the speeches of Lord Hoffmann and Lord Millett in Twinsectra v Yardley [2002] 2 AC 164 (HL) on the character and effect of Quistclose trusts as follows:-

“A Quistclose trust is one whereby A pays or transfers money or property to B so that B holds the money or property in trust for A subject to a power for B to apply the money or property for a stated purpose. Hence A’s beneficial interest in the money or property will remain unless and until the money or property is applied in accordance with that power. … The only trust is the resulting trust for the payer and the power to apply the money for a stated purpose is a mere power and not a purpose trust. If the purpose fails then the money or property is held on resulting trust for A freed from any power, and so can be recovered by A by a proprietary claim whether or not B is solvent.”

27.  Mr Cheung, counsel for the defendants, submits in reply that there never existed a Quistclose trust between the plaintiff and the 1^st or 2^nd defendant. He relies on the same authority of Twinscetra where Lord Millett continued at paras 73 & 74:-

“73. A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A lender will often inquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but this is not enough to create a trust; once lent the money is at the free disposal of the borrower. Similarly payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cashflow. Commercial life would be impossible if this were not the case.

74. The question in every case is whether the parties intended the money to be at the free disposal of the recipient: In re Goldcorp Exchange Ltd [1995] 1 AC 74, 100 per Lord Mustill. His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose, for as Lord Wilberforce observed in the Quistclose case [1970] AC 567, 580:

‘A necessary consequence from this, by a process simply of interpretation, must be that if, for any reason, [the purpose could not be carried out,] the money was to be returned to [the lender]: the word “only” or “exclusively” can have no other meaning or effect.’”

28.  Mr Cheung submits that one has to look at the purpose objectively. He says that the purpose of depositing the money into the 2^nd defendant’s bank account was only because the new company had no bank account at the time. It is submitted that there is no presumption there would be a Quistclose trust simply because the money was banked into the 2^nd defendant’s bank account, and there was no intention of the parties to create a trust.

29.  While I agree with Mr Cheung that the test is an objective one that the court needs to examine all the objective circumstances, I would like to add that the subjective intentions of the parties to create a trust are irrelevant. Lord Millett continued in Twinsectra (supra) at 185B-C that:-

“A settler must, of course, possess the necessary intention to create a trust, but his subjective intentions are irrelevant. If he enters into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them.”

30.  I think it behoves the court to peruse In Re Goldcorp to see how Lord Mustill decided on the question of whether the parties intended the money to be at the free disposal of the recipient. Lord Mustill said at 100F-101C:-

“The first argument posits that the purchase moneys were from the outset impressed with a trust in favour of the payers. That a sum of money paid by the purchaser under a contract for the sale of goods is capable in principle of being the subject of a trust in the hands of the vendor is clear. For this purpose it is necessary to show either a mutual intention that the moneys should not fall within the general fund of the company's assets but should be applied for a special designated purpose, or that having originally been paid over without restriction the recipient has later constituted himself a trustee of the money: see Quistclose Investments Ltd. v. Rolls Razor Ltd. [1970] A.C. 567, 581-582. This requirement was satisfied in In re Kay ford Ltd. (In Liquidation) [1975] 1 W.L.R. 279 where a company in financial difficulties paid into a separate deposit account money received from customers for goods not yet delivered, with the intention of making withdrawals from the account only as and when delivery was effected, and of refunding the payment to customers if an insolvency made delivery impossible. The facts of the present case are, however, inconsistent with any such trust. This is not a situation where the customer engaged the company as agent to purchase bullion on his or her behalf, with immediate payment to put the agent in funds, delivery being postponed to suit the customer's convenience. The agreement was for a sale by the company to, and not the purchase by the company for, the customer. The latter paid the purchase price for one purpose alone, namely to perform his side of the bargain under which he would in due course be entitled to obtain delivery. True, another part of the consideration for the payment was the collateral promise to maintain separate cover, but this does not mean that the money was paid for the purpose of purchasing gold, either to create the separate stock or for any other reason. There was nothing in the express agreement to require, and nothing in their Lordships' view can be implied, which constrained in any way the company's freedom to spend the purchase money as it chose, or to establish the stock from any source and with any funds as it thought fit. This being so, their Lordships cannot concur in the decision of Cooke P. [1993] 1 N.Z.L.R. 257, 272-273, that the purchase price was impressed with a continuing beneficial interest in favour of the customer, which could form the starting point for a tracing of the purchase moneys into other assets.” (Emphasis added)

31.  Applying In Re Goldcorp to our present case, I find that although the funds given by the plaintiff to the 1^st defendant, via the 2^nd defendant, were for a particular purpose, I do not consider that a Quistclose trust has arisen from the same after hearing the evidence:-

(1) The plaintiff did not engage the 1^st defendant or the 2^nd defendant as an agent to defray the expenses of the Company.

(2) The Oral Agreement merely provided that the 1^st defendant should apply the funds as the working capital of the Company.

(3) There was nothing in the agreement to constrain in any way the 1^st defendant and/or the 2^nd defendants to spend the funds as they chose. (At the end, it would be up to the 1^st defendant to prove how he had applied a total of HK$400,000 towards the Company’s working capital.)

(4) The plaintiff paid over the funds for one purpose alone, namely to perform his side of the duty of contribution under which he would in due course be entitled to 50% shares of the Company (an HK$800,000 worth company).

32.  Mr Cheung submits that the 2^nd defendant was acting as an agent in receiving the money for the Company, not for the plaintiff.

33.  In my view, however, at the material time when the plaintiff gave the money to the 2^nd defendant, he did so on the basis of the Oral Agreement made between the plaintiff and the 1^st defendant. The Company is not a party to the agreement, and the parties had not become the shareholders of the Company yet. I hold that there was no agency agreement made between the 2^nd defendant and the Company.

34.  It is also of my view that the parties did not intend to create a trust position for the following reasons:-

(1) Both the plaintiff and the 1^st defendant were 50% shareholders and directors of the new joint venture company. They dealt with each other as equal principals and at arm’s length. I do not see the necessity for them to entrust with each other for making their contribution to the Company. There is no agency or any relationship of ascendency. There is no fiduciary element arose and no basis existed for equity to intervene in what is a purely commercial relationship (Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681 at paras 64-72); and

(2) The 2^nd defendant was not appointed by the parties to keep separate of the funds. Instead, it was a mere agent of the 1^st defendant in receiving the funds at the 1^st defendant’s direction.

35.  On the other hand, Mr Tsui relies on the fact that there were the Agreed Specific Purposes made between the parties.

36.  However, if one looks at the pleaded case of the plaintiff more closely (rather than the case runs by the plaintiff at trial), it was pleaded in the Re-Amended Statement of Claim (para 7(b)) that the Agreed Specific Purposes include only two terms: (i) HK$5,000 out of the HK$400,000 would be used as the share capital of the new company; and (ii) HK$395,000 out of the HK$400,000 would be injected into the new company as its working capital. These are the only terms defined under the Agreed Specific Purposes and are already incorporated into the Oral Agreement, which I have no difficulty to accept.

37.  But where is the evidence in support of the term that “the funds could only be applied for the Agreed Specific Purposes” and the restriction of “not at the free disposal of the 1^st defendant”? It is important to note that there was no mention of any discussion between the parties in this regard in the plaintiff’s witness statement, which was adopted as his evidence in chief, nor was there any oral evidence given, let alone any agreement. Neither could we see such a requirement being mentioned in the cost estimation or the business plan provided by the plaintiff. Not surprisingly, such terms were strenuously denied by the defendants.

38.  In the absence of any evidence, I find that there was no agreement between the parties as to any restriction in the disposal of the funds.

39.  Was there anything else in the court’s view that can be implied, to constrain the 1^st or 2^nd defendant’s freedom of disposal? Again, there was none. There was no evidence on any discussion about how to safeguard the funds from being disposed of freely by the defendants. There was no undertaking as to such effect given by the defendants to give rise to a trust, nor was there any plaintiff’s revocable mandate (as discussed in Twinsectra, pages 171 & 192).

40.  It is the 1^st defendant’s evidence that it was his practice that he would utilize whatever funds available within his group of affiliated companies (on a sharing basis) to settle any outstanding bills for convenience, as shown in the supporting documents he provided together with the Excel Sheet in the trial bundles. The 1^st defendant’s evidence also reveals that the 2^nd defendant is an active company in operation with staff sharing with his other companies. Therefore, I have no hesitation in finding that any sum deposited into the 2^nd defendant’s bank account would have been mixed with its general cash flow and cannot be separated.

41.  I come to the view that the plaintiff gave the money to the 1^st defendant on the faith that the money would be applied as the Company’s working capital. But he knew that he had no control over how the 1^st defendant would deal with it, and that the money would have been mixed with the 2^nd defendant’s general funds.

42.  Therefore, I find that there was no agreement or restriction that the funds were not at the free disposal of the 1^st or 2^nd defendant.

43.  In reaching such conclusion, I cautiously note that although it is not fatal to finding that the plaintiff contemplated that the funds would be mingled with the 2^nd defendant’s general funds, I do consider that the plaintiff has not demonstrated that he had any intention to restrict the 1^st or 2^nd defendant’s free disposal of the funds. See Snell’s Equity (34^th edn, 2020) at para 25-034:-

“… A’s intention needs to be communicated to B so that it is clear to B that the monies must be returned if A’s purpose cannot be fulfilled. It is not fatal to finding the required intention that A contemplates that the money may eventually be mingled with B’s general funds. But a requirement that the money is to be kept unmixed in a special account strengthens the inference that B does not have it at his free disposal, and that he is not a simple contract debtor. Unless A’s intention to restrict B’s free disposal of the money is demonstrated, then the money ordinarily belongs beneficially to B. This is consistent with the true default position that the transfer of the legal title ordinarily carries with it the beneficial interest.”

44.  For the above reasons, I find that there was only a contractual relationship between the plaintiff and the 1^st defendant that the latter would apply the funds as the Company’s working capital, but it was not sufficient to create any trust relationship. The plaintiff has failed to prove, on the balance of probabilities, that a Quistclose trust ever existed.

THE EVIDENCE

The Parties

45.  The plaintiff says that he is a university graduate majored in marketing in Hong Kong. He is now 38 years old. He used to work as a personal assistant to a real estate owner in managing his employer’s portfolio in rental business. He has held some insurance licences and investment licences. However, he only became an entrepreneur at the age of 33. Two years later, around March 2018, he first met the 1^st defendant in a property investment event. OOne is the first time he joined others to start a new business.

46.  The plaintiff says that, around May 2018, the 1^st defendant suggested to him to start a property agency business for overseas properties together. The plaintiff said that he had substantial sales experience and the 1^st defendant had good connections with other property agents. Therefore, they both considered that their collaboration would work as their knowledge and skills could complement each other. They further went into a discussion of setting up a joint venture company for the new business.

47.  The 1^st defendant is 54 years old. He says that he owns and manages several interior design and decoration/construction companies. It is not disputed that his construction business is well-established, and he has about 30-40 staff within his group of companies, sharing staff across them.

48.  The 1^st defendant, however, denies that he suggested the joint venture business. He says that it was in fact the plaintiff who claimed to have a lot of potential buyers and good connections with many overseas developers.

49.  In my view, I do not think that the question as to who initiated the business idea is of any relevance to the issues of this case. Their personal backgrounds are not in dispute.

The Agreement

50.  The plaintiff says that he began to estimate the costs for setting up the new business after several discussions. He produced a calculation sheet to show a cost estimation of HK$2 million to cover about two years’ expenditures. The estimation included HK$400,000 renovation costs for the office they were going to rent at Wing Kwok Centre.

51.  Pausing here, it is the evidence of both the plaintiff and the 1^st defendant that the HK$400,000 renovation costs were initially budgeted at HK$300,000. The 1^st defendant subsequently raised the estimation for renovation to HK$400,000, which the plaintiff accepted. Despite accepting the increased renovation budget, the plaintiff added that the 1^st defendant should still try to keep the renovation costs below HK$400,000 with the remaining saved for the running capital of the Company. The defendant denies having such a conversation. He says that the renovation costs were agreed at HK$400,000, not just an estimate.

52.  The plaintiff says that, on 29 May 2018 during a meeting with the 1^st defendant, they have reached the Oral Agreement and the total capital of the Company was agreed at HK$800,000, with each of them contributing 50% ie HK$400,000.

53.  The 1^st defendant denies the Oral Agreement. Instead, he says that the working capital of the Company was only fixed at HK$400,000, which was to be contributed by the plaintiff. The 1^st defendant himself would only shoulder the cost of the renovation works agreed at HK$400,000. However, this part of his evidence is clearly contradicted by his own letter dated 5 January 2019, in which it was stated that both of them were to contribute HK$400,000 to be injected into the Company.

54.  In my finding, there is not much difference in the outcome of either account of events. However, I accept the plaintiff’s version as it was supported by the contemporaneous documents, namely the cost estimation sheet, which supports their budget that HK$800,000 (including HK$400,000 renovation costs) would be sufficient to cover the first six months of the operation of the Company. It makes all business sense that both of them would contribute an equal amount of money, either in cash or in money worth by way of renovation, for their respective shares of the Company.

55.  I accept the terms of the Oral Agreement as alleged by the plaintiff.

56.  I find that the HK$400,000 paid by the plaintiff to the 1^st and 2^nd defendants was paid in accordance with the terms of the Oral Agreement. It was agreed that the HK$400,000 would be used for the working capital of the Company.

The HK$400,000 Expenditures

57.  The 1^st defendant claims that the HK$400,000 contributed by the plaintiff had been received (via the 1^st and 2^nd defendants) and injected into the Company as the Company’s working capital, and that whatever amounts he had been paying out for the Company’s expenses he was utilizing the Company’s working capital.

58.  The 1^st defendant was allowed to show to the court in greater details how the HK$400,000 had been injected into the Company as working capital since there were no accounting transactions or ledgers to verify the same. The defendants have the burden of proof if they put forward an affirmative defence. The 1^st defendant gives evidence on behalf of both defendants and would rely on the following matters:-

(a) There was a receipt stamped with the company chop of the Company in acknowledging the receipt of HK400,000 from the plaintiff; and

(b) The 1^st defendant provided an Excel sheet showing the expenses with approximately 150 pages of invoices and voucher receipts to support his contention (“the Excel Sheet”).

The Official Receipt

59.  In respect of the receipt of the HK$400,000, there are two receipts produced before the court:-

(1) An A4 size receipt printed and issued by the 2^nd defendant (BTB) with the signature of the 1^st defendant dated 6 June 2018, stating that “[the 2^nd defendant] acknowledges receipt of HK$400,000 from [the plaintiff] to be applied as the working capital of OOne Property Group” (“the BTB Receipt”); and

(2) A local stationery receipt voucher issued by Blessing with its company round chop stamped and dated 15 June 2018, stating “received from [the plaintiff] a total of HK$400,000 in cash” (“the Blessing Receipt”).

60.  The plaintiff’s evidence is that he received the BTB Receipt on 15 June 2018 from the 1^st defendant after he made the deposit of HK$400,000 on the same date. He says that the BTB Receipt was dated 6 June 2018 because he originally informed the 1^st defendant that he would make the deposit on 6 June 2018, but he delayed it to 15 June 2018. He says that he did not pay much attention to the Blessing Receipt when the 1^st defendant handed it to him together with the BTB Receipt.

61.  The 1^st defendant says that he would rely on the Blessing Receipt to prove that the funds had been received by the Company. However, the 1^st defendant also says that the 2^nd defendant BTB that received the funds for Blessing was his own company, and he was the only shareholder and director of BTB.

62.  I find that the BTB Receipt is the official receipt for the transaction, and I would disregard the Blessing Receipt for the following reasons:-

(1) As of 15 June 2018, the parties had not yet acquired the Company as their joint venture vehicle. Prior to the share allotment on 20 June 2018, Blessing was then owned by one Li Kwok Fai Daniel. As such, the Company was not in a position to issue any receipt for accepting the working capital from the plaintiff as the joint venture company. The crucial question is how the 1^st or 2^nd defendant subsequently injected the funds received in the 2^nd defendant’s bank account into the Company;

(2) There are no other accounting documents, e.g. accounting ledgers or entries, whether from the Company or from BTB to support that the Company had received the funds through BTB on 15 June 2018; and

(3) The Oral Agreement was made between the plaintiff and the 1^st defendant. No agreement was made with the Company. Thus the funds must have been paid to the 1^st defendant as a recipient and, at his direction, paid to his another company’s bank account (namely BTB’s bank account).

63.  In my finding, there is no evidence to show the funds contributed by the plaintiff had reached the Company at the material time on 15 June 2018. I find that the funds were transferred into the 2^nd defendant’s bank account pending for use as the working capital of the Company in accordance with the Oral Agreement.

64.  The peculiar feature of the present case is that the funds contributed by the plaintiff have been mixed with the general funds in the 2^nd defendant’s bank account, and the 1^st defendant claims that the funds have been defrayed even before the same could be deposited into the Company’s bank account. In my view, not every out-of-pocket money allegedly paid by the 1^st defendant for the Company would be taken as meeting the Company’s expenditures. It remains for the court to examine whether each transaction was legitimately spent for the Company.

65.  In other words, if the money had been used to defray the expenses of the Company as agreed, the Company, and only at that moment, would have been able to record the transaction as debiting the expense amount and crediting the same amount for the increase of the capital in equity. Hence, the money had reached the Company and spent. An example of this is the non-disputed rental payments made to the landlord.

66.  Conversely, if the 1^st and/or 2^nd defendants had never applied the funds to pay the expenses of the Company but spent for his own benefit, this means that the funds have never reached the Company. There would be a breach of the terms of the Oral Agreement, and the funds ought to be returned.

The Expenses

67.  The 1^st defendant has produced, for the purposes of this trial, the Excel Sheet which compiled all the expenditures allegedly consumed the entire HK$400,000 for the Company. There are a total of 38 entries (WO01 – WO38) with supporting documents such as invoices, vouchers, and receipts. The Excel Sheet is not a rudimentary one but with great details.

68.  The 1^st defendant says that apart from the HK$189,000 security deposit and rental payments paid to the landlord (WO02) and the HK$50,000 deposited into the Company’s bank account (WO22), all the remaining items are mainly charges for the extra or variation works of the renovation project (WO03-05, 07-09, 11-12, & 15) totalling approximately HK$78,000 and other setting up costs in preparation of the grand opening of the Company (eg loose furniture, television sets, and stationery etc) totalling approximately HK$48,000. He says that the plaintiff had prior notice of all those items. He says that, more particularly, the extra works were works not originally anticipated nor included in the renovation, which he undertook to complete.

69.  The plaintiff contends that not all expenditures on the Excel Sheet were related to the Company. In the course of the trial, the plaintiff accepted that the HK$189,000 rental payments and the HK$50,000 bank deposit were legitimate. The only items that remained in dispute are some of the extra works (together with a few stationery items) in the total sum of approximately HK$70,000. The plaintiff also points out that there was a disparity between the total amount of the expenditures on the Excel Sheet being HK$378,081.24 and the fund of HK$400,000 he deposited.

70.  However, the plaintiff could not pinpoint any problem with those disputed extra works. Under cross-examination, he accepted the suggestion of the defendant’s counsel that all those disputed items were in fact related to the Company. The only thing that the plaintiff could say (which I accept) is that he did not understand much about the contents of those items. I accept that the plaintiff does not have much experience in construction.

71.  I now turn to the 1^st defendant’s oral evidence. Attention is drawn that the Excel Sheet was made under the company name of Evergreen (FIC) Ltd (“Evergreen”), not the Company. The 1^st defendant explains that it was prepared by his staff, and Evergreen was one of his companies and responsible for carrying out the renovation works. Counsel for the defendants submits that even though the Excel Sheet and all the supporting documents were not issued or attention to the Company, it cannot be denied that those expenditures were used for the Company, it would just take some accounting procedures for the Company to do a final account within his group of companies. I agree.

(i) Order for disclosure

72.  In cross-examination, when the 1^st defendant was asked to explain the extra works with respect to the original scope of works, he disclosed for the first time that there was actually a quotation for the renovation project (“the Quotation”), being made at the request of the accountant for auditing purposes after the renovation had been completed, but he had never showed it to the plaintiff.

73.  Counsel for the plaintiff made an oral application for disclosure of the Quotation and asked the 1^st defendant to fetch it to the court. Counsel for the defendants fairly not opposed.

74.  I allowed the application and ordered the 1^st defendant to produce the Quotation (RDC O 24 r 12). In my opinion, without the Quotation setting out the details of the original scope of works, the witnesses would hardly be able to identify whether the extra works were indeed included in the original scope of works. Despite repeated requests were made by the plaintiff for the Quotation before commencement of the proceedings and in the pleadings and witness statement, it was unanswered by the 1^st defendant. This is wholly unsatisfactory. I consider that the Quotation is relevant to the issues of the case and is necessary for disposing fairly of the cause or matter. I also allowed the plaintiff to be re-called if the plaintiff’s counsel saw it necessary.

75.  The Quotation, dated 24 August 2018, consists of 3 pages of description and 5 pages of drawings and plans. It was issued by Evergreen, the contractor, to the Company with a fee quoted at HK$400,000, including a design fee of HK$130,000. I accept it represents the original scope of works that the 1^st defendant agreed to undertake as his contribution.

(ii) Extra works

76.  The 1^st defendant explained, in cross-examination, that there were some unforeseen situations during the renovation, resulting in the need for certain additional or variation works, and he had to charge for those extras. He says, for example:-

(1) Item WO03 (The Painting works): HK$24,500. After his contractor had painted the whole ceiling once, the paint started to peel off. He then claimed that he had to pay another sub-contractor to repaint the whole ceiling again. This item also included re-doing the plastering for the whole wall as the paint they put on could not cover the previous color. They eventually changed to lay wallpapers instead. These works were originally included in the renovation under the Quotation (Items 2.1.4 & 2.2.1).

(2) Item WO08 (Electrical works): HK$27,600. Although the 1^st defendant had the opportunity to inspect and check the electrical wirings in the premises before the renovation commenced, he claimed that the wirings were unexpectedly messed up and the whole existing wirings at the premises had to be replaced. This item also included the relocation of electrical sockets right after they were newly installed, and the replacement of the fuses in the MCCB board. All these works had been charged once in the Quotation (Items 2.4.1, 2, 5).

(3) Item WO15 (Petty cash items): HK$8,376. This includes 50 pages of receipts issued by the construction hardware stores, ranging from a few dollars to a couple of hundred dollars. The 1^st defendant said those were the cost for buying the tools and parts which he had to provide for the daily sub-contracted workers. This item also included the replacement of 16 ceiling tiles. He said the 7 sets of LED light trays they purchased earlier was “too yellow”, therefore they discarded them and purchased another 10 sets with bright white lighting (WO09). But when they replaced the new LED light trays, they damaged the newly installed ceiling tiles. So, he had to order the extras. Again, it is of note that the original renovation has already included “Supply and install the new ceiling panels, new ceiling system, and LED light trays” (Items 2.1.2, 3 & 2.4.3).

77.  The above is not a comprehensive account of all the extra works under dispute. It is inconceivable that almost each and every item of the renovation works within these four corners of the 500 sq ft office premises had gone wrong. I bear in mind the 1^st defendant has already charged HK$130,000 for the design fee and has increased his quotation from HK$300,000 to HK$400,000. It is also his evidence that his HK$400,000 renovation fee was agreed not to be done at cost; it included his profits.

78.  Perhaps I shall borrow a passage from Keating on Construction Contracts (11^th edn, 2021) para 3-079:-

“The contractor must do the work with all proper skill and care. This duty is often expressed as one to do the work in a good and workmanlike manner. It is suggested that this is a continuing duty during construction and not only upon completion. In deciding what degree of skill is required the court will, it is submitted, consider all the circumstances of the contract including the degree of skill is expressly or impliedly professed by the contractor. Breach of the duty includes the use of materials containing patent defects, even though the source of such materials has been chosen by the employer. It may also include relying uncritically and without due precaution on an incorrect plan supplied by the employer where an ordinarily competent builder should have had grave doubts about the plan’s correctness.”

The proper skill and care described are even more apt for our present case as the 1^st defendant was to provide a design and build contract.

79.  In my view, those extra works claimed by the 1^st defendant are in fact works done under the original scope of works of the renovation, or, at the very least, the cost of those remedial or wasted works should be borne by the contractor (ie the 1^st defendant’s company Evergreen) under the Quotation. Accordingly, I disallow the above extra works.

(iii) Item of work: the cabinet

80.  In re-examination, the 1^st defendant was asked by his counsel to confirm that the low cabinet ordered from a furniture factory in Shenzhen (WO04) at HK$5,800 was not included in the original scope of works. But, unfortunately, he could not articulate any straightforward answer.

81.  I drew the attention of 1^st defendant that there was only one low cabinet in the Company’s office premises, as shown in the photos in brown. Under the Quotation, one can see an item of work “Supply and install a low cabinet of wood veneer finish” (Item 2.2.7), together with a drawing with a specific dimension of the cabinet. On the other hand, an invoice for the cabinet under the Excel Sheet with the same specification is also found.

82.  To this, the 1^st defendant explained that there was a high cabinet that required him to make good on-site, but it was not shown in the photos. He said he had ordered some replacement parts from the same furniture factory for the high cabinet, which cost him HK$5,800. That was not included in the original works. He said the low cabinet was ordered from the same factory at HK$10,000 odd, which he had paid and had been included in the original scope of works. He said it should be a mistake made by the furniture factory that they put down the details of the low cabinet on the invoice for the parts of the high cabinet.

83.  Incidentally, even the 1^st defendant himself considered it hard to believe.

84.  I totally rejected the 1^st defendant’s explanation. I find that the 1^st defendant did pay HK$5,800 to the factory for ordering the low cabinet, not for the parts of a high cabinet. The document of WO04 is not an invoice but marked clearly as a “quotation”. If there were any mistake in so far as the description of the cabinet is concerned in the said quotation, the 1^st defendant’s staff would require the furniture factory to correct it at the time the order was placed. No other invoice or receipt is being produced by the 1^st defendant in relation to any other cabinet. Clearly, the HK$5,800 charge for the low cabinet had already been included in the Quotation, and I find that this item was double charged by the 1^st defendant.

(iv) Item of work: the carpet

85.  The 1^st defendant claims HK$4,200 for 210 pieces of carpet tiles (WO07) as an extra work item in the Excel Sheet. There is also an item of work and material in the Quotation as “Supply and install new carpet” (Item 2.3.2). The 1^st defendant explained that this counted as extra work because there were not enough carpets, and they had to re-order more carpets as a supplement. However, I drew the 1^st defendant’s attention to the floor plan he provided with the Quotation that by his own measurement, the usable area of the office premises was only about 500 sq ft (46 m²). He admitted that each square-tile carpet is at the standard size of 500 x 500 mm. I invited the 1^st defendant to do a rough calculation. He confirmed that the 210 pieces of carpets he ordered would be able to cover 52 m² (210 x 0.5 x 0.5), which is more than enough to cover the entire floor area of the office premises. He then admitted that it was again another mistake and such claim should never have been included in the Excel Sheet, whether as an extra item or not. I find that it was a double-charged item.

86.  Enough is said about the extra works charged by the 1^st defendant. In fact, there are many other items I have invited counsel to go through with the 1^st defendant, but I am not going to set out all the questionable items here. For similar reasons, I am not satisfied with the 1^st defendant’s explanation.

87.  Mr Cheung submits that the costs of extra works mentioned in the Excel Sheet were all incurred for the purposes of the Company albeit being additional works, and therefore, it’s the Company that should bear those expenses and costs, not the 1^st defendant.

88.  I disagree. Despite that those costs of extra works were incurred for the purpose of the Company, there were errors or mistakes in billing his client resulting in double charging. And it is a serious matter. Further, if the work items were double charged, that means the money had never been applied as the working capital of the Company. The money remains in the 1^st or 2^nd defendant’s pocket. Therefore, it is in breach of the Oral Agreement.

89.  I have examined the parties’ evidence carefully. If there is contradictory evidence, I prefer the plaintiff’s evidence to the 1^st defendant’s. It is because the evidence given by the plaintiff was straightforward. The evidence given by the 1^st defendant was at times evasive and unreliable. However, I am not going so far to rule on the 1^st defendant’s credibility as the Excel Sheet items involve tedious expenditures that could have been included by mistakes or, to a certain degree, reflect the standard of the contractor’s skill and care only.

90.  Counsel for the defendants is very helpful in submitting a table showing the double charged items that the 1^st defendant could not explain and admittedly double charged in his Closing Submissions:-

Description	Amount (HK$)	Bundle Reference
W003	$24,500	[B1/174]
W004	$5,800	[B1/175]
W008	$27,600	[B1/181]
W011	$2,642	[B1/189]
W012	$1,500	[B1/190]
W015	$8,376	[B1/195-246]
W037	$5,000	[B1/294]
Total	$75,418

91.  Mr Cheung fairly accepts that those items totalling HK$75,418 should be taken out from the Excel Sheet. I would also add to the above table the item of work on the carpet (WO07) in the sum of HK$4,200, being another double-charged item. Here, I will disallow those expenses in the total sum of HK$79,618.

92.  I find that the 1^st defendant had never applied these amounts as the working capital of the Company, ie the funds have never reached the Company. I order that this HK$79,618 should be returned to the plaintiff by the 1^st defendant and by the 2^nd defendant being the receiving agent of the 1^st defendant. However, I would not disturb the remaining items in the Excel Sheet (including those setting up costs mentioned in Paragraph 68 above) as they were accepted by the plaintiff at trial.

The Shortfall

93.  The total amount on the Excel Sheet only sums up to about HK$378,000. There is still a shortfall of HK$22,000 from the HK$400,000 to be accounted for. Mr Cheung submits that it was the 1^st defendant’s evidence that there were some other charges he had not included in the Excel Sheet, such as the administrative fees (the head office overheads of the contractor), the salary of the foreman Mr Peter Chan, and the HK$4,000 company logo fee etc. However, I find that those items, except the company logo, should have been already covered in the Quotation. It is the 1^st defendant’s evidence that the design fee he charged included the salary of the foreman and the Quotation also included his profit. Further, this new evidence is not found in the witness statement. I would only allow the undisputed HK$4,000 company logo fee. I hold that the 1^st defendant needs to account for the shortfall at HK$18,000 ($400,000 – $378,000 + $4,000).

94.  Mr Cheung raised another matter that the plaintiff received a sum of US$3,710 income but did not deposit it into the Company’s bank account. I find that that was not relevant to the present proceedings. This court is not moved to make any findings as to the Company’s income. I am therefore not able to deal with the Company’s income. Likewise, I would not deal with the HK$50,000 in the Company’s bank account (see below).

The Remaining Balance

95.  The plaintiff asks for a court order to withdraw the HK$50,000 remaining in OOne’s bank account. It is submitted, on his behalf, that the court can order the trustees, namely the 1^st and 2^nd defendants, to transfer the money in OOne’s bank account to the plaintiff, either as part of the tracing exercise or by way of a direct order.

96.  In my view, it does not seem right for the court to make any order against a non-party, the Company. Further, the HK$50,000 deposited into the Company’s bank account was what the parties agreed to perform and were not in breach of trust. In any event, I have found that there was no trust but only a breach of contract. Accordingly, I decline to make any order in respect of the remaining balance at the Company’s bank account.

97.  The parties should approach the liquidator to resolve the leftover funds; otherwise, the funds would be passed to the government as bona vacantia.

ORDER FOR AN ACCOUNT

98.  Mr Tsui asks for an order for an account. He submits that the plaintiff needs to know where the money has gone, and the missing funds have to be accounted for by the 1^st defendant.

99.  I find that ordering an account is unnecessary because the 1^st defendant has already put forward his own account of the funds, and the whole accounting exercise has been done at trial. The plaintiff accepted part of the accounts, while the court has rejected (1^st defendant conceded) the remaining as double charging items. The picture is clear about how much the 1^st defendant is liable for repaying to the plaintiff.

ACCOUNT OF PROFITS

100.  Mr Tsui submits that it is possible to order an account of profits in breach of contract cases or in commercial cases (Chitty on Contracts (33^rd edn, 2018) vol 1, paras 26-063 – 65). He urges the Court to order an account of profits against the defendants.

101.  With respect, I do not agree. Account of profits in breach of contract case would only be granted in “exceptional cases” (id.), and there is nothing exceptional in our present case. There is completely no evidence suggesting any “profits” from the breach to justify an account of profits.

102.  The existing remedy is adequate.

CONCLUSION

103.  For the above reasons, I find that the defendants are liable to return to the plaintiff HK$97,618, being the double charged expenditures of HK$79,618 plus the shortfall of the balance at HK$18,000.

104.  There will be judgment in favour of the plaintiff against the 1^st and 2^nd defendants for HK$97,618, to be paid jointly and severally by the defendants within 30 days of this Judgment.

105.  Interest is to run at the judgment rate from the date of Judgment until payment.

COSTS

106.  Due to the late disclosure of the Quotation, considerable court time has been wasted. Although the plaintiff is not seeking relief in respect of the renovation costs, the scope of the original works must have been relevant when the parties were in dispute about the extra works. If the Quotation could have been provided earlier, this trial may have been avoided.

107.  As such, although the plaintiff only succeeds in claiming HK$97,618, I do not see any reason to depart from the general rule that costs follow the event. Costs of this action would be against the defendants.

108.  As to the costs of the action DCCJ 306/2009, I would order costs against the 1^st defendant. In fact, such part of the costs has already been subsumed into the consolidated action.

109.  There will be an Order Nisi that the 1^st and 2^nd defendants do jointly and severally pay the plaintiff’s costs of the consolidated action (including DCCJ 259/2019 and DCCJ 306/2019), such costs to be taxed if not agreed, with certificate for counsel. In absence of any application for variation, this costs order shall be made absolute in 14 days from the date hereof.