ARCHER, HAROLD DEAN v. THE HONG KONG CHANNEL LTD.

1996, No.A560

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. The defendant company is a producer of television programmes for hotels. These programmes are produced on video tapes and video compact discs and are provided to hotels who subscribe to the service. The programmes feature items of interest to visitors to Hong Kong and include features on the facilities of the particular hotel. The programmes include advertisements which finance the service.

2. The idea for this service originated with the plaintiff. He and an associate, Mr Ed Burrell, a retired banker and financial consultant, found investors for the project. A shareholders agreement was signed which provided that the board of directors of the defendant company should include representatives of the investing shareholders as well as the plaintiff. The shareholders agreement also provided that the plaintiff should be the first managing director of the company. It was provided that he should enter into an Employment Contract with the company, the terms of which had already been drafted "as soon as reasonably practicable after it has been decided that the company shall continue to carry on the business ....."

3. The plaintiff signed the employment agreement on 6th July 1990. He remained as Managing Director until a meeting of the Board of Directors on 17^th June 1995 when it was resolved that his employment be terminated immediately. At that time the plaintiff contested the validity of the vote. He now accepts, for the purpose of these proceedings, that he was validly dismissed.

4. The plaintiff's principal claim is for undrawn salary and Chinese New Year bonuses owed to him prior to his dismissal. In addition he claims the balance of the sum he says he is owed as compensation for having been dismissed without notice, a payment representing 7 days annual leave due to him under the contract as well as a claim for severance payment under s.31B of the Employment Ordinance Cap.57 or alternatively long service payment under s.31R of the Employment Ordinance.

5. The defendant company admits that the upaid wages of the plaintiff on 17th June 1995, which is the date it alleges the plaintiff's employment ceased, amount to $457,667 but alleges that the plaintiff has no right to the sum he claims in respect of undrawn Chinese New Year bonuses. Indeed it claims by way of set-off and counterclaim a sum of $40,000 which it says was drawn by the plaintiff as an unauthorised Chinese New Year bonus in 1993. Furthermore the defendant claims by way of set-off and/or counterclaim the sum of $371,970 which it alleges was drawn by the plaintiff in respect of quarters expenses without authority over and above his contractual housing allowance of $25,000 per month. The defendant denies that the plaintiff was due any leave at the time of the termination of his contract, having already taken more than the leave to which he was entitled for 1995. The defendant alleges that the plaintiff took 17 days excess leave in April 1993. The defendant further denies that the plaintiff is entitled to severance pay or a long service payment under the Employment Ordinance.

The duration of the plaintiff's employment

6. In order to qualify for a long service payment under s.31R of the Employment Ordinance the plaintiff would have to show that he was employed by the defendant company under a continuous contract for not less than five years. Both the starting date and the finishing date of the plaintiff's employment have been in issue.

The finishing date

7. It is accepted that at a meeting of the Board of Directors held at the defendant company's offices on 17^th June 1995 at which the plaintiff was present it was resolved that the plaintiff's employment with the company be terminated immediately. The 17^th June 1995 was both a Saturday and a public holiday. The following Monday, 19^th June 1995 was also a holiday. The plaintiff has argued that Tuesday 20^th June was the true date of the termination of his contract. He has advanced two arguments for this proposition. Firstly he points to s.31D(3) of the Employment Ordinance and argues that it indicates a legislative policy that contracts of employment cannot be determined on a public holiday. I am satisfied that there is no force in this argument. If that subsection has any relevance to the question it is quite the reverse of that argued by the plaintiff as it expressly contemplates contracts of employment ending upon public holidays. The second argument put forward by the plaintiff is that since he was required to attend the company's office on the 20^th June, he was employed until that date. What occurred on 20^th June was what was described by Ms Sheena Hardy as "management takeover meeting" attended by the plaintiff and his solicitor and the solicitor for the defendant company amongst others. At this meeting other members of staff whose employment was terminated were informed and told they would be compensated. The plaintiff was still a director of the company. His presence had been requested because he had been running the company and the new management team would take over that day. I find that this request carried with it no implication that his contract of employment as Managing Director which had been expressly terminated by the Board of Directors on the preceding Saturday would be extended until the following Tuesday. I find therefore that the plaintiff's contract of employment terminated on Saturday 17^th June 1995.

The starting date

8. It is the plaintiff's case that, although his written contract of employment as Managing Director was signed on 6^th July 1990, his actual employment by the defendant started as early as the middle of May that year after the signing of the shareholders agreement on 15^th May 1990. He said that his rent had been paid by the defendant company for 1 or 1½ months before 6^th July and he had been given what he described as "ad hoc payments for project work" before that date.

9. He said that he employed a lady named Flora Lau as sales manager and another lady named Sarah Burgoyne as a secretary/office manager "in about May".

10. There is no doubt that as originator of the idea for the business which the defendant company was to undertake, he had been engaged in work to set up the business for some months prior to 6^th July 1990. That the work was done for the ultimate benefit of the company does not necessarily mean that he was an employee at the time he performed it. On the other hand, the fact that the plaintiff signed a written contract of employment on 6^th July 1990 does not of itself preclude the possibility that he was employed by the company before that time.

11. The question of whether the plaintiff was an employee before that date is a question of fact based upon the evidence. Performing work in return for remuneration is a matter from which a contract of employment might be inferred.

12. Somewhat curiously the plaintiff can point to no documentary evidence of his employment prior to July 1990. Although he says, for instance, that he was paid by cheque, he has produced no evidence of such cheque or cheques. There is nothing in the company's audited accounts for the period from 13^th October 1989 (the date of incorporation) to 30^th June 1991 which indicates that the plaintiff received either a salary or an accommodation allowance for the period prior to July 1990. The plaintiff at first explained this by suggesting that his "ad hoc payments" came from the figure of $157,383 in those accounts in respect of "preliminary expenses". After the defendant showed, through Mr Alan Cheung who acted as financial consultant for the company in the preparation of these accounts, that that figure was referable exclusively to solicitors' charges, the plaintiff could only suggest that his pre-July 1990 remuneration might be covered by the figure for "consultancy fees" or "sundries or miscellaneous expenses". If his remuneration is covered by the figure for "consultancy fees" it does not suggest that the plaintiff was an employee of the defendant. I consider it improbable that salary would be included in the figure for "sundries or miscellaneous expenses".

13. Far from supporting the plaintiff's claim that he was employed by the defendant company prior to July, the Report of the Directors which formed part of those accounts and was signed by the plaintiff, specifically refers to 6^th July 1990 as being the date the plaintiff entered into an employment agreement with the company.

14. The defendant's contention that the plaintiff was not an employee of the company prior to July 1990 is supported by the "Employees return of remuneration" for the year ended 31^st March 1991 which was signed by the plaintiff and dated 18^th April 1991 and submitted to the Inland Revenue Department. That return specifically states that the plaintiff's salary and his quarters were provided from 1^st July 1990. I did not find the plaintiff's explanation as to why he had not included his alleged income prior to 1^st July 1990 in that return as convincing.

15. Even if the plaintiff did receive remuneration from the defendant company prior to 1^st July 1990, whether by way of a cheque or payment of the rent, I do not find that the plaintiff has discharged the burden of showing that it was probably attributable to a contract of employment. He himself refers to the ad hoc nature of such payment. That in itself is not suggestive of a continuous contract of employment which is required by s.31R of the Employment Ordinance.

16. The terms of the shareholder agreement dated 15^th May 1990, the signing of which the plaintiff suggests marked the commencement of employment, does not suggest a contract of employment prior to the signing of the written contract of employment in July 1990. Clause 6.03 refers to the plaintiff entering into an employment contract on a subsequent date namely "as soon as reasonably practicable after it has been decided that the company shall continue to carry on the business referred to in Clause 3.02". Even more significant is the provision in Clause 6.02 that the Managing Director should be appointed by the Board. Clause 5.01 provided that the Board should comprise six directors. By virtue of Clause 5.08 the necessary quorum for a board meeting was three directors. It appears from the Directors Report signed by the plaintiff attached to the Statement of Accounts for the period from 13^th October 1989 to 30^th June 1991 that the defendant company did not have three directors prior to 5th July 1990.

17. I accordingly find that the plaintiff has failed to establish on balance of probabilities that his employment with the company was for any longer period than from 6^th July 1990 (the date of his signing the Employment Agreement) until 17^th June 1995, the date of his dismissal. The plaintiff does not qualify for a long service payment under s.31R of the Employment Ordinance.

Severance Payment

18. The plaintiff claims in the alternative for a severance payment under s.31B of the Employment Ordinance by reason of redundancy. This point can be disposed of briefly. It was abundantly clear from the evidence that the reason for the defendant's dismissal was the dissatisfaction of his fellow directors with his performance as Managing Director. The reason for his dismissal was totally unconnected with any of the facts referred to in s.31B(2)(a) or (b) of the Employment Ordinance. After his dismissal a new Managing Director was appointed and the nature of the company's business remained the same. The fact that the company subsequently moved its premises to premises with a cheaper rental was not any part of the reason for the plaintiff's dismissal. The plaintiff's claim under s.31B of the Employment Ordinance therefore is dismissed.

19. As I have previously stated the defendant company admits that at the time of his dismissal on 17^th June 1995 the plaintiff had not drawn wages amounting to $457,667. The plaintiff's claim for unpaid wages includes not only that sum but also $120,000 in respect of Chinese New Year Bonuses he claims were due to him in 1992, 1994 and 1995, and wages for 18th-20^th June 1995 in the sum of $4,429. In the light of my finding that the plaintiff's contract was terminated on 17^th June 1995, this latter sum is not due to him.

Two Issues

The issue of Chinese New Year Bonuses

20. The question of whether the plaintiff was entitled to an extra month's pay representing a Chinese New Year Bonus remains an issue, not only because the plaintiff is claiming $120,000 in respect of undrawn New Year bonuses in 1992, 1994 and 1995 but also because the defendant counterclaims the sum of $40,000 which the plaintiff drew as a purported Chinese New Year bonus in 1993 and which the defendant says was drawn without authority.

21. There was no reference in the plaintiff's written contract of 6^th July 1990 to any entitlement to a Chinese New Year bonus. That contract was of three years duration but since the plaintiff continued as Managing Director thereafter he must be deemed to have been employed on the same terms in the absence of any evidence leading to a contrary inference.

22. Whereas it lay within the authority of the plaintiff as Managing Director to authorise payments of Chinese New Year bonus to the staff, he had no authority to award himself such a bonus. That would require the authority of the Board of Directors. The plaintiff's evidence is that there was a meeting of the directors in June 1992 when he received this authority. His evidence was that all directors were present as well as Mr Barry Clark. He said his authority came about in this way. He told the directors "I gave the staff a Chinese New Year Bonus including myself" and that nobody dissented. I assume that his argument is that that the silence of his fellow directors amounted to ratification of his decision to award himself a Chinese New Year Bonus and authority to give himself a Chinese New Year Bonus each year thereafter.

23. The evidence of Mr Stuart McCarthy, a director whom the plaintiff alleged was present at the meeting, was that there was no such meeting at which the plaintiff raised the subject of a Chinese New Year Bonus. He had not come across a case in his experience where a Managing Director had been given an extra month's pay at Chinese New Year.

24. Evidence confirming Mr McCarthy's evidence came from the statement which I accept was signed by Mr Steven Ervin, another director at the relevant time who has recently died. He said that he was not party to any oral or written amendments to the Employment Agreement of the plaintiff.

25. There are no minutes of any such meeting in the Minutes Book of the defendant.

The issue of the Housing Allowance

26. A similar issue arises in relation to an allegation by the plaintiff that his housing allowance, which had been set at $25,000 by his written contract, had been raised by the Board of Directors at a meeting on 20^th June 1993. The case for the defendant is that no such raise was ever authorised and that any excess of housing allowance taken by the defendant over his contractual entitlement must be deducted from any salary owed to him.

27. The plaintiff's evidence was that there was a meeting on 20^th June 1993 at which he and his fellow directors Stuart McCarthy and Steven Ervin were present. He had informed his fellow directors that his landlord wanted to raise his rent to $36,000 per month and that Mr Ervin had said "Well we can't expect our Managing Director to live in a hovel. I guess we have to do it." He took that as authority to pay himself a revised housing allowance of $36,000 per month.

28. Mr Stuart McCarthy's evidence is that there was a meeting in June 1993 at which the plaintiff mentioned that his rent was going up, but mentioned no figure. He said Mr Ervin had said words to the effect that they all had similar problems which they had to deal with. Nobody had authorised a rise in the plaintiff's rental allowance.

29. Mr Steven Ervin's statement which was admitted into evidence was to similar effect.

30. There were no minutes in the company's Minutes Book recording that an increase in the plaintiff's rental allowance had been authorised.

Resolution of the Two Issues

31. Both the issues of the alleged Chinese New Year Bonus and the alleged increase in rental allowance turn ultimately upon my assessments of the credibility of the witnesses I have heard and in particular the plaintiff and Mr McCarthy.

32. Mr Ervin's statement supports Mr McCarthy's account but his evidence was not subject to cross-examination.

33. In respect of both issues, I preferred the evidence of Mr McCarthy to that of the plaintiff. That assessment was not made solely upon the impression each made upon me in the witness box.

34. Even the plaintiff conceded that being a small business, its affairs were conducted loosely - often directors met informally in the coffee shop of hotels. It seems likely that their meetings were general discussions of how the business of the company was progressing.

35. Right from the start, however, the plaintiff appears to have treated his contractual relations with the company with a similar looseness. Although by his written contact he was entitled to a housing allowance of $25,000 per month, the plaintiff appears to have treated this from an early stage as a simple obligation by the defendant to provide him with housing (both to pay the rent of his flat and the management charges). Although for the first few months the rent of his flat and management fees may have approximated to his contractual housing allowance, by June 1991 when his rent was increased to $24,500, it no longer did so. The plaintiff nonetheless continued to cause his rent and management fees to be paid by the company. This can be seen by looking at the figures of his quartering expenses for the year ending 30^th June 1992 and 30^th June 1993. I think it is probable that when his rent went up again to $36,000 in June 1993, he simply proceeded on the same basis without any authority from his fellow directors. The likelihood of this being the case can be seen by looking at his quarterly expenses in the accounts for the year ended 30^th June 1994. According to his version he had been given authority to increase his housing allowance to $36,000 per month throughout this period yet what was expended on his quarters during that financial year was substantially more than that.

36. I think it probable that he approached the question of an extra month's pay at Chinese New Year on a similar loose basis. Since the other staff were receiving such a bonus, he decided that he should also be entitled to it.

37. I consider it likely that the plaintiff realised that he was not strictly entitled to this New Year bonus and increased rent under the terms of his agreement and that this is the explanation for his behaviour in relation to the accounts to which Mr Alan Cheung testified. It is clear that from an early stage the plaintiff was very anxious that his own remuneration should not appear separately in the audited accounts of the defendant but be merged in the figure of salaries payable to all other employees. Mr Cheung's evidence points to the extraordinary lengths he was prepared to go to achieve this, despite the fact that the company's legal obligation to disclose his remuneration separately had been explained to him. It appears that he was only prepared to agree to the unusual presentation of his remuneration in the accounts for 13^th October 1989 to 30^th June 1991 because of the immediacy of a tax deadline. Significantly that presentation removed his remuneration from a part of the accounts when it would be more likely to be observed by a fellow director co-signing the accounts. It is particularly significant in my view that for the year ended 30^th June 1994, the first year that a very significant increased rental for his flat had been paid, he was not prepared even to go along with the compromise presentation of the accounts that he had agreed with his accountant in the accounts for the previous three years but that he made renewed attempts to conceal his remuneration. I found the plaintiff's explanation for his attitude to the accounts, namely that he was concerned to see that they were presented properly, implausible in the light of the evidence of Mr Alan Cheung as to the attempts that had been made to explain the company's legal obligation to him.

38. On the evidence before me, I do not believe that the annual accounts of the company were ever put before a meeting of the Board of Directors and properly approved, nor do I believe that they were put before the shareholders in a general meeting of the company. In all the circumstances, I do not find the fact that the signature of a co-director appears in the accounts amounts to implied agreement by the Board of Directors to a variation in the terms of the plaintiff's employment either in respect of housing allowance or Chinese New Year bonus.

39. I find therefore that the plaintiff was not entitled to any greater housing allowance than $25,000 per month throughout the period of his employment with the defendant company and that he was not entitled to a Chinese New Year bonus.

40. The defendant bases its set-off and counterclaim on the excess paid to the plaintiff in respect of housing for the years ending 30^th June 1993, 30^th June 1994 and 1995 as well as a figure of $36,000 paid as rent by the plaintiff on 16^th June 1995 (see paragraphs 19 and 20 of the statement of Stuart McCarthy dated 15^th April 1997).

41. I accept the defendant's figure that the excess paid in respect of the plaintiff's accommodation for the year 1992/93 was $25,900, that in respect of the year 1993/94 it was $153,950 and that in respect of 1994/95 it was $156,120. In other words, a total of $335,970.

One month's wages in lieu of notice

42. The plaintiff claims one month's wages in lieu of notice under s.7 of the Employment Ordinance. He acknowledges he has already received a payment of $40,000 in respect of this claim but he also claims that in addition he is entitled to a sum representing one month's housing allowance. In view of my finding that that allowance was never increased beyond that stipulated in the employment control of 6^th July 1990 the plaintiff's claim would be limited to $25,000. I am satisfied that the plaintiff's contractual housing allowance would fall within the definition of "wages" in s.2 of the Employment Ordinance and that if dismissed without notice, the plaintiff would be entitled to one month's wages inclusive of his housing allowance. The plaintiff's evidence is however that his monthly rent fell due on the 17^th of each month, the same day of the month as his contract was terminated. There is no dispute that the rent of $36,000 for the month commencing 17^th June 1995 was paid by the defendant out of company funds by cheque dated 16^th June 1995. That payment therefore exceeded his contractual entitlement to a housing allowance by $11,000. Accordingly the plaintiff received more than his contractual entitlement in respect of wages in lieu of notice. The plaintiff's claim for an additional sum in respect of wages in lieu of notice therefore fails.

43. The defendant has counterclaimed for the $36,000 which was paid in respect of the plaintiff's rent for the month commencing 17^th June 1995. The $371,970 claimed in paragraph 17 of its defence and counterclaim represents $335,970 in respect of excess housing allowance and this $36,000. It follows from what I have said earlier that the plaintiff was entitled to $25,000 of that sum as part of his wages in lieu of notice. The defendant's counterclaim therefore succeeds to the extent of $11,000. However, I am not satisfied that the defendant has established that the rental cheque dated 16^th June 1995 was not included in the $456,120 which the plaintiff received in respect of housing allowance in the year ended 30^th June 1995. On that basis the sum of $335,970 which I have found to be excess housing allowance paid to the defendant already includes this $11,000.

Claim for a compensation in respect of one half of annual leave entitlement

44. The plaintiff's contract entitled him to two weeks paid leave in each calendar year in addition to normal public holidays in Hong Kong. Any leave not taken during the calendar year in which it was earned was forfeited (see Clause 6.01 of the Contract of Employment).

45. In his Statement of Claim the plaintiff sought compensation for 7 days annual leave which he claimed was due to him at the time of his dismissal. The defendant counterclaimed that the plaintiff had taken 4.5 days more leave in 1995 than his contractual entitlement.

46. At the trial it was agreed between the parties that the plaintiff's leave entitlement for 1995 was 7 days and that the wages in lieu of that period of leave would amount to $9,230.

47. By virtue of the term of his employment contract the plaintiff could not carry over the balance of any leave entitlement from one year to the next. This court therefore needs look no further than the leave the plaintiff took in 1995. He says that he left Hong Kong on holiday in late December 1994 and returned to work at mid-day on 10^th January 1995. I am satisfied that the term "normal public holidays" in the plaintiff's employment contract should be construed to accord with the definition of "public holiday" as defined in Interpretation and General Clauses Ordinance, Cap.1. By virtue of the definition, "Sundays" would be included as public holidays. Accordingly 1^st, 2^nd and 8^th January 1995 were public holidays. The plaintiff therefore took 6½ days as holidays in 1995.

48. His claim for compensation in respect of leave due to him succeeds to the extent of ½ day; which on the basis of the agreed weekly rate of $9,230, amounts to $659. (i.e. $9,230 ∫ 7 x 1/2)

49. I do not find that any breach of fiduciary duty by the plaintiff in failing to ensure that proper records of his leave were kept by the company provides a defence to his claim, though the plaintiff's conduct in this regard is relevant to the question of costs.

50. The defendant's counterclaim in respect of the plaintiff's leave for 1995 fails.

Excessive leave in 1993

51. The defendant's counterclaim that the plaintiff took 17 days more than his contractual entitlement to leave in 1993 was not supported by evidence and accordingly fails.

Summary of Findings

52. I shall summarise the effect of my findings on the claims of the parties as follows :

The plaintiff's claims :

1. The plaintiff's claim for unpaid wages (inclusive of bonuses) (which the plaintiff quantified at $582,096) succeeds only to the extent of $457,667 which is the amout admitted by the defendant in its defence.

2. The plaintiff's claim for additional compensation representing one month's wages in lieu of notice, fails.

3. The plaintiff's claim for compensation in respect of one half of his annual leave entitlement, namely 7 days, succeeds to the extent of ½ day, namely $659.

4. The plaintiff's claims for severance and long service payment fail.

The defendant's counterclaim

1. The defendant's counterclaim for unauthorised drawings by the plaintiff in respect of housing allowance (which the defendant quantified at $371,970) succeeds to the extent of $335,970.

2. The defendant's counterclaim in respect of an unauthorised drawing of $40,000 as a purported Chinese New Year bonus succeeds.

3. The defendant's counterclaim relating to annual leave taken by the plaintiff which it quantified at $27,935 fails.

53. After the plaintiff's successful claim ($457,667 + $659) is set off by the defendant's successful counterclaim ($335,970 + $40,000), a balance of $82,356 remain owing to the plaintiff and I give judgment for the plaintiff in that sum, plus interest thereon at 11.5 per cent per annum from 25^th June 1995 until today and thereafter at judgment rate until payment.

Cost

54. Subject to either party making application to the court within 14 days to be heard on the question of costs, the following order shall take effect :

1. That there be no order as to the plaintiff's costs of his claim.

2. The defendant's costs of its counterclaim be taxed and paid by the plaintiff.

55. The reasons for my making such a provisional order in respect of the plaintiff's costs are that he succeeded in his claim for unpaid wages only to the extent admitted by the defendant in its defence, namely $457,667. Furthermore if the plaintiff had ensured that the defendant company kept proper records of his leave, then his claim in that respect would almost certainly have been avoided.