CHUNG PUI TAK AND ANOTHER v. TAM CHI LEUNG NOLAN AND OTHERS

HCA 1439/2012

[2022] HKCFI 3038

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1439 OF 2012

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JUDGMENT
(RELIEF AND ORDER)

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1.  This is the aftermath of the judgment of this court dated 27 January 2021[1] (“the Judgment”).  Save as referred to below, the discussion and findings made in respect of the various issues in dispute in the Judgment will not be repeated here.  The same definitions and abbreviations in the Judgment are adopted here.

2.  Pursuant to §221 of the Judgment, and as requested by the parties, this court gave further direction on 22 March 2021 for written submissions for the purpose of finalising the relief and order to be granted on the basis of the findings in respect of P2’s claim against the defendants.

3.  The disagreement between the parties principally lies in the nature and extent of relief to which P2 is entitled to consequential upon the findings made in the Judgment.

NATURE OF THE RELIEF TO WHICH P2 IS ENTITLED TO

4.  Essentially, according to the defendants, this is claim for an account in common form entitling P2 to an order from the court for an account and/or an inquiry.  No payment of any form should be ordered now[2].  The plaintiffs disagree, saying that the claim is based on expressly pleaded wilful default and breach of fiduciary duty on the part of D1 to account and not to be in conflict of interest in respect specifically the pleaded items of payments made by P2 caused by D1 which benefited the defendants.  It was in defence of that that D1 also sought statutory relief pursuant to section 358(1) of the CO, which was dismissed in the Judgment. Amongst other issues, the court was asked to adjudicate whether and to what extent D1 has accounted to P2 for such items.  This was what the court tried and found, and whilst P2 may be entitled to further account and inquiry, P2 says that it may also elect for an order against the defendants to make good the proven unjustified or unverified payments so made by P2.

5.  Considering the circumstances of this case, including peculiarly of the trial actually conducted by the parties, I can see the point of P2’s argument.

6.  The pleaded case of the plaintiffs was premised not merely on establishing whether P2 is entitled to an account from D1 as a fiduciary, though admittedly, it may require some stretching in construing the pleading, including the prayer, as a whole to see the plaintiff’s point.  The defence was also not that D1 owed no duty to account, but that all have been accounted for.  By the time when this case came to trial, in issue were the positive contentions of breach of fiduciary duty on the part of D1 to P2 by consistent refusal to render full account as well as actual self-dealings and breach of good faith by making use of his common directorship and control of the P2, Hui Guang and the defendants.  One should be reminded that P2 and Hui Guang are not in fact associated but related as a matter of business arrangement.  Further, the plaintiffs, which had to rely almost solely on the scrutiny of the financial and account documents obtained after the collapse of the business of Hui Guang to ascertain the state of affairs, and to identify items of payments by P2 revealed by the account which were said to be irregular, baseless and/or exorbitant and ought not to have been paid by P2 (ie the Items).  What was tried was also the contention of knowing assistance of such breach on the part of D2 and D3.

7.  This court made finding in respect of the scope of the duty of D1 to account.  At the same time, the exercise at the trial was tantamount to the undertaking of an account on the basis of the financial documents together with the assistance of the parties’ accounting experts, all poured in by the parties.  As referred to in the Judgment, many of these documents were disclosed by the defendants at different stages only after the commencement of the action and before the trial.  This court was asked to, and did, make findings in respect of each and every one of the Items after such an exercise in respect of them at the trial.  In defence, D1 also specifically raised the issue of equitable allowance in relation to the Management Fees, albeit not properly advanced for assessment at the trial.  This court eventually found that D1 has failed to account for the Items, some in part and some in their entirety in specific amounts.

8.  Unlike an ordinary case where the plaintiff claims against a fiduciary for an order for an account or inquiry, the plaintiff’s claim is framed and the case was tried in a form tantamount to the undertaking of an account exercise.  The court was asked to make findings in respect of the questioned items upon such exercise after hearing both sides’ evidence, accounting expert evidence included, as to whether the items were accounted for.  Pragmatically, one wonders what further account could realistically be expected perhaps except for inquiry as to the consequential loss and damages suffered by P2.  But P2 says it is not confined to such way forward.

9.  As to that, on behalf of the defendants, reference is made to §221 of the Judgment as if that contained this court’s indication or endorsement of a particular course to take.  However, what this court did in that paragraph was to recite what the parties put forward during the trial as different considerations that might have bearing on the appropriate relief to be granted and thus the order to be made.  Hence the premise on which counsel proposed to adjourn the issue of relief and order for further submissions on the basis of the findings then to be made.  The issue of the way forward is open.

10.  Relevantly §221 of the Judgment just mentioned immediately followed this court’s citation of Libertarian Investment Ltd v Hall (2013) 15 HKCFA 681 to address the argument of inconsistent remedies of an account and equitable compensation as advanced on behalf of the defendants.  I expressed my understanding of the explanation in that case to be not really one about the two being inconsistent remedies as such.  However, the explanation also made clear one point.  The plaintiff can at every stage elect whether or not to seek further account or inquiry.  This, I understand, essentially explains why Mr Chiu for the plaintiffs made it quite clear during the trial that the appropriate remedy would much depend on how this court found in respect of the Items on the evidence of the account before the court.

11.  For the present purpose, Mr Chiu makes clear that first, P2 seeks no further account; and second, P2 would not pursue the claim for damages for breach of fiduciary duty of D1 which might have entailed the consideration of ordering an inquiry as to damages.  The plaintiffs will seek remedy to make good the Items from the account undertaken at the trial, which D1 is proved to have failed to verify or justify.  It may perhaps be mentioned that at the same time of handing down this judgment, this court is also handing down the decision in respect of the plaintiffs’ application against D1 for a Mareva injunction on the basis of what P2 claims to be entitled to as relief pending herein.  The stance of D1 is that he now does not dispute his liability to account for the Items, but only the quantum.

EXTENT OF THE RELIEF TO WHICH THE PLAINTIFF IS ENTITLED TO

12.  Two issues are raised by the defendants as to quantum: (i) no loss suffered by P2 in respect of the Items; and (ii) limitation of claim in respect of the Items.

13.  The second issue can be addressed first and briefly. The parties do not dispute the applicability of limitation in principle in different circumstances.  Limitation does not apply to a claim for an account simpliciter, ie exercise of pure equitable right against the fiduciary for an account and nothing more: see Liu Hsiao Cheng v Wong Shu Wai [2018] 1 HKLRD 1087 (at §§17; 23-31).  As mentioned, the plaintiffs’ stance is that this is not, and was not tried as, an action for an account simpliciter.

14.  Where limitation is applicable, the starting point is that the issue must be properly raised.  Where the claim was framed and tried the way this case was, limitation issue in respect of the right to compensation on account of the questioned items should have been raised properly.  It could have been raised, because even in the context of the exercise of the court’s discretion whether or not to order mere account or enquiry (which per se is not remedy), any limitation issue as to an order for payment consequential upon such further account/enquiry (which is remedy) is relevant: see Al-Dowaisan & Anor v Al-Salam & Ors [2019] 2 BCLC 328 (at §150).  Had the limitation issue been raised, the plaintiffs would have had the proper opportunity to contend and to adduce evidence in answer.  To name a few, contentions on the basis of effective concealment on the part of the defendants, which were at the material times under the effective and sole control and management of D1, and the state of knowledge of the plaintiffs (albeit addressed in its specific context at the trial) could have been made.  Particularly, in the circumstances of the case as found, it seems the defendants have no reason for believing such contentions, if raised, might have turned out in their favour.  I say no more, save that submissions now in respect of limitation issue, in my view, exceed what the further submissions and deliberation of the court permit.

No loss

15.  The no-loss argument was raised and considered in the account exercise at the trial.  It is repeated for the present purpose. Essentially, D1 argues that except for the management fees (to the extent which D1 caused P2 to pay) as well as the two cheques and the journal entries (which D1 accepts are not accounted for), no loss was caused to P2 in respect of the rest of the Items essentially because they were correspondingly reflected somehow in the account of the related company.  Therefore, no order for payment to such extent should be made against D1.

16.  This is a tricky consideration, mainly because of the business model adopted by the parties involving the various entities (which were not associated but related) in the joint venture.  That was further convoluted by design with the various artificial accounting arrangement under the control and management of D1 as found in the Judgment.  Considering the circumstances of this case and the authorities cited by counsel, I am of the view that whilst the notion of loss to P2 is not relevant to whether D1 has discharged his duty to account, it is not entirely irrelevant for the purpose of considering the order for payment sought by P2.

17.  On behalf of P2, much is said about differentiating a claim for consequential loss and damages for failure to account and that for the making good of the defective account, ie the so-called falsifying or surcharging the account.  The final court in Libertarian Investment Ltd (above) described (at §§168-170) the following scenarios when the plaintiff is faced with an account:

(1)  If the account discloses an unauthorised payment, the plaintiff may falsify it by seeking to have it disallowed.  The plaintiff will then be entitled to have the deficit made good by an order for payment of the same by the defendant.  This is not consequential loss but the amount paid to be restored.

(2)  Alternatively, the plaintiff may seek an inquiry as to what has become of the unauthorised payment.  If the unauthorised payment was dissipated or applied so as to result in loss, the plaintiff will be entitled to still seek disallowance of the payment and an order for payment of the same.  If the unauthorised payment was applied so as to earn a profit, the plaintiff will be entitled to elect to adopt the application, and to trace and claim such profit which is not for the defendant to keep.

(3)  Where the account does not include any property which the defendant failed to obtain, but should have done so, for the benefit of the trust, the plaintiff can surcharge the account by asking the defendant to compensate for such that should have been obtained (on the basis of wilful default as discussed above).

18.  In any of the above scenarios, the starting point is the notion of remedy as a rational answer to the void which the plaintiff suffers as a result of the impeached disposition of property or payment of money belonging to the trust.

19.  The circumstances of this case were that the payments by P2 were made in the context of the operation of business under a model involving the various separate entities adopted by the parties.  D1 relies on the purported reciprocal accounting acknowledgement whereby the expenses of P2 on behalf of Hui Guang were recorded as receivables of P2 in the balance sheet, and therefore would have been reimbursed by the sales income collection by P2 on behalf of Hui Guang.  However, it was proved at the trial that insofar as the payments made by P2 that could not even be verified are concerned, it means not much by referring to a seemingly corresponding or reflective entry in the account of the related company which would be nothing more than another assertion on paper that could not be verified as a matter fact.

20.  On this basis, I turn to the order sought in respect of the Items.

The two cheques

21.  D1 does not object to an order for payment of the amount of HK$110,210.

The journal entries

22.  D1 does not object to an order for payment of the amount of HK$1,044,625.42.

The management fees

23.  The defendants seek to advance further argument on the basis of further analysis of evidence (if leave is given) in respect of whether or not the entire sum of HK$1,270,490.32 was paid as the management fees.  However, what this court has said in this respect in the Judgment should not be re-opened.  Nor may the argument about equitable allowance be.  When the sum of payment is found not to be justified as a matter of fact, P2 should be entitled to the restoration of the same.

Transportation expenses

24.  The amount of HK$572,543 paid by P2 could not be verified as transportation expenses payable by Hui Guang.  The defendants argue that such, if paid without justification, could only be loss to Hui Guang. However, the case presented at the trial was that D2 allegedly paid for those expenses for Hui Guang, and D1 caused P2 to reimburse D2 of the same; and this court merely made observation in the Judgment about the relevance of the defendants’ argument, ie this should be loss of Hui Guang, and only Hui Guang could complain about it.  This court did not make finding regarding that.  When the alleged liabilities cannot be verified, and thus proved as a matter of fact, the sum would be unjustified outright payments made by P2 as caused by D1, and P2 should be entitled to its restoration.

Subcontracting fees

25.  The sum of HK$2,305,477.37 charged by D2 against Hui Guang was settled by P2 for and on behalf of Hui Guang.  As found, this was not genuine subcontracting fees payable by Hui Guang to D2, but invented as a tool in the accounting to enable D2 to retrieve its own business receipts from its Mainland customers collected by Hui Guang.  The defendants argue that whilst the conflict of interest on the part of D1 without disclosure is found in respect of such dealings for the benefit of D2, no loss has been caused to P2.

26.  The Disputed Arrangement, accepted as a fact by the plaintiffs at the trial, had implications on Hui Guang and P2.  As for Hui Guang, its income became overstated but the same was somehow addressed by the liability to pay to D2 the subcontracting fees (representing income to D2 from its Mainland customers which was not for Hui Guang to keep).  The precise effect, if any, on its Mainland tax liability in monetary terms was not entirely clear at the trial.  As for P2, it was the pocket from which such subcontracting fees were made out to D2, which would not have been P2’s property to keep under the convoluted arrangement.  The complications discussed in the Judgment in this respect renders it difficult to form a net view of the result.  Insofar as P2 is concerned, it is equally difficult to conclude that such payments formed a deficit in its account regardless.  As the necessary premise for falsifying the account by an order for payment of the amount is uncertain, I refrain from making the order on the basis of the plaintiffs’ election.

Material processing fees

27.  The sums of HK$1,308,180.90 and HK$3,664,319.63 were outstanding amounts of the material processing fees payable by D2 to Hui Guang for D2’s contracts with its own Mainland customers.  It is argued that such amounts, which have not been received, would be loss to Hui Guang, in which the cause of action lies.  Unlike the above items, I tend to agree.  The mere fact that P2 is the pocket of Hui Guang does not change that.

The suppliers’ invoices

28.  The total amount of HK$3,298,851.30 paid by P2 in accordance with the suppliers’ invoices to Hui Guang in question cannot be verified.  On the basis of the account in this state, this amount, which cannot be verified as a matter fact, constituted unjustified deficit of P2.  P2 is entitled to have such payments restored to it.

Cash withdrawals

29.  As discussed in the Judgment in this respect, the total amount of HK$800,000 cash withdrawals from P2 simply could not be reliably verified as a matter of fact.  This constituted unjustified deficit of P2.  P2 is entitled to have this sum restored to it.

TERMS OF THE ORDER

30.  A couple more other points.

31.  At one point, there was argument as to whether the so-called “Basic Clauses”, effectively declaring the entitlement of P2 to falsify and surcharge the account, should be incorporated into the order to be made.    This court also raised the issue for consideration in the direction dated 22 March 2021. The clauses were objected to by the defendants mainly on the ground that they were not pleaded.  Insofar as they were meant to be declarations of a state of affairs actually sought, they were indeed not pleaded. It should however be clear by now that they are not actual relief sought by P2, but merely statement of the basis for the relief sought and for clarity.  P2 also does not seek to incorporate them in the order to be made any more.

32.  On the basis of the draft proposed order, adjusted in view of the above, and upon P2’s election not to seek any order for further account or inquiry, the following order is made in respect of P2’s claim against the defendants referred to in §227 of the Judgment and as proposed by the plaintiffs:

(1)  In respect of the management fees (§§125-147 of the Judgment):

(a)  D1 do pay P2 the sum of HK$15,000;

(b)  D3 do jointly and severally pay P2 the sum of HK$1,239,490.32;

(c)  D1 do pay P2 the sum of HK$16,000;

(2)  In respect of the transportation expenses (§§148-154 of the Judgment), D1 do pay P2 the sum of HK$572,543;

(3)  In respect of the suppliers’ invoices (§§192-195 of the Judgment), D1 do pay P2 the sum of HK$3,298,851.30;

(4)  In respect of the cash withdrawals (§§196-200 of the Judgment), D1 do pay P2 the sum of HK$800,000;

(5)  In respect of the two cheques (§§201-204 of the Judgment), D1 do pay P2 the sum of HK$110,210;

(6)  In respect of the journal entries (§§205-207 of the Judgment), D1 do pay P2 the sum of HK$1,044,625.42.

33.  The total amount comes to HK$7,096,720.04.  Considering the submissions, I am minded to just order the above sums to carry simple interest at 1% above HSBC prima rate from the date of writ to judgment (the date hereof) and judgment rate thereafter until payment.

COSTS

34.  As the aftermath of the trial and part of the Judgment, costs since the handing down of the Judgment and incidental to the finalisation of the relief and order, together with the costs of this action, shall be to the plaintiffs, to be taxed if not agreed.