ACTIVE PROFIT LTD v. NISSHO IWAI HONG KONG CORPORATION LTD AND OTHERS

HCCL 47/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.47 OF 1998

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J U D G M E N T

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The application

1. By summons dated 4 May 2004 the plaintiff herein, Active Profit Ltd, seeks payment from the 1st, 2nd, 3rd and 4th defendants of the sum of HK$33,873,597.07, or such amount as the court shall think fit, by way of "further interim payment" pursuant to various provisions of Order 29, rr 11 and 12, RHC.

2. This application was set down for one day, for hearing on 18 June 2004. Given the history of this case one day cannot have been a serious estimate of the time required to argue the point, and the application should not have been forced into the list on that basis; in fact two additional days were required, which at short notice the court diary was hard-pressed to accommodate.

The background

3. On 30 June 2003, this court handed down judgment consequent upon the trial of this action.

4. The plaintiff, Active Profit, through the 1st and 2nd defendants had been an investor in a joint venture set up to develop a housing project on agricultural land near Tai Wai, Shatin. In the event the development, which was anticipated to have taken place with Sun Hung Kai, did not proceed, and the joint venture was cancelled. However, Active Profit maintained that the other parties to the joint venture had acted so as to deprive it of the fruits of its investment, and in 1998 it had instituted these proceedings.

5. After a 15 day hearing the plaintiff's contentions were vindicated. The judgment which was rendered speaks for itself. The sealed Order of 10 October 2003 reflects the finding, inter alia, that the 1st defendant, Nissho Iwai, and likewise the 2nd defendant, Milemore Investment Limited, were trustees of certain interests of the plaintiff in the joint venture, and had acted in breach of trust and breach of fiduciary duty towards the plaintiff. For their part the 3rd and 4th defendants, Messrs Kodera and Cho, were found liable to the plaintiff as constructive trustees of that which was referred to (and defined within the Order as) the 'traceable assets'.

6. Consequential directions were made as to the further discovery to be made by the defendants with the aim of providing the plaintiff with information sufficient for it to make its election as to the remedy it wished to pursue, it having been recognized in the judgment (at paragraph 167 thereof) that additional information would be required.

7. In the event, after further delays and additional disagreement/argument, such discovery ultimately was provided upon affidavit.

8. On 10 June 2004 the plaintiff made its election by letter of that date from its solicitors. Paragraph 3 of that letter, which is exhibited to the 18th Affirmation of the plaintiff's managing director, Mr Albert Chan, stated that Active Profit "hereby makes election in favour of an account of profits against the defendants and will pursue all such remedies as are not inconsistent with such election and which are open to our client to pursue pursuant to the Judgment".

9. This application for "further" interim payment is made consequent upon such election. As is thus implicit, however, this is not the first application of this type.

10. By summons dated 14 October 2003 the plaintiff had made its first application for interim payment, wherein it had sought the sum of HK$47,540,450.00, or such other sum as the court should think fit, by way of interim payment.

11. In the event this application was compromised when it came on for hearing, it being agreed between respective senior counsel for the parties that the court should order that an interim payment of HK$7.5 million was to be paid into court by the defendants within 21 days. I understand that it was accepted by counsel for the defendants that, on the basis of the existing judgment of this court, the defendants were liable to pay at least such amount by way of interim payment.

12. Of the global sum of $7.5 million the amount of $3.75 million was to be paid by the 1st defendant, $3.375 million by the 3rd defendant, and the amount of $375,000 by the 4th defendant. These sums were duly paid into court on 18 March 2004.

13. Paragraph 2 of the Order of the Court dated 26 February 2004, which recorded this position, stated that such interim payment was to be without prejudice to the plaintiff's right to elect between the various alternative remedies which were open to it after compliance by the defendants with the discovery requirements specified in the Judgment Order sealed on 10 October 2003.

14. Accordingly, the present application for further interim payment takes place against this backdrop. The basis for the interim payment now sought is thus on the basis of an account of profits pursuant to the provisions of Order 29 rule 12(a), RHC.

15. This application also takes place shortly before the hearing of the defendants' appeal, and the plaintiff's cross appeal, against the judgment of this court consequent upon the trial of this action. I understand that these appeals (CACV 320 and 332 of 2003) are listed to be heard by the Court of Appeal from the 1st to 9th December 2004.

16. I am informed by counsel that an application for a stay of execution of this judgment has been made to a single judge of the Court of Appeal, and has been refused. No application has been made to me to stand this application down pending the determination of these appeals. Accordingly this court must deal with this application on the basis of the judgment as it presently stands.

Interim payment on an account of profits

17. Order 29 rule 12 reads as follows :

"If, on the hearing of an application under rule 10, the Court is satisfied -

(a) that the plaintiff has obtained an order for an account to be taken as between himself and the defendant and for any amount certified due on taking the account to be paid; ...

the court may, if it thinks fit, and without prejudice to any contentions of the parties as to the nature or character of the sum to be paid by the defendant, order the defendant to make an interim payment of such amount as it thinks just, after taking into account any set-off, cross-claim or counterclaim on which the defendant may be entitled to rely."

18. The issue is thus very much within the discretion of the court, having regard to all the circumstances, and if it is considered that notwithstanding the arguments raised the plaintiff will recover a substantial sum, the power exists to order an interim payment under this head. However, the issue of such interim payment is not etched in stone; it is able to be adjusted on final judgment or order, wherein the court may "make such order with respect to the interim payment as may be just", a power encompassing any type of variation, and may even include "an order for the repayment by the plaintiff of all or part of the interim payment" : see the provisions of Order 29, rule 17.

19. Thus is the broad nature of the statutory scheme. In this case, of course - as Mr Chang SC has stressed - this post-election application for such payment comes at a more advantageous stage of the proceedings for his client, since it is a post-judgment application, liability having been established against the defendants, that which is remaining being the quantum element of the equation, which is to be crystallized upon the taking of an account of profits.

20. There is much jurisprudence as to the nature of an account of profits, and I have been referred to various learned texts on the subject. The essence of this remedy is that it is a remedy in the nature of disgorgement for wrongdoing: "that is, to take away from the wrongdoer any gain made through the wrong. Disgorgement operates without regard to any loss by the plaintiff, on the principle that a defendant should not be allowed to profit from wrongdoing" and "When a wrongdoer is forced to give up his gain, there is no need to show that the gain came from the plaintiff ... the defendant is not giving back, but giving up." : see Lionel Smith, The Law of Tracing (Oxford 1997) at pp.19 and 297.

21. A concomitant of the fundamental disgorgement principle is that there is liability on a trustee to account for all profits obtained, subject to such allowances, if any, which the court may see fit to allow in the exercise of its discretion. As will shortly be seen, the issue of allowances or legitimate deductions is an element which has loomed large in the context of the current argument, but the point must be made that the discretion to permit allowances is a discretion that will be but sparingly exercised in favour of the wrongdoer who has acted in breach of trust/fiduciary duty, particularly in instances of dishonesty or surreptitious dealing with trust assets on the part of the defendant trustee/fiduciary.

22. A good deal also has been said during argument about the burden of proof in an application for interim payment on an account of profits. In this regard I am inclined to the view that in an interim exercise such as this, conducted on a post-judgment basis, wherein the plaintiff has established, as opposed to merely asserting, its right to such an account, that the appropriate starting point is for the defendants to disgorge the profits shown to have been received, the burden thereafter falling upon them to justify the allowances asserted, as representing monies that they should be permitted to retain pending final assessment and determination by the court at the actual taking of the account. Accordingly, this is the approach that I have been minded to adopt in coming to a decision upon this application.

The proceeds of sale

23. Shortly put, the factual underpinning of the judgment handed down by this court consequent on the trial of this action is that the Beachshore shares were wrongly sold back at par to Kodera, notwithstanding that the underlying value of the land holdings had grown to hugely inflated levels, and that Kodera, and thus not Beachshore (in which the plaintiff, Active Profit, was an investor through Nissho Iwai and Milemore), was in a position to realize an enormous profit upon a sale of those shares to Sun Hung Kai.

24. Of this sale price of some HK$406.422 million, the 3rd defendant, Kodera, received HK$376,117,464.00, out of which he transferred HK$37,611,746.40 to Cho, the 4th defendant, and HK$134,025,761.31 to Nissho Iwai, the 1st defendant.

25. I am reminded that a relatively small sum, in the amount of HK$2,166 million, was withheld by the purchaser, Sun Hung Kai, which is currently held by Messrs Johnson, Stokes and Master, and that in addition there was a purported assignment of loans, pursuant to which Nissho Iwai further received HK$9,880,573 and Kodera HK$18,225,100.

26. These then are the starting figures put forward by Active Profit for the purpose of the interim payment as presently sought.

The argument

27. This application was strongly resisted.

28. On behalf of the 1st defendant, Nissho Iwai, Mr Shieh SC emphasized in his persuasive address that the remedy for which the plaintiff now had elected, an account of profits, was personal and not proprietary, and accordingly that the present debate should not encompass proprietary considerations such as tracing. He observed that his client was in a different position from that of the other defendants, in that no monies had been directly received from the sale of the Beachshore shares, and he stressed that his primary case was that the monies thus received by his client from the 3rd defendant, Kodera, could not properly be characterized as 'profits', and represented simply the repayment of pre-existing bona fide loans which had been advanced to Kodera by his client.

29. It followed, said Mr Shieh, that the plaintiff not only could not readily demonstrate, for the purposes of the present interim payment application, that the monies received by his client from Kodera were thus characterisable, but equally it could not be shown that there was the necessary causal link, and that such alleged 'profits' had been made as the result of a breach of trust.

30. Accordingly he invited the court to dismiss this application against the 1st defendant.

31. On behalf of the 2nd, 3rd and 4th defendants Mr Jat SC recognized, at least in terms of monetary receipt, that his clients had been direct recipients of the sale proceeds, and thus that they were very much in the front line of Mr Chang's attack. However he was undaunted.

32. Mr Jat was critical of the present application. He submitted that this application was intended to be a 'short cut' in terms of the proper account taking process, wherein evidence would be taken, preferably upon the basis of issues as defined in pleadings to be ordered for the purpose, and that the burden was on the plaintiffs to show that there would be recovery of the amount presently sought. With reference to authority he stressed the importance of causation, which required a determination of the net profit arising from the breach of trust/fiduciary duty, and further referred to difficulties in the attribution of profit to particular breach. These were matters, he said, which should be sorted out at the hearing of the account, a personal and not a proprietary remedy, and not in the present ad hoc 'summary' manner which lent itself to supposition at this stage.

33. Mr Jat further argued strongly that full credit presently should be given to the 'allowances' which had been sought to be maintained in the affidavit evidence before the court, and which for present purposes are the only such 'allowances' which are the subject of argument

34. These allowances are four in number, namely: commission payable to Nissho Japan in the sum of HK$8 million and to Nissho Hong Kong in the further sum of HK$2 million, a management fee of HK$68 million that would have been payable to the 2nd defendant under clause 7.2 of the Mainplaza Shareholders' Agreement, the so-called 'compensation for carparks' in the sum of HK$12.105 million which the 2nd to 4th defendants say is a "potential liability" to compensate the 3rd defendant for alleged loss of the excess car parks, and finally the figure of HK$7.605 million allowance for 'administrative expenses'.

35. It was asserted that each of these allowances or deductions was appropriate and proper, and certainly should not be disallowed at this interim stage.

Decision

36. I am inclined to accept the contention of Mr Chang SC that in making this application the plaintiff has not been attempting to steal a march on the proper procedure; as he pointed out, although this was a 'further' application for an interim payment, the first such application obviously had been hamstrung by the failure of the defendants then to provide the necessary discovery, and thus the present application was the first occasion on which there could be sensible argument on the merits subsequent to the election that had been made by the plaintiff.

37. After some reflection I further accept his argument that in all the circumstances of this case an order for interim payment would represent a just order to make, not least in light of the fact that the defendants' application for a stay of the judgment had been dismissed, as had an application for security for costs.

38. I bear particularly in mind that the monies in issue on this application are that which Mr Chang categorized as 'first generation profits', that the receipt of these monies is not in dispute, and that whatever order is made in terms of interim payment in no way prejudices the final position upon the taking of the account. However, although Mr Chang opened this application by seeking an order for payment to the plaintiff, it seems tolerably clear that by the conclusion of this hearing all parties were working on the basis of any order to be made being an order for payment into court. Whether this surmise be correct, in my view it is wholly inappropriate in the circumstances, not least in light of the forthcoming appeal in December, and also the plaintiff's status as, in effect, a $2 company, to consider any course other than that of a payment into court.

39. I further accept the proposition that that which is being requested, on the basis of the judgment of this court, is that of disgorgement, upon an interim basis, of payments that indisputably have been made, and that as a matter of principle that once, as here, there has been found to be a breach of trust/fiduciary duty then, absent approved/undisputed deductions, the wrongdoer should not be left in the position of retaining control of monies received in breach of trust. I recognize, also, that on this application the plaintiff in this case is neither required to satisfy the court of need nor of the fact of prejudice arising should such order not be forthcoming.

40. It is trite law that an account of profits is a personal remedy as well as having a proprietary element, and I do not accept that for the present purposes of an interim payment that it is possible or desirable, or in the circumstances justified, successfully to drive a 'wedge' between the two, as has been sought to be achieved.

41. There is, of course, a real difference in the factual position of the 1st defendant on the one hand and of the 2nd to 4th defendants on the other, and I have been reflected at some length upon Mr Shieh's primary argument to the effect that the monies accruing to his client were in payment of pre-existing debts, and that his client should be able to make use of these monies in exchange for a chose in action.

42. In my view, however, and without finally deciding the point, there is an element of artificiality within this submission. There is in the present case incontrovertible evidence as to how these repayment monies were sourced, and on the basis of the findings of this court this is most certainly not a case in which the 1st defendant, Nissho Iwai, was in the position of an innocent third party, given that it has been found to have been privy to a breach of trust. I confess that I do not find it an attractive approach for Mr Shieh to say, in effect, that even though his client's actions have enabled Kodera to obtain and use the monies from the share sale, in breach of trust, and then to discharge the debt due from Kodera's company, that nevertheless the position of the 1st defendant is, or can be, simply arrogated to that of a disinterested and uninvolved third party creditor analogous to a bona fide purchaser without notice. In the context of this case that is a quantum leap, and one which in the present context I am unprepared to make. In my view it is not open to a trustee to exchange a chose in action for an asset he is holding in trust, and for present purposes I reject Mr Shieh's arguments in this regard.

43. The issue of the deductions or 'allowances' claimed has been the subject of detailed debate in this application. However the point should be made at the outset that there are a number of allowances which have been claimed to which the plaintiff, at least at this interim stage, has made no objection: namely, the alleged loans, the land cost, phases I and II, legal expenses actually incurred, the respective shares which would have accrued to the 2nd defendant, the 1st defendant and its parent, Nissho Japan, and the 'arrangement fees' allegedly payable to the 1st and to the 2nd defendant. I am told that even if all these items are allowed in full absent any question of further quantification or valuation, a substantial sum will remain out of which the court would be able to make a further interim order.

44. As earlier indicated (at paragraph 34 above) the specific 'allowances' presently at issue are four in number.

45. As to the commission payments payable to Nissho Japan in the sum of HK$8 million and to the 1st defendant, Nissho Hong Kong, in the amount of HK$2 million, it is difficult to see why this should be regarded as a permissible allowance. As Mr Chang submitted, given that part of the 1st defendant's breach of trust consisted of brokering the deal for the sale of the Beachshore shares to Sun Hung Kai, it is difficult to appreciate why the 1st defendant and Nissho Japan should be permitted to profit, whether on the basis of 'commission' or otherwise, from committing and assisting in the very act that constituted a breach of trust. In fact, in the circumstances this would seem to be classifiable as a 'secret commission', to which the law attaches a constructive trust as soon as it is received.

46. I bear in mind also, under this head, that by March 1996 Nissho Japan was a 100% shareholder of Nissho Hong Kong, and that this court earlier has held that "by this stage [the 1st defendant] in effect was Nissho Japan". It is a matter of history that by this stage Mr Okuyama, who had brokered the deal with Sun Hung Kai, was working for Nissho Japan, which thus would have had knowledge of that which he was doing.

47. At the end of the day, therefore, I presently discern no basis for permitting this claimed allowance, although of course I remind myself, in light of the interim nature of this application, that this issue, as with all the others, can be revisited.

48. Turning now to the administrative expenses element, which have been claimed in the sum of HK$7.605 million, I accept the argument as to the current paucity of the evidence placed before the court by Mr Kodera in this regard, and note the absence of documentation and the difficulty in establishing that any such work ever was actually undertaken.

49. In this Mr Chang may or may not be correct in his assertion that under this head a figure simply has been picked out of the air, but in the context of this application I see no reason why this amount should be retained, as the defendants have argued. Whilst I appreciate that Mr Jat submitted that this was an estimated figure in the nature of a quantum meruit claim, the fact remains that in the final accounting which took place between the parties that no charge was raised for administrative work, and it is hard to avoid the impression that this element resembles no more than a post facto reconstruction for tactical purposes. In this view I may be incorrect, but if so the matter can be further, and finally, addressed at the taking of the account.

50. Of the disputed 'deduction items', the two matters that have caused concern have been the so-called 'management fee' of HK$68 million, and the compensation for the 'excess car parks', which is placed at HK$12 million.

51. The significance of this cumulative figure of HK$80 million is immediately obvious within the context of an account of profits. The case of the 2nd to 4th defendants on this sum is summarized in Mr Kodera's 19th affirmation. It is said that there was agreement to compensate Kodera and Cho in the amount of approximately $80 million in respect of the 'discounted' price for which they agreed to sell the land to Mainplaza, and it is further said that the term 'Management Fee' was a convenient label used in later agreements to include the "Second Agreed Portion" of HK$59.2 million and a sum of HK$8.8 million on account of Kodera and Cho's remaining 3.1% interest in Beachshore, with the remaining HK$12 million to be paid to Milemore by way of entitlement to the so-called "Excess Car Parks".

52. Against this backdrop, Mr Jat submitted that if Mainplaza, and not Kodera, were to have acquired the Beachshore shares to sell to Sun Hung Kai, that Kodera and Cho would have insisted upon payment of these sums to Milemore before agreeing to any Mainplaza/Sun Hung Kai share deal. Moreover he said that by express agreement the Management Fee and the Excess Car Parks would be transferred to Milemore prior to distribution of any dividends, and that the issue of a Certificate of Compliance was not a condition precedent to such payments, but provided only for deferral of the time when such amounts had to be paid, that is, until the end of the project.

53. The plaintiff's short response to this submission is that the 2nd, 3rd and 4th defendants were here embarking upon a purely hypothetical exercise against the background of the decision that was made not to proceed with the redevelopment. It is said that in such circumstances the 2nd defendant incurred no costs/expense nor undertook any 'managing' at all, and further that payment of the sum of HK$68 million - which formed part of the 'package' argument rejected in the judgment of this court - was clearly conditional upon the contingency that there would be physical completion of the redevelopment and that a certificate of compliance would have been issued. Such conditions never were fulfilled, the defendants chose to cease the development in the manner that occurred, and the Mainplaza Shareholders Agreement fell away. Accordingly, sums which would have been payable if the development had gone ahead and the Shareholders Agreement had remained in place had no relevance to the accounting of profits exercise, and did not translate into a proper allowance to permit, either for the purpose of this interim exercise or at the final taking of the account.

54. So far as the alleged compensation for the excess car parks was concerned, the plaintiff further submitted that this involved the entirely arbitrary attribution of the figure of HK$12.105 million which is asserted to represent a 'potential liability' to compensate Kodera for the alleged loss of the excess car parks, and that there was no evidence to support this purported valuation. In addition, the submission went, this was but a potential liability, and no sum was ever paid out and no costs/expenses were incurred nor property or assets contributed. As was the case with the management fee, this issue was contingent upon physical completion of the project and issue of the certificate of compliance, neither of which had taken place, so that there was no requirement for any such transfer. In this connection the point also is taken on behalf of the plaintiff that there never has been a claim by the 3rd defendant for any such 'compensation' for such purported 'loss', and that this is something which should be pursued directly and is not an avenue to be approached by way of 'allowance' within the context of an account of profits.

55. In my judgment there is merit in the plaintiff's contentions. At this interim stage I find difficulty in appreciating why either the issue of the Management Fee or that of the Excess Car Parks, either singly or together, should be regarded as constituting a legitimate allowance so that the 3rd defendant is entitled to retain this portion of the profits consequent upon the share sale to Sun Hung Kai. As Mr Chang succinctly, and in my view correctly observed, such deductions, if permitted, in effect would remove the gains accruing from the breach of trust, as established by the judgment, on the basis of that which it is alleged would have happened had there been no breach. This cannot be the correct approach.

56. It follows from the foregoing, therefore, that in terms of the four categories of deductions/allowances claimed, I have concluded that the necessary threshold has been reached, and in the present context I reject the arguments which seek to prevent these sums of money from being taken into account upon this application for interim payment. In light of the judgment of this court it appears to me that such application should give effect to the fundamental principle of disgorgement, and I fail to see why there should be an accommodation in favour of wrongdoers as if the abandoned development had been successful.

57. The only remaining matter which has been subject to argument is that of interest. There are two facets to this.

58. Originally it had been claimed by the defendants that interest should be taken into account upon the loans - in the sums of HK$9.88 million and $18.225 million - that have not been the subject of challenge by the plaintiff in this application. However, during argument Mr Jat has made it clear that he is not seeking to maintain this argument, which thus no longer has relevance in the present application.

59. The other interest element in the present equation is the plaintiff's submission that by reason of the proprietary nature of its claim that the plaintiff is entitled to trace into all 'second generation' profits also, and that one of these categories is interest earned upon the 'primary' profits as retained by the defendants. Mr Chang recognized that there are difficulties here, at the interim stage at least, but says that for present purposes the plaintiff would be content if interim payment be made of an amount calculated by reference to prime rate plus 1% compounded, representing the bare minimum to which the plaintiff ought to be entitled in any event.

60. On this 'second generation' aspect I am unconvinced. In the circumstances of this case I do not consider that it is appropriate to introduce any such 'second generation' element at this interim stage. It strikes me that this is an issue to be ventilated at the hearing of the taking of the account.

61. It follows from the foregoing, therefore, that I reject the defendants' opposition to the making of interim payments. As to the quantum thereof, the plaintiff's counsel have put forward a useful 'Interim Payment Profits Calculation Table' which speaks for itself and which, save for the disallowed element of interest, is premised upon the success of the plaintiff's arguments within the parameters of this application, and which further gives credit for the 1st interim payment, in the sum of HK$7.5 million, which earlier was made by the 1st, 3rd and 4th defendants. For immediate purposes I further accept the proposed 50 : 50 apportionment which provisionally has been adopted between the direct recipients, the 3rd and 4th defendants, on the one hand, and the 1st defendant on the other, and I accept Mr Chang's proposition that there is no reason why at this interim stage this issue should finally be decided.

62. I am therefore prepared to proceed on the basis of these proffered calculations which, absent the element of interest, and before giving credit for the sum of HK$7.5 million earlier paid into court, demonstrates minimum interim payments to be made by the 1st, 3rd and 4th defendants in the sums of $12,980,509.27, $7,789,100.83 and $3,852,772.15 respectively. These figures, therefore, which for convenience have been rounded down to the nearest hundred dollars, form the basis of the order of this court upon this application after giving credit for the sums earlier paid.

Order

63. The order of this court is thus as follows :

Within 28 days of the date hereof the 1st defendant do pay into court the sum of HK$9,230,500, the 3rd defendant do pay into court the sum of HK$4,414,100, and the 4th defendant do pay into court the sum of HK$3,477,700, such sums to be held in court in interest bearing accounts until further order.

64. As to the costs of this application, I see no reason why costs should not follow the event. I make an order nisi that the plaintiff is to have the costs of this application, such costs to be taxed if not agreed. I certify the application as fit for two counsel.