DIE UKW HONG KONG LTD v. FAN KAM HON

DCCJ 2524/2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2524 OF 2011

__________________________

REASONS FOR DECISION

Introduction

1.  In this action, the Plaintiff alleges that its former director, the Defendant herein, has breached his duties as a director of the Plaintiff. It claims for various sums of compensation and an order for account of the alleged irregularities found in the audited financial statements for 2009 (which covers the period from 1 January to 31 December 2009) prepared by Abacus CPA Limited (“2009 Financial Statements”).

2.  The Plaintiff sought to enter summary judgment against the Defendant for only one of the sums pleaded in the Amended Statement of Claim, namely director’s loans made to the Defendant by the Plaintiff from January 2009 to March 2010 in the sum of $457,839 (“Director’s Loan”).

3.  At the end of the hearing, I grant unconditional leave to the Defendant to defendwith reasons reserved. I now give my reasons.

Background Facts

4.  The Plaintiff was set up in 2004 pursuant to a partnership agreement made between a German company shortnamed as DIE UKW GmbH (“UKW Germany”) and the Defendant on 6 July 2004 for the purpose of sourcing various goods from China to UKW Germany for sale and distribution.

5.  UKW Germany is at all material times under the control of Mr. Michael Dierkmann (“Dierkmann”). UKW Germany/Dierkmann and the Defendant (through a company limited owned by his wife) had been in business dealing for some time before the said partnership agreement was reached.

6.  The shareholders of the Plaintiff are UKW Germany (75%) and the Defendant (25%). Dierkmann and the Defendant were appointed as the only directors of the Plaintiff.

7.  Since Dierkmann did not station in Hong Kong, the daily business of the Plaintiff had to be left to the Defendant. Therefore, shortly after the Plaintiff was set up, a management agreement dated 20 August 2004 (“Management Agreement”) was reached and signed between the Plaintiff and the Defendant, which set out the duties, powers and remuneration of the Defendant as the managing director of the Plaintiff.

8.  Under the Management Agreement, the Defendant was responsible for, inter alias, dealing with the entire resourcing activities for UKW Germany on the Asian market as well as negotiating with suppliers and visiting trade fairs that are important for the Plaintiff (see §2(1)2 therein). The Management Agreement also provided that any single payment transfers or account drawings exceeding USD20,000 would require the consent of UKW Germany (see §2(1)c therein). The Defendant shall receive remuneration of 20,000 per month (see §6(3) therein).

9.  Disputes arose between UKW Germany/Dierkmann and the Defendant in or about September/October 2010 in respect of the 2009 Financial Statements.

10.  Since 29 December 2010, the Defendant was removed as a director of the Plaintiff. He was replaced by Mr Kwok Chun Keung (“New Director”) who is the attorney of Dierkmann in Hong Kong.

The Plaintiff’s Assertions

11.  The Plaintiff relies on the 2 affirmations of the New Director made on 5 December 2011 and 16 March 2012 respectively.

12.  Dierkman, the director who has direct dealing with the Defendant during the relevant period from January 2009 to March 2010, has not filed any affirmation for the purpose of this application.

13.  In gist, the said two affirmations of the New Director state that:

(1) Note 12 of the 2009 Financial Statements which shows that that a director’s loan of $279,854.23 was due and owing from the Defendant to the Plaintiff;

(2) an audit confirmation dated 3 August 2010 signed by the Defendant confirming that he was indebted to the Plaintiff as at 31 December 2009 a sum of $279,854.23 (“Audit Confirmation”); and

(3) an updated accounts of the director’s loan as at March 2010 (“Updated Accounts”), which is based on the ledger accounts of the Plaintiff from January to March 2010 (“2010 Ledger”) and prepared by Abacus CPA Limited, show that the director’s loan due from the Defendant as at March 2010 has increased by $117,985 to $457,835.

The Defendant’s Assertions

14.  The Defendant has filed 2 affirmations in reply dated 20 December 2011 and 2 February 2012 respectively to oppose the Plaintiff’s application.

15.  He deposes that Dierkmann was responsible for the financial and accounting matters of the Plaintiff. Abacus CPA Limited, who produced the 2009 Financial Statements and the Updated Accounts were engaged to be the accountancy firm of the Plaintiff on the advice of Dierkmann since or about 2006.

16.  The Defendant’s affirmations, together with the Amended Defence, disclose the following defence/replies to the Director’s Loan:

(1)  The Defendant never borrowed any loans from the Plaintiff or took out the Plaintiff’s fund for his own personal use;

(2)  The entry of director’s loan in the 2009 Financial Statement was not accurate and authentic;

(3)  A sum of $113,111 described as “dividend declared, portion related to Die Ukw GMBH adjusted” in the Updated Accounts (p135 of hearing bundle) was wrongly recorded and should not have been included in the Defendant’s director account because (i) it was the dividend belonging to UKW Germany and (ii) the Defendant has paid this dividend sum back to Dierkmann in cash on or about 30 April 2009;

(4)  The remaining of $344,728 ($457,835 - $113,111) were reimbursements of the expenses paid by the Defendant for the Plaintiff in his daily business.

Applicable Legal Principles

17.  The applicable legal principles of an Order 14 application are well-known and need no further elaboration at length. Nevertheless, one has to bear in mind that in an Order 14 application such as this one, the court is not required to determine, at this stage, if the Defendant’s version of events is to be believed or to assess if his defence would succeed at trial. I am only required to consider, at this stage, if what the Defendant says is believable and whether the Defendant has shown that there are triable issues in this case.

18.  Further, it cannot be denied that summary judgment is an extraordinary procedure whereby instead of trial first and then judgment, there will be judgment at once and never any trial. This procedure is to prevent a defendant from delaying a plaintiff in obtaining judgment in case where the defendant has clearly no defence to the plaintiff’s claim at all. Unless it is obvious that the defence put forward by the Defendant is frivolous and practically moonshine, Order 14 ought not to be granted.

19.  Reference can be made to Hong Kong Civil Procedure 2012, Vol. 1, para 14/4/8 & 14/4/9; Re Safe Rich Industries Limited, CACV 81/1994 and Schindler Lifts (Hong Kong) Ltd. v. Ocean Joy Investments Ltd. [2003] 1 HKC 438, per Ma J (as he then was).

Whether Triable Issues

20.  I have considered the submission made by Counsel for both sides and I do not propose to repeat them here.

21.  The crux of the Plaintiff’s argument submitted eloquently by Mr Lam, Counsel for the Plaintiff, turns mainly on Note 12 of the 2009 Financial Statements and the Audit Confirmation. Mr Lam is adamant in stressing that the Defendant has signed the said two accounts documents confirming that he owed the Plaintiff a sum of $279,854 as at 31 December 2009; and that the Defendant has offered no explanation why he still signed them if he alleged that the sum was not correct.

22.  It is pertinent to note that the Director’s Loan was not a loan advanced to the Defendant pursuant to any loan agreement. It is substantially a mathematical balance of money allegedly owed by the Defendant to the Plaintiff between January 2009 and March 2010 after setting-off (1) the moneys withdrawn by the Defendant from the Plaintiff’s bank account against (2) the expenses paid by the Defendant for the Plaintiff’s business, such as travelling costs and inspection costs to/in China. Reference can be made to the ledger account of 2009 exhibited as “KCK-8” in the 2^nd affirmation of the New Director (“2009 Ledger”) and 2010 Ledger.

23.  It is true that the Defendant has signed the 2009 Financial Statement and the Audit Confirmation. But in my view, the Audit Confirmation is not conclusive in proving that the Defendant still owes the said sum of $279,854.23 to the Plaintiff. As I have pointed out in the hearing to Mr Lam, there is a note in the lower half of the Audit Confirmation stating this:

“We appreciate that you may have settled the above account after the date mentioned above, but we would still appreciate your confirmation that the balance is correct.’

24.  I further say that Note 12 of the 2009 Financial Statements should not be viewed or taken out of context of the whole 2009 Financial Statements. If read as a whole, it is not clear in the 2009 Financial Statements (and thus it is a triable issue) if the director’s remuneration payable to the Defendant in the sum of $393,000 (see Note 13 therein) was paid. The payment or non-payment of the director’s remuneration will, in my view, have a direct bearing on whether the Defendant de facto owes the Director’s Loan and if so, how much.

25.  The figure ($7,760) stated in the item “(Decrease) in amount due to a director” in the middle of the Cash Flow Statement (p119 of hearing bundle), which Mr Lam for the Plaintiff refers me to, does not match at all with the director’s remuneration of $393,000 and cannot be taken as the evidence that the same has been paid in cash.   

26.  Since neither the 2009 Financial Statements nor the affirmation evidence before me at this stage seem to show that the director’s remuneration was actually paid in cash, it gives rise to the possibility that the same could have been settled by way of setting-off against any sum allegedly due from the Defendant to the Plaintiff, ie the bank withdrawals made by the Defendant from time to time or the so-called Director’s Loan.

27.  The fact that the Defendant has not counterclaimed for this amount of the director’s remuneration in his counterclaim certainly leads some support to the above possibility.

28.  If the director’s remuneration was not yet paid by the Plaintiff or was paid by off-setting against the so-called Director’s Loan, then it would unfair to enter summary judgment against the Defendant at this stage.

29.  In relation to Mr Lam’s submission on the lack of explanation by the Defendant in his affirmations as to why he still signed the same if he alleged that the Director’s Loan was inaccurate, I think the Defendant has, to a certain extent, given some explanation in his supplemental affirmation, ie Direrkman was in control of the financial and accounting matters of the Plaintiff; Abacus CPA Limited (chosen by Direrkman) has been preparing the financial statements of the Plaintiff since or about 2005; the work of compiling the financial statements is more or less the same every year; Dierkman has confirmed and approved of the 2009 Financial Statements (see paras 11, 12, 15 and 16 of his supplemental affirmation). Given the above, there would be little reason for the Defendant, being the minority shareholder, not to sign the 2009 Financial Statement.

30.  Due the matters set out above, I cannot say that the defence put up by the Defendant that the he never borrowed any loans or took the Plaintiff’s fund for his own use is not an arguable defence.

31.  On the other hand, one would easily notice from the 2009 Ledger that there is a table called “Director current account” (see p344 of hearing bundle) in which a dividend sum of $113,111 (Counsel for both sides have confirmed that the correct figure of the dividend should be $113,111.25) is mentioned. This dividend sum of $113,111.25 gives rise to part of the Director’s Loan of $279,854. Note (2) therein explains the said dividend sum of $113,111.25 and it reads like this:

“(2) Amount belongs to DIE UKW GMBH [UKW Germany] and should not be booked in the current account of Steven Fan [Defendant].” (emphasis added)

32.  Then in the dividend account (see p345 of hearing bundle), there is an entry dated 20 November 2009 in the exact amount of $113,111.25. The description of this sum reads this:

“DIRECT OR [DIRECTOR] FOR MICHAEL DIEKMANN 01/09-12/09”

33.  I have repeatedly asked Mr Lam for the Plaintiff in the hearing if it was a common ground that the said sum of $113,111.25 was actually the dividend belonging to UKW Germany and that it should not have been booked under the Defendant’s accounts. Mr Lam prefers to remain silent on this point in order not to prejudice the Plaintiff’s case.

34.  Under such circumstances, whether the dividend sum of $113,111.25 should have formed part of the Director’s Loan must be, in my view, a triable issue to be resolved by the trial judge after hearing oral testimony.

35.  Looking at the same dividend sum of $113,111.25 from another prospective, the 2009 Ledger is disclosed and thus relied on by the Plaintiff in its affirmations. It is as a matter of fact the Plaintiff’s own documents. A plain reading of Note (2) and the dividend account mentioned above seems to support (or at the very least it is arguable) the Defendant’s contention that the said sum of $113,111.25 was wrongly recorded and should not have been included in the Defendant’s director account.

36.  Since the Director’s Loan includes this sum of $113,111.25, it follows that there is also an arguable defence on the inaccuracy of the entry of the 2009 Financial Statements.

37.  With respect, I cannot see the logic of Mr Lam’s submission that the inclusion of the said dividend sum of $113,111 into the Updated Accounts “goes to reduce the amount of the director’s loan” which is “a concession from P’ in favour of the Defendant. Quite on the contrary, the inclusion of $113,111.25 into the Updated Accounts goes to increase the Director’s Loan.

38.  Lastly, I echo the submission made by Mr So, Counsel for the Defendant, that the Plaintiff seeks summary judgment on the director’s loan as at March 2010. Yet the Plaintiff relies on the affirmations of the New Director who came into picture only on and after 29 December 2010. There is no direct evidence from Dierkmann (because he has not filed any affidavit evidence) to rebut the Defendant’s allegations, such as, withdrawal of cash from the Plaintiff’s funds by the Defendant on Dierkmann’s request for the latter’s use while he was in Hong Kong but without supporting invoices/vouchers (see p67 para (e) of hearing bundle); withdrawal of USD9000 and USD7000 on 30 April 2009 from the Defendant’s current account in cash to Dierkmann, which represented the dividends of $113,111.25.

39.  This again raises another triable issue as to whether some of the bank withdrawals were for the utilization of Dierkmann and should not have been taken as part of the Director’s Loan due from the Defendant.

40.  All in all, there are more than one triable issues in this case, which can only be resolved by way of oral testimony given in the trial. And I cannot say on the affirmation evidence before me at this stage that the Defendant has not put up an arguable defence(s).

Conclusion

41.  Due to the matters set out aforesaid, I make the following order:

(1) The Defendant be granted unconditional leave to defend;

(2) Costs of this summons be in the cause, with certificate for counsel, to be taxed if not agreed;

(3) The parties do comply with Order 25 rule 1 of the Rules of the District Court within 28 days from today to seek further case management directions from a Master.  

42.  The hearing bundle is to return to the Plaintiff for re-use. Only the content pages should be kept in the Court file for records purposes.