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.  The trial having gone off part-heard to date to be fixed  I have this morning given directions as to discovery relating to its future conduct.  I have also heard argument in respect of an important part of the Order of Andrew Cheung J dated 18 July 2007.  The judge in making the Order recorded an undertaking by the Defendants in the following terms:

“	Upon the Defendants undertaking … to do the following pending judgment or further order;
	(i)	to pay 60% of the net income of the work that they may undertake between now and judgment into court;
	(ii)	to keep a proper account of all such work undertaken by the Defendants and the income derived therefrom; and
	(iii)	where so required in writing by the Plaintiff’s solicitors, to appoint jointly with the Plaintiff’s solicitors an accountant to verify the said account and the amount to be paid into court.”

2.  A dispute has already arisen as to whether the Defendants are complying with this undertaking.  Mr Chan, for the Plaintiff, has prepared a calculation to the effect that they should be directed to pay into court a little over $43,000.  Miss Leung, on the Defendants’ behalf, has submitted that based on the accounts that have been kept of the Defendants’ income and expenses, these show a net deficit and accordingly, for the time being, there is nothing to pay into court.

3.  The dispute is a marked one.  What has happened is that the Defendants formed a limited company in late 2006 through which they rented a band room for them to rehearse in.  After they split from the Plaintiff in April this year, they changed the company name to K-Town Music Limited which is their corporate persona.  All of Soler’s income is paid to the company which contract’s on the Defendants’ behalf.  Miss Leung submits that this is a perfectly unremarkable and sensible course for the Defendants to take.  Whilst that may well be so the accounts that have so far been produced on their behalf purport to set off expenses which should not be allowed before assessing the net income position.  These items include private supermarket bills and substantial bar bills at fashionable bars.

4.  Miss Leung’s response to these items is to say that these bar bills are an absolutely necessary expense because the Defendants need to promote themselves by taking out people who are in a position to give them performance work.  As to the supermarket bills she says no more than they need to eat.

5.  Finally, she submits that even allowing all these items at face value the amounts themselves are so, relatively, modest, which they are, that removing them would not put the Defendants into any meaningful profit requiring a payment into court.

6.  She suggests that these income statements, coming at the start of their independent career, are likely to be unrepresentative of what is expected to occur on the income side where they have recently been busy so that income will increase to the extent that they will achieve net profitability requiring a payment in of 60% that profit.

7.  Mr Chan says that the Defendants are playing fast and loose with the judge’s Order.  The obligation to pay 60% of net profit is a personal obligation and not one calculable on the net position produced by their corporate alter ego.  He has proposed a formula which cuts out the Defendants’ company from their calculations.  He submits that I should take the gross income paid to them and reduce that by taking variable percentages for expenses.  The net position is the figure to be applied and 60% of it should go into court.  The expenses differ according to the place where the income has been earned.  Performances in Mainland China should attract the biggest discount for expenses of around 35%, in Hong Kong 10% and Macau 5%.  These percentages are put forward based on previous performances by Soler at these locations.  Mr Chan concedes that I could apply larger discounts if I consider that to be the correct course to take.

8.  The judge’s Order contemplates the appointment of an accountant to verify any account, but it seems to me that the issue now presented to me is more concerned with a proper interpretation of the Order rather than an accountancy dispute.  The real point here is whether it is legitimate for the Defendants to present their accounts as those of the company that represents them.  As a matter of principle, I can see no objection.  This is their corporate persona and so I will allow the matter to proceed on this basis.  What is more important is that the income/expenditure account should be carefully scrutinised to ensure that expenses are not inflated by the inclusion of categories of expense which should not appear there.  This is not to be approached as an account that one would see in support of a tax assessment where as much as possible is put in as a business expense.

9.  As to the present account, I will disallow the supermarket bills.  These are private expenses.  We all have to eat.  The entertainment expenses I will allow in principle on presentation of vouchers but within reason.  On this occasion, the amounts are reasonable but this is not to be seen as my giving the Defendants carte blanche to spend it up in Lan Kwai Fong and Soho on keeping potential clients sweet in the hope of getting some performances or appearances out of them.  This needs to be judged by reasonable standards.  I cannot really say more than that at this time.

10.  As to the present situation, as I see the Defendants’ accounts there will be nothing to be paid into court.  Miss Leung expects that to change over the late summer and autumn when the Defendants have a number of paying commitments.  They will present regular accounts and I hope that these can be agreed, otherwise I will need to go through the same exercise, which I very much hope to avoid.  What I do expect it that the accounts kept and the supporting vouchers will fully record income and expenditure.  If a dispute is purely one of accountancy then a joint accountant will need to be appointed to resolve the issue.  If the dispute is one of interpretation of the Order then the dispute will need to come back to me.

11.  As to costs it has been agreed that these will be reserved to the first day of the resumed trial.