LEUNG WING YIU v. SIU KING YUEN AND OTHERS

HCA 5382/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5382 OF 1996

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D E C I S I O N

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The appeal and the preliminary point

1. This is an appeal against the decision of Master Yuen made on 29 August 2001 in respect of the Plaintiff's application for interim payment. The learned Master ordered the Defendants to pay the Plaintiff forthwith the sum of $7,000 by way of interim payment. The Plaintiff appealed and sought an interim payment of $840,000. On the other hand, the Defendants also cross-appealed and asked for the order be set aside and the application for interim payment be dismissed.

2. The appeal came before me on 24 October 2001. After some arguments by the parties, the Plaintiff applied for an expert report filed on 15 October 2001 to be relied upon although no summons had been issued for that purpose. I have dealt with that application and I decided that if I were to allow the Plaintiff to rely on that report, justice demands that leave and time be given to the Defendants to file a report in reply. Before I gave any directions for the same and adjourned the appeal for that purpose, I was invited by Mr Chong (who appeared for the Defendants) to decide on a preliminary point since it has been fully canvassed before me and if I decide the matter in favour of him on that point, the appeal could be disposed of without any reference to the reports. The point was in respect of the construction of the judgment of Cheung J and its effect on the interim payment application. After hearing Mr Lam (who appeared for the Plaintiff and have no objection to such a course), I decide to accede to such request in the special circumstances of this case. I must stress that I regard it as exceptional for a court to decide on just one of the points raised in the appeal without hearing full arguments as to the other issues. It is not a course to be encouraged and such exercise should not be embarked upon lightly. I fully acknowledge that in general all disputes should be dealt with together (see Hong Kong White Book para.33/4/9). In the present case, the issue has been fully argued before me and by reason of the application of the Plaintiff for admission of new evidence, the hearing of the other issues would have to be adjourned for quite some time. I therefore consider that it is just and convenience that I should not postpone the determination of this issue.

The nature of the dispute in the action and the judgment of Cheung J

3. The present case is exceptional on the facts. We are dealing with an application for interim payment in the context of a partnership dispute. Whilst the Plaintiff relied upon an order for assessment of damages in the judgment of Cheung J of 16 March 2001, I am of the view that one should have regard to the overall position in determining the true purport and effect of that judgment. The Plaintiff and the 1st and 3rd Defendants had been partners in two businesses. The Plaintiff's case was that the 1st and 3rd Defendants have wrongly transferred the businesses to the 2nd Defendant which was a company incorporated by the 1st and 3rd Defendants with one Kung Wing-hong. The defence case was that these were done at a time when further capital was necessary and Mr Kung could provide the same. The transfer was done with the agreement of the Plaintiff. Cheung J found that although there were negotiations and the idea was that the matter would be discussed as the businesses would be carried on with new funds from Mr Kung, the parties had not come to a final agreement on all important issues. Cheung J concluded that the partnership between the Plaintiff and the 1st and 3rd Defendants was dissolved on 16 January 1996. This is important because upon dissolution of the partnership, the Plaintiff's entitlement as a partner, was to have the affairs of the partnership wound up and the accounts of the partnership settled.

4. At the trial before Cheung J, his Lordship was only asked to determine two issues,

(a) whether there was a final and binding agreement among the parties to the effect that the assets and business of Photographic Company and Output Service would be transferred to the new company with effect from 1 November 1995;

(b) if the court finds issue (a) in the defendants' favour, whether the agreement was repudiated by the defendants thereby entitling the plaintiff to terminate the agreement by a letter from his solicitors dated 18 January 1996, and whether the agreement was in fact validly terminated.

5. As mentioned, Cheung J decided issue (a) in favour of the Plaintiff in his judgment of 16 March 2001. There was no need for issue (b) to be considered. His Lordship was then asked to make a declaration dissolving the partnership. There was no dispute that the partnership was dissolved on 16 January 1996 and a declaration was granted accordingly. At p.20-21 of his judgment, Cheung J said,

"The parties had agreed on the relief that they would invite the court to make in the light of the determination by the court. Accordingly, I shall make the following orders :

(1) An account be taken by the Master of all profits made by the new company during the period from 1 November 1995 to the date of this order;

(2) An account be taken by the Master of all profits made by Mr Siu and Mr Yeung from all business activities of the new company during the period from 1 November 1995 to the date of this order;

(3) Payment to the plaintiff of all sums found due after the taking of the accounts. The plaintiff is to receive the sums on behalf of the firms;

(4) Payment to the plaintiff of interest on the sums found at half of the judgment rate from 1 November 1995 to the date of this order;

(5) Delivery up of the furniture, machinery and equipment listed under paragraph 11(c)(i) of the Answer to the Interrogatories for Mr Siu affirmed on 17 July 2000 within 14 days of the date of this order failing which damages for conversion of the furniture, machinery and equipment are to be assessed;

(6) The question of interest on the damages for conversion be reserved to the Master assessing the amount of damages;

(7) A declaration that the firms were dissolved on 16 January 1996;

(8) An account be taken by the Master of the firms' assets, receivables, debts and liabilities as at 16 January 1996;

(9) An inquiry be taken by the Master on whether any of the firms' debts and liabilities have been paid and by whom;

(10) Liberty to apply; and

(11) Costs of the action be to the plaintiff.

The parties further ask the court to make the following orders, which I shall now do :

(1) An account be taken by the Master of all debts collected by Mr Siu and/or Mr Yeung and/or the plaintiff from the firms' customers and debtors from 1 November 1995 to the date of this order;

(2) Payment to the plaintiff of all sums found due after the taking of the account in (1) above. The plaintiff is to receive the sums found on behalf of the firms;

(3) An account be taken by the Master of all monies collected by the plaintiff and/or Mr Siu and/or Mr Yeung from the new company's customers and debtors from 1 November 1995 to the date of this order;

(4) Payment to the new company of all sums found due after the taking of account in (3) above; and

(5) The new company's counterclaim be dismissed and that the costs of the counterclaim be to the plaintiff."

6. The order for delivery up of furniture, machinery and equipment and assessment of damages in the event of failure to deliver up was relied upon by the Plaintiff. Steps were taken by the Plaintiff to have an assessment before Master and directions were given by Master Yuen for that purpose. It was in the context that assessment of damages that the Plaintiff applied by interim payment by a summons dated 20 June 2001.

My analysis of the effect of the judgment of Cheung J

7. In my judgment, one should have regard to the whole of the judgment of Cheung J and the premise on which the orders were made in considering the effect of the same. Delivery up or damages for conversion are not the usual kind of relief granted in respect of partnership disputes. An account is normally required between the partners (see Lindley & Banks on Partnership, 17th Edn., Para.23-72; and Paras.23-116 and 23-121 to 23-128 as to how such account is to be taken). In the winding up of a partnership, each partner is entitled to force a sale of all partnership assets which are capable of being sold and to have the value of any unsaleable asset brought into account by the partner who retains it. No partner can insist on a division of the partnership assets in specie. (see Lindley & Banks on Partnership, 17th Edn., Para.25-54 propositions (2) and (3)) Upon sale, the proceeds would be taken into account in the settlement of the partnership accounts. It follows that in the present context, the Plaintiff could not insist on the return of the furniture, machinery and equipment to him.

8. Mr Lam submitted that I should not go behind the judgment of Cheung J. I agree. However, I still have to ask myself whether the judgment of Cheung J has the effect that the Plaintiff contends for, viz. to give to the Plaintiff the benefits of all these furniture, machinery and equipment notwithstanding that the final account of the partnership has not been settled. The difficulty with such interpretation of the judgment of Cheung J is highlighted by the following contentions of the Plaintiff. Mr Lam argued that in assessing the damages for conversion (and hence in assessing the interim payment), the Court should award to the Plaintiff the full value of these furniture, machinery and equipment without regard to the facts that the Plaintiff was only a 1/3 partner and the Defendants had paid for most of the hire purchase instalments in respect of these goods.

9. I have great difficulty in understanding why the Plaintiff should have such a windfall which clearly exceeds his interest as a partner in those goods. I also doubt very much whether this was the intention of Cheung J in making these orders. Although there is an order for assessment of damages, it is not clear whether the damages is to be assessed on the basis of the limited interest of the Plaintiff in the goods or on the basis of the full value of the goods as contended for by the Plaintiff. Further, it is not clear how this assessment fits into the overall taking of partnership account. There is no provision as to immediate payment by the Defendants to the Plaintiff of such damages upon assessment. Mr Lam contended that it was not necessary to spell this out as this was implied. In a usual case where interlocutory judgment is entered, it is correct that final judgment would be entered in the prescribed form (Form No.43) as of course after the assessment. But can one say the same in respect of the unusual provisions (unusual in the context explained by me in Paragraphs 7 and 8 above) here?

10. The ideal course is to refer the matter back to Cheung J for clarification. However, since the parties did not take such course, I have to try my best in deciding the point. In my judgment, one has to start with the requirement that a partnership account has to be taken and the rationale behind. The rule has been stated by Warrington LJ in Meyer & Co. v. Faber (No.2) [1923] 2 Ch 421 at p.439,

"...in an action by one or more partners, whether using the name of the firm ...or not, against a co-partner alleging that money is due from the defendant to the plaintiffs in connection with the affairs of the firm, whether the claim arises in respect of transactions during the continuance of the partnership, or in the course of the winding up of its affairs after dissolution, the only relief which the plaintiff could obtain would be an account of the dealings and transactions of the partners."

And further at p.441,

"The result is that, in my opinion, neither moneys in the hands of a partner, as the result of his collection and distribution of the assets of a dissolved partnership, nor moneys standing to his debit in the books of the firm, are moneys due to, or held by him for, the firm or proprietors thereof. They could not be recovered by an action in the name of the firm, nor even by an action by the other partners, except after an account has been taken of the dealings and transactions of the partners."

The rationale of this rule can be found at p.437, when Warrington LJ referred to the submissions before the court,

"Secondly, he says further that money got in by one of the partners in a firm can only be recovered in an action by the other partners for an account of the dealings and transactions of the partners in which it would be open to the defendant to show that the money alleged to be in his hands belongs wholly or partially to himself, or even that a larger sum is due to him. That objection is of a substantial character."

(See also Para.23-72 of Lindley & Banks on Partnership, 17th Edn. stating the same rationale for the rule.)

11. To the same effect is the judgment of the Privy Council in Gopala Chetty v. Vijayaraghavachariar [1922] 1 AC 488. It was held in that case that if a partnership has been dissolved but no account has been taken, the proper remedy of a partner in respect of an asset received by another partner is to have an account taken. There was no separate right to sue for the recovery of the asset or a share of it. Hence, if the remedy for an account was time barred, the partner cannot recover by suing for a share in an item as part of the partnership asset.

12. Having regard to such rule and its rationale, it is clear that it is the right of one partner to demand for an overall account to be taken in respect of partnership dealings when he is sued by another partner regarding a specific asset or item in the partnership account. This is particularly so in the winding up of the partnership. In essence, it is a right of set off.

13. In my judgment, what the Plaintiff is seeking to do by proceeding with the assessment of damages without asking for an overall account regarding the partnership to be taken is contrary to these principles of law. The crucial question is whether such a course is warranted by the judgment of Cheung J? Whilst it may follow from an assessment of damages that final judgment would be entered in favour of the Plaintiff, it is at least highly arguable that in the special context of the present case that even if final judgment is to be entered, its enforcement should be stayed pending the other accounts being taken. I see nothing in the judgment of Cheung J to prevent that course from being taken and I note that the judgment did expressly give parties general liberty to apply.

14. Mr Lam argued that the purpose of the order for delivery up and assessment of damages is to give the Plaintiff a right to receive payment of such damages in advance irrespective of the general law. He submitted that such damages would be held by the Plaintiff on behalf of the other partners. That would mean that the Plaintiff would recover the money from the Defendants and then hold part of it for the 1st and 3rd Defendants until final account is taken. I fail to see why I should attribute such an intent to Cheung J, in particular, I cannot discern anything in the order or the judgment of Cheung J nor in the underlying pleadings to suggest that Cheung J wished to depart from the general law when he made these orders. Mr Lam said that the Plaintiff was in effect making a claim against the Defendants on behalf of the whole firm, including the 1st and 3rd Defendants. This cannot be right because although originally, the Plaintiff did sue on behalf of himself and all the partners other than the 1st Defendant, by an amendment to the Writ on 18 December 1998, it was made clear that he was only suing for himself. Further, no action can be maintained against the partners by the firm as a matter of law, see Meyer & Co. v. Faber (No.2) [1923] 2 Ch 421 and Kao, Lee & Yip v. Koo Hoi Yan Donald [1994] 2 HKC 228.

The correct approach

15. Mr Lam also referred to Order 29 rule 11 and submitted that since he was relying on Order 29 Rule 11(1)(b), he was entitled to interim payment subject to the question of quantum in the light of the interlocutory judgment. That is plainly wrong. Rule 11 says the Court may, if it thinks fit, order the respondent to make an interim payment to such amount as it thinks just. The court clearly has a discretion in the matter. Even after an interlocutory judgment, a plaintiff is not entitled to interim payment as of right. In the present case, given the context under which the order for assessment of damages was made and the general principles applicable to dissolution of partnership, I am of the view that the principle set out in Para.23-92 of Lindley & Banks on Partnership, 17th Edn. is equally applicable although in that passage, the learned editor was discussing the matter in the context of Order 29 Rule 12. I hold that in the circumstances of the present case, interim payment should only be made when it can clearly be shown that a balance is due to the Plaintiff without a full account being taken. On the material before me, I am not satisfied that this is such a case.

Conclusions

16. I therefore conclude that the application for interim payment against the 1st and 3rd Defendants should be dismissed. I would therefore set aside Paragraph 1 of the order of Master Yuen and order that the application in paragraph 1 of the Plaintiff's summons of 24th August 2001 be dismissed insofar as the 1st and 3rd Defendants are concerned.

17. However, this does not dispose of the matter with regard to the 2nd Defendant. The 2nd Defendant was not a partner and my above analysis is not directly relevant. However, it follows from what I said in Paragraph 14 above that the Plaintiff can only pursue the application against the 2nd Defendant on the basis of his own interest in the goods, the assessment would be in respect of the conversion of such interest and the application for interim payment should be dealt with in such context. For that purpose, the valuation evidence is relevant and I would give leave to the 2nd Defendant to file its report within 28 days from 24 October 2001. The appeal in respect of the 2nd Defendant is to be restored to a date to be fixed in consultation with counsel's diary.

18. As to costs, I shall reserve my decision until the whole appeal is disposed of.