CHOW FU HSIEN v. K VISION INTERNATIONAL INVESTMENT (HK) LTD

CACV 197/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 197 OF 2010

(ON APPEAL FROM HCA NO. 2884 OF 2004)

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BETWEEN

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JUDGMENT

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Hon Tang Ag CJHC:

Introduction

1.  This appeal arose out of a development known as "Celebrity Plaza" which is erected on a site in the south-eastern corner of Hui-Zhong-Li Residential Area, Chaoyang District in Beijing ("the Site").

2.  The Land Use Rights in relation to the Site was granted by the Beijing Municipal Real Estate Administration Bureau ("the Bureau") by a Grant Contract for Beijing Municipality State-owned Land Use Rights made by the Beijing Municipal Real Estate Administration Bureau dated 6 December 1994 ("the Grant"), to Beijing K Vision Building Construction Co., Ltd ("Beijing K Vision").

3.  Under Clause 11 of the Grant, Beijing K Vision was obliged to pay RMB103,000,000 to the Bureau, as to 40% thereof within 5 days, and the balance of 60% to be paid within 60 days, of the signing of the Grant.

4.  By a Deed made in 1998 ("the Deed"), the Defendant acknowledged and agreed that the Plaintiff should have 35% in the Defendant's interest in Beijing K Vision.  At the time of the Deed, the Defendant had a 80% interest in Beijing K Vision, the other 20% being held by Beijing Residential Development Construction Holdings Company ("Beijing Residential").

5.  Beijing Residential and the Defendant were parties to a Co-operative Development Agreement dated 23 April 1994 ("CDA"), and agreed to establish a cooperative enterprise, namely, Beijing K Vision, to build Celebrity Plaza with a minimum construction area of not less than 110,000 sq m.  Beijing K Vision would be owned as to 80% by the Defendant, and 20% by Beijing Residential, which would have a registered capital of US$12,000,000. 

6.  Under the CDA, it was the responsibility of the Defendant to pay, inter alia, the land use costs of RMB103,681,000 to the Bureau as well as the "advance cost (of the work) of the Project in the sum of RMB213,000,000".  Clause 5.

7.  Subsequent to the Deed, by an Equity Transfer Contract dated 29 August 1995, the Defendant sold 55% of Beijing K Vision to Sino Science International Trust Co. Ltd ("Sino Science").  The consideration for the sale was US$22,000,000 and RMB105,690,000 as well as 6,000 square meters "of the completed office building of the Celebrity Plaza".  The Defendant sold 25% to Far East Petroleum Company Limited ("Far East") for US$17,238,000 by an agreement dated 22 August 1996.  I should add that the Defendant had acquired Beijing Residential's 20% interest in Beijing K Vision.  We have no details about this transaction and the appeal has proceeded on the basis that this has no relevance to the account taking in relation to the sale of the 80%.

8.  It is not disputed in these proceedings that the Defendant had received US$22,000,000 and RMB105,690,000 from Sino Science in respect of the 55%, as well as US$17,238,000 from Far East.

9.  The Plaintiff has obtained summary judgment on 19 July 2007 against the Defendant in these proceedings which were commenced in 2004, when Master Lung ordered:

"1. A declaration that the Declaration of Trust signed by the Defendant in favour of the Plaintiff in about 1998 ('Declaration of Trust') is valid and subsisting and binding on the Defendant and that the Defendant holds 35% ('the Plaintiff’s Share') of the Defendant’s interest in the Celebrity Plaza project (including all income and profits attributable thereto) on trust for the Plaintiff.  The Defendant is obliged to account to the Plaintiff all the income and profits generated from the Plaintiff’s Share;

2. The Defendant do pay the Plaintiff the sum found due upon the taking of the said account with interest thereon at such rate and for such period as the Court shall determine at the taking of the account…"

An appeal against that judgment was dismissed by Saunders J on 20 February 2008.

10.  On 6 February 2009, Master de Souza gave leave to the Plaintiff to fix a date for an account to be taken of the profit and income derived from the disposal of the 55% and 25%.

Account taking before Master Lung

11.  The taking of account was heard before Master Lung.  Before Master Lung, the Plaintiff's case was supported by the expert evidence of Mr Tam Tak Wah.  Mr Tam's status as an expert was not in issue.  In essence, his evidence was that the profits to the Defendant in the sale of the 80% interest in Beijing K Vision, could be arrived at by comparing the proceeds of sale with the costs of the 80% interest to the Defendant. 

12.  In his report, he said:

"1.3   The only contribution by Hong Kong K Vision to Beijing K Vision was US$12,000,000 as capital and Rmb156,353,563.74 as capital reserve.

……

2.3.   It is worth to note that at this juncture, and for analysis purpose, Hong Kong K Vision has never paid anything to Beijing K Vision save and except the US$12,000,000 as capital and Rmb156,353,563.74 as capital reserve.  Moreover, after the 2 agreements for sale of the equity interest to Sino Science and Far East, Hong Kong K Vision has obtained the following :-

(a) US$22,000,000; and

(b) Rmb105,690,000; and

(c) The property rights of 6,000 sq. m. gross floor area of the completed office building (Note: reduced to 3,000 sq. m. after the Arbitration Award); and

(d) US$17,238,000.

......

7.1   Based on the above, the approximate profits generated from the Celebrity Plaza for Hong Kong K Vision shall be the summation of:

(a) approximately HK$142,289,710.94; and

(b) the property rights of 3,000 sq. m. of the completed office building of the Celebrity Plaza; …"

13.  Mr Tam also produced the following Table ("the Table"):

Description	Amount in US$	Amount In RMB	Unsettled Items
(1) Sale of 55% shares - Amount received in accordance to the First S & P Agreement - Property rights entitled to be received from Sino Science	22,000,000.00	105,690,000.00	3,000 sq.m.  of the completed office building of the Celebrity Plaza
(2) Sale of 25% shares - Amount received in accordance to the Second S & P Agreement - Amount not received and shall be applied to offset to the amount due to Far East	16,826,100.00   411,900.00
(3) Remaining 20% shares - Amount to be determined by the liquidation committee of Beijing K Vision			26.7% of the net asset value of Beijing K Vision (exclude the service apartment premises)
(4) Total costs (i) Contribution to Beijing K Vision (ii) Payable to Far East - public construction cost - interest up to 15-3-2005 - interest from 16-3-2005 until settlement (iii) Payable to Far East - land transfer cost and its penalty charge - 七通一平 cost - interest up to 15-3-2005 - interest from 16-3-2005 until settlement - offset of consideration (iv) Audit fee receivable from Sino Science (v) Arbitration fee receivable from Sino Science (vi) Counter claim arbitration fee payable to Far East	(12,000,000.00)                       (411,900.00)     (24,086.30)	(156,353,563.74)   (2,950,057.08) (1,231,902.93)     (449,455.00)   (4,290,130.00) (1,745,768.79)     3,409,090.00 50,000.00 296,999.73	To be determined To be determined
Total	26,802,013.70	(57,574,787.81)
Net profit denominated in HK$ (assumed exchange rate HK7.75 to US$1 , HK$1 to Rmb0.88)			HK$142,289,710.94

14.  The law is quite clear and can be taken from Halsbury's Laws of England (Vol 1) at para 82, under "The duty to keep accounts", where it says:

"It is the duty of an agent to keep accurate accounts of all his transactions and to be prepared at all times to produce them to his principal.  If he fails to keep proper accounts every presumption consistent with the facts will weigh in favour of the principal …" 

15.  Following five days of hearing on 17 November 2009, Master Lung made, inter alia, the following orders:

"(1) The defendant do pay the plaintiff HK$37,787,830.40 (35% of HK$34,324,481.25) together with interest at the prime rate of the HSBC [sic] from time to time, being the commercial rate, from 26 October 1995, the date of cause of action[1] to 19 July 2007, the date of Judgment and thereafter at the judgment rate until payment, subject to parties' agreement or argument as stated above;

(2) A declaration that the Plaintiff has a 35% beneficial interest in the Defendant's property rights in 3,000 square meter of the completed office building of Celebrity Plaza;

(3) A declaration that the Plaintiff has a 35% beneficial interest in the Defendant's 26.7% share in the net asset value of Beijing K. Vision; …"

16.  We are concerned with Order (1) under which Master Lung ordered the Defendant to pay the Plaintiff HK$37,787,830.40, which is 35% of HK$107,965,229.69, the net amount which the Defendant had received from the sale of the 80% after providing for tax. 

Burden of Proof

17.  It is not disputed, and, rightly so, that the burden of proof was on the Defendant to show that the Defendant had incurred costs in addition to the sums of US$12,000,000 and RMB156,353,563: See (4)(i) of the Table.  The parties have ignored the other costs under (4)(ii) to (vi).

18.  It was the Defendant's case before the Master that in addition to those two sums, the sum of RMB105,690,000 received from Sino Science had been used as follows:

(1)   RMB20,000,000 to Beijing Residential pursuant to Clause 5 of the CDA;

(2)   RMB62,201,000 to the Bureau in satisfaction of the balance of payment of the land under the Grant;

(3)   RMB23,489,000 to Beijing K Vision for developing the Celebrity Plaza ("the three payments").

19.  As Recorder Yu has correctly pointed out the court had to proceed the basis that the burden rests firmly on the Defendant to satisfy the Court that he is entitled to make deductions for the 3 payments: para 47.  Master Lung was not satisfied that the Defendant had discharged the burden of proof and disallowed any deduction. 

20.  The Table was reproduced in para 23 of Recorder Yu's judgment, who then said:

"25.      The Order of 19 July 2007 required the defendant to account to the plaintiff 'all the income and profits' generated from the plaintiff’s share.  Leading counsel for the plaintiff accepted both before the Master and before me that the defendant is entitled to deduct any cost or expenditure, including capital contribution, in the project."

21.  Recorder Yu referred to Ting Kwok Keung v Tam Dick Yuen & Ors (2002) 5 HKCFAR 336 and said he should ask himself,

"… whether, even though I do not enjoy the advantages enjoyed by the Master, I am nevertheless satisfied that the conclusions of the Master on the facts are plainly wrong."  Para 50

he allowed the Defendant's appeal to that extent.

The Appeal

23.  Both the Plaintiff and the Defendant have appealed to us. 

24.  In essence, Mr Coleman SC for the Defendant contended that the learned Recorder ought to have accepted the defence in respect of the 1^st and 3^rd payments as well and adjusted the amount payable by the Defendant to the Plaintiff accordingly: see para (2) of the Order sought in the Notice of Appeal.  On the other hand Miss Lisa Wong SC for the Plaintiff contended that para (1) of the order of Master Lung should be restored.  She also contended that Master Lung's order made on 2 March 2010 that the Plaintiff be paid interest as from the date of the writ should be varied so that interest should be payable as from 26 October 1995: see para (5) Respondent's Notice.

25.  The Defendant was taken to have contributed US$12,000,000 and RMB156,353,563.74.

26.  Of these two sums, the first, namely, US$12,000,000 is relatively straightforward.  US$12,000,000 was the registered capital of Beijing K Vision, although it is not entirely clear why the Defendant was supposed to have paid US$12,000,000 when the CDA provided that the registered capital should be provided pro rata by the Defendant and Beijing Residential. 

27.  The other figure RMB156,353,563.74 requires greater attention.

28.  Sino Science had commissioned two audit reports, AR 352 and AR 360, dated 2 September 1995 and 7 September 1995 respectively from China Development Certified Public Accountants Ltd as part of the due diligence exercise in respect of its acquisition of the 55% from the Defendant pursuant to the Equity Transfer Contract. 

29.  In AR 352, China Development Certified Public Accountants Ltd stated:

"We accept your appointment to audit the owner's equity (paid-up capital) and the relevant assets and liabilities of Beijing K Vision Building Construction Co. Ltd. as of the end of August 1995 in connection with your acceptance of the equity transfer thereby."

30.  The figure of RMB156,353,563.74 appeared for the first time in the Balance Sheet (as of 31 August 1995) produced in AR 360 ("the AR 360 balance sheet") as Assets Reserve (referred to by the parties as capital reserve) ("the capital reserve") under the heading of "Owner's Equity".  Also the Total Owner's Equity was there stated to be RMB259,350,763.75.  The AR 360 balance sheet is produced below:

"Balance Sheet
	31 August 1995	Denomination: Yuan

Assets	Figures at the Beginning of the Year	Figures at the End of the Year
Current Assets
Cash		11,254.10
Bank Deposits		453,858.84
Prepayments		173,463,089.00
Inventories		33,496.75
Total current assets		173,961,698.69
Fixed Assets
Original prices of fixed assets		1,003,830.78
Less: accumulated depreciation		329,086.70
Net value of Fixed Assets		674,744.08
Disposal of Fixed Assets		29,041.86
Construction in progress
Development Costs		61,188,286.24
Other Assets
Start-up expenses		8,759,214.81
Other deferred outgoings		15,074,709.11
Total other assets		23,833,923.92
Total assets		259,087,694.79
Liabilities and Owner's Equity
Current Liabilities
Other Accounts Payable		336,931.04
Total current liabilities		336,931.04
Total liabilities		336,931.04
Owner's Equity
Paid-up Capital		102,997,200.01
Including: Investments made by Chinese Party
Investment made by Foreign Party		102,997,200.01
Assets Reserve		156,353,563.74
Total Owner's Equity		259,350,763.75
Liabilities and Total Owner's Equity		259,687,694.79

31.  The figure of RMB156,353,563.74 did not appear in AR 352, which was dated 5 days earlier than AR 360.  AR 352 stated:

"After our audit, we acknowledge that the total value of owner's equity in [Beijing K Vision] as of 31 August 1995 was [RMB]69,518,540.44 …"

32.  AR 352 also included a balance sheet as of 31 August 1995 ("AR 352 balance sheet").  The first part of the AR 352 balance sheet up to "Total Assets" is identical to the AR 360 balance sheet.  The latter part of the AR 352 balance sheet dealing with Liabilities and Owner's Equity is different and is produced below.

"Balance Sheet
	31 August 1995	Denomination: Yuan

Liabilities and Owner's Equity
Current Liabilities
Accounts Payable		189,832,223.31
Other Accounts Payable		336,931.04
Total current liabilities		190,169,154.35
Total liabilities		190,169,154.35
Owner's Equity
Paid-up Capital		70,265,655.52
Assets Reserve		-747,115.08
Total Owner's Equity		69,518,540.44
Liabilities and Total Owner's Equity		259,687,694.79

33.  AR 360 provided the following explanation ("the explanation"):

"The Audit Report being referenced as Zhong Yu (1995) Shen Zi No. 352 issued by us on 2 September 1995 acknowledged that as of 31 August 1995, the total assets of Beijing K Vision Building Construction Co. Ltd amounted to 259,687,694.79 Yuan, the total liabilities thereof amounted to 190,169,154.35 Yuan, and the total owner's equity amounted to 69,518,540.44, including the paid-up capital which was 70,265,655.52 Yuan, the capital reserve which was ‑747,115.08 Yuan (the paid-up capital being US$8,186,512.51, exchange rate being 8.5831).  Pursuant to Article 4 of the Equity Transfer Contract entered into between K Vision International Investment (H.K.) Limited and Sino Science International Trust Investment Co. Ltd., the resolutions of the Board of Directors of K Vision International Investment (H.K.) Limited dated 31August 1995 and the decision set forth in the Letter of Discussion and Determination regarding the Payments of Capital Injection, Beijing K Vision Building Construction Co. Ltd. shall convert the amount in the sum of RMB189,832,223.31 Yuan payable to K Vision International Investment (H.K.) Limited into a part of the registered capital and capital reserve of Beijing K Vision Building Construction Co. Ltd.

After (our) audit, we acknowledge that after the adjustment to the relevant accounting items and data by Beijing K Vision Building Construction Co. Ltd., as of 31 August 1995, the total assets amounted to 259,687,694.79 Yuan, the total liabilities amounted to 336,931.04 Yuan, the total owner's equity amounted to 259,350,763.75 Yuan, including: the paid-up capital which was 102,997,200.01 Yuan (US$12,000,000, exchange rate being 1: 8.5831), and the capital reserve which was 156,353,563.74 Yuan."

34.  Unfortunately, apart from the Equity Transfer Contract, none of the documents referred to in the explanation is available, but it is important to note the following statement in the explanation:

"Pursuant to Article 4 of the Equity Transfer Contract (and the unavailable documents) … [Beijing K Vision] shall convert the amount in the sum of RMB189,832,223.31 Yuan (see AR 352) payable to [the Defendant] into a part of the registered capital and capital reserve of [Beijing K Vision]."

35.  RMB189,832,223.31 can be found in the AR 352 balance sheet as "Accounts Payable".

36.  Article 4 of the Equity Transfer Contract contained the Defendant's representations and warranties, which included a warranty that Beijing K Vision had paid the land costs.

37.  There is no dispute that the 40% of the land costs had been paid as of 31 August 1995 and included in both AR 352 and AR 360 balance sheets as part of the Development Cost of RMB61,188,286.24.

38.  An important issue is whether the balance of 60%, namely, RMB62,201,000, (the unpaid land costs) was dealt with in either the AR 352 or more importantly the AR 360 balance sheet.  Much time was taken in the proceedings over the nature or composition of the capital reserve, and in particular, whether the capital reserve had included or covered the unpaid land costs. 

39.  Mr Tam's evidence was that it would have been included in or covered by the capital reserve.  As I understand his evidence, he arrived at that conclusion by deduction.  He said in cross-examination that the unpaid land costs were accounts payable as of 31 August 1995 and had been included in the RMB173,463,089 described as expense prepaid to Beijing Residential in the AR 352 balance sheet, and in the capital reserve in the AR 360 balance sheet.  He said:

"… the accounts payable was turned into capital reserve and implying that Hong Kong K Vision (the Defendant) would be bearing all the payments of all these costs to different parties."  Transcript page 14D.

40.  The following transcript of Mr Tam cross-examination should also be noted:

"Q. But still, the figure of $173 million is listed as being an expense prepaid to Beijing Residential, and Beijing Residential was not responsible for paying the land use fees.

A. That's right.

Q. So how can you assume that the $62 million is included in the $173 million?

A. Because the expenses on use of land is the basic and major cost of this project and that's to be borne by Beijing K Vision, the cost is to be borne by Beijing K Vision.  If the relevant costs are not listed in this record, in the litigation process, Hong Kong K Vision should raise that because that would affect the outcome of the arbitration directly.  That's why, basing on that, I deduce that the cost was already included in the 259 million-odd dollars, that would be the share capital plus the capital reserve. 

Q. Have you finished?  Still it's a rather important assumption based on rather thin ground, isn't it?

INTERPRETER: I'm sorry, 'Based on rather'?

Q. It's a very important assumption based on rather thin ground, would you not agree?

A. I would agree that it is an important assumption, but I would not agree that it is without basis."

41.  Mr Tam expanded on AR 352 and 360 in re-examination by Miss Lisa Wong.  I will quote from his evidence at length because the learned Recorder said when he overturned the Master's decision in respect of the 2^nd payment:

"56. … that the defendant’s evidence was unsatisfactory.  So was his discovery.  But even taking that into account, it remains difficult to say that there was any evidence that this payment had been taken into account in the amounts stated for capital and capital reserve in the balance sheets dated 31 August 1995. …"  para 56

42.  The learned Recorder had earlier said:

"36. The Court is not bound to accept an assertion from an expert merely because there was no evidence adduced by the other side to rebut it (see Full Wisdom Holdings Ltd v Traffic Stream Infrastructure Co.  [2004] 3 HKC 1, 11I).  The Court must consider the correctness of such an assertion having regard to the reasoning proffered for the opinion, and whether it is inconsistent with other evidence and commonsense, although it must always do so with care and must not commit the error of 'playing expert' itself.  In the present case, what Mr Tam was in effect saying was that under the accounting practice in the Mainland, items which are in fact liability (account payable) would be treated as current asset (prepayments).  At the same time, he was saying that there was no difference in the accounting treatment between Hong Kong and the Mainland.  This aspect of the evidence was not covered in his report, and no other evidence has been adduced by the plaintiff to explain or justify the rationale behind the so-called practice.  I cannot accept that it is proper accounting practice, whether in Hong Kong or elsewhere where the practice is no different from ours, to treat an item of liability as an asset in a balance sheet.  In my view, the learned Master was in error in accepting the assertion as to Mainland accounting practice in support of Mr Tam’s conclusion."

43.  This is what Mr Tam said in re-examination (transcript 17M – 20R):

"Q. Now, first of all, can I ascertain from you that a balance sheet, to be fair and accurate, of course should reflect payments actually made and receipts actually received?

A. Yes.

Q. Now, what about liabilities?  What about liabilities that already existed as at 31 August 1995; should the balance sheet also include such liabilities?

A. Yes, should be.

Q. That is regardless of the fact whether those liabilities had been satisfied by 31 August 1995, is that correct?

A. Yes.

Q. Because the purpose of such a balance sheet is to reflect the accurate financial position of Beijing K Vision as at 31 August 1995.

A. Yes.

Q. Now, if a liability has already been incurred, a substantial liability has already been incurred by 31 August 1995, but has not been paid, now, if that item is left out of the balance sheet, then would the balance sheet still be accurate?

A. Will affect, yes.

Q. Now, on that note, can I ask you to turn to bundle B, bundle B page 247-45. 247-45. Now, Mr Tam, this is a copy of the joint venture agreement between Beijing Residential and Hong Kong K Vision for the development and construction of Celebrity Plaza.

A. Yes.

Q. Now, if you turn over the page to page 46, under clause 5.

A. Yes.

Q. You would see that this clause provides for certain payments to be made by Hong Kong K Vision to Beijing Residential for certain costs of the development.

A. Yes.

Q. Now, and then if you again turn over the page to page 47, you would see a payment schedule at the top of the page. Now, looking at the dates by which the various instalments were payable, would you regard these as liabilities already incurred before the date of this balance sheet?

A. Yes.

Q. And if the balance sheet -- if any of these instalments had not been paid and if the balance sheet should then leave out such unpaid items, would the balance sheet still be correct?

A. The accuracy would be affected.

Q. The accuracy would be affected because it would then understate the company's accrued liabilities.

A. Yes, agree.

Q. And then if we then turn to another agreement that you've been shown, at page 247-50. Now, this is an agreement, this is an agreement between the Beijing Land Management Bureau and Beijing K Vision, the joint venture company.

A. Yes.

Q. And if you turn to page 247-52, under chapter 4, chapter 4 contains the provisions for the payment of land use cost.

A. Yes.

Q. Now, we are particularly interested in the schedule for payment. Now, in clause 11, clause 11 provides for the payment by two instalments, first of all, 40 per cent within five days of the agreement.

A. Yes.

Q. And then the balance of -- the balance 60 per cent within 60 days.

A. Yes.

Q. From the date of this agreement.

A. Yes.

Q. Now, if we turn to page 247-56, now, it can be seen that the agreement [was] signed on 6 December 1994.

A. Yes.

Q. So looking at this date, the date for payment of the second instalment, that is the balance 60 per cent, would be 6 February 1995, would that be correct?

A. Yes.

Q. So the question I would ask you is that if, notwithstanding the provision in clause 11 (of the Grant), the balance 60 per cent had not been paid by Beijing K Vision as at 31 August 1995, should that liability be reflected in Beijing K Vision's balance sheet?

A. Yes, it should be.

Q. Now, we know that the balance is 62-odd million renminbi.

A. Yes.

Q. If the balance sheet had left out this sum of 62 million-odd renminbi, would that balance sheet still be a correct statement of account?

A. No, not correct any more.

Q. It's not correct because it would understate Beijing K Vision's liabilities by 62-odd million renminbi, is that right?

A. Yes.

Q. Now, Mr Tam, questions were put to you regarding the accounting treatment of liabilities already accrued as at 31 August 1995 but had not been paid on that date.

A. Yes.

Q. Now, the question was put that why should such liabilities be classified as ' 預付賬款'.

A. Yes.

Q. Can you explain that, perhaps with reference to another balance sheet attached to the later audit report at page 1905, 1905.  (AR 360)

A. Yes.

Q. First of all, Mr Tam, can you tell us again why these two audited reports were commissioned by Sino Science?

A. Because Sino Science would like to understand, as of 31 August, whether the cost of the company had been listed in the assets, as assets of the company, and that the account payables are to be borne by the selling party, and the company itself didn't have any external borrowings.

Q. Now, if I may ask you to have the two balance sheets side by side.

A. Yes.

Q. Now, Mr Tam …

MS WONG:    Master, those two pages, the 1899 (AR 352) and 1905 (AR 360).

COURT:  Thank you.

Q. Now, Mr Tam, can you look at the two balance sheets.  As far as I can see, the first part up to the grand total figure of 259,687,694.79, now, the two balance sheets up to that point are the same, are exactly the same.

A. Yes.

Q. And it is correct for me to understand that this grand total figure to be the total cost of construction paid and incurred up to 31 August 1995?

A. Yes.

Q. Now, those costs were incurred – costs incurred and already paid as well as costs incurred but not yet paid.

A. Yes.

Q. And then, now, can you explain to us what is different between the two balance sheets is in the lower half of the page – of the two pages.  Now, looking at 1905 (AR No 360), can you explain the accounting treatment accorded to this total cost by the parties to the sale and purchase, with reference to what appears at page 1905?

A. In the first balance sheet (AR No 352), the item "Accounts payable but not yet paid" involving 189 million-odd dollars, would imply that that's the amount the company would have to pay to other parties.  But in the second balance sheet (AR No 360), there are some adjustments made.  This obligation to pay by Hong Kong K Vision is …

MS WONG:    No, 'By Beijing K Vision'.

INTERPRETER: I'm sorry.  Sorry, may I ask the witness to repeat?

A. Originally, this obligation to pay was on Beijing K Vision and now is removed from the accounts payable of the company and listed as capital reserve in the account.  That means it's become the obligation to pay by Hong Kong K Vision.

Q. And that is by converting the liability to pay by Beijing K Vision into a capital reserve contributed by Hong Kong K Vision.

A. Yes.

Q. Now, is the capital reserve refundable or not refundable?

A. Not refundable.

Q. So in other words, if we look at the capital reserve figure, does it mean that that is the figure which Hong Kong K Vision has to inject into Beijing K Vision to discharge all pre-31 August 1995 liabilities of Beijing K Vision?

A. Yes, you may say so.

Q. The payment, once made, is not refundable.

A. Yes, that's right.

Q. And if any part of this amount should happen to not have been paid before 31 August 1995, it would have to be paid by Hong Kong K Vision after that date.

A. Yes.

Q. To make up the capital reserve accrued before 31 August 1995.

A. Yes.

Q. And Mr Tam, now, in addition to the capital reserve, Hong Kong K Vision also injected registered capital into Beijing K Vision.

A. Yes.

Q. In fact, that's the figure which we see against '外方投資' on page 1905 (AR No 360).

A. Yes.

Q. This is the renminbi equivalent converted from US$12 million, is that correct?

A. Yes.

Q. So those two figures would then make up a total contribution of 259 million-odd renminbi.

A. Yes."

44.  With respect, it is a fact that each of AR 352 and AR 360 produced, what purported to be, a balance sheet of Beijing K Vision as of 31 August 1995.  There is no evidence that Sino Science was dissatisfied with AR  360.  The relevant question is whether the unpaid land price was reflected in either of the balance sheet. Mr Tam's evidence is that it must have been, otherwise they would not have been balance sheets properly so called.  With respect, that makes perfect sense.  I can see no reason not to accept Mr Tam's evidence.  More importantly, I cannot agree that the learned Master was plainly wrong in accepting Mr Tam's evidence.

45.  There was no expert evidence from the Defence.  Moreover, I note that although under the Equity Transfer Contract, the Defendant had warranted that the entire land price had been paid (Article 4(10)), it is accepted that 60% of it was unpaid as of 31 August 1995.  Indeed, under Clause 11 of the Grant the 60% should have been paid within 60 days of 6 December 1994.

46.  Nor was there any evidence from the Defendant to show how or when the capital reserve was paid.  For example, whether the entire capital reserve had been paid prior to 31 August 1995.  Nor the purpose of such payment. 

47.  The learned Recorder said in his judgment at para 14 that:

"14.   The taking of the account was severely handicapped by the absence of primary documents and, in particular, the accounting records of the defendant."

48.  According to Mr Qu Hong, a director and a major (97%) shareholder of the Defendant, the Defendant's documents were kept by a Miss Lam, who was the financial controller as well as a minority shareholder of the Defendant, and that disputes had arisen between him and Miss Lam, resulting in litigation.  Recorder Yu said:

"16.   Mr Qu obtained an Order in HCA2710/2004 for inspection and making copies of documents kept in the defendant’s registered office.  He said however that not all the accounting documents of the defendant were kept in that office.  He said he had requested Miss Lam to make an affirmation on behalf of the defendant to comply with an Order for disclosure dated 12 November 2007.

17.   Miss Wong SC, for the plaintiff, pointed out that Miss Lam’s solicitors intimated in correspondence that they were waiting to hear from the defendant’s solicitors as to the mechanism for the filing of an affirmation by Miss Lam, but that this was not followed up.

18.   The consequence of all this is that the Court does not have any primary document to assist it in the taking of the accounts.  What it does have consist principally of :

(a)  two balance sheets of Beijing K Vision dated 31 August 1995 which were the subject of two audit reports commissioned by Sino Science, at the time when Sino Science was conducting due diligence into Beijing K Vision;

(b)  the report by the auditor commissioned by the Arbitral Tribunal; and

(c)  the Arbitral Award.   

The plaintiff’s accountant, Mr Tam, derived his information from these documents."

49.  I respectfully agree with the learned Recorder that:

"42.   … the starting point is that the defendant is under a duty to account as trustee, and it is his duty to keep proper accounts.  Miss Wong SC so submitted, relying on Lewin on Trusts, 18^th ed., (2008) p.800 §23-22. …

……

44.   Insofar as the defendant contends that the RMB105,690,000 it received had been used for the discharge of liabilities which had not been reflected in the accounts, the burden is plainly on the defendant so to prove."

50.  Given that the Defendant had not followed up on Miss Lam's offer, I do not think the Defendant has a reasonable excuse for the absence of the primary documents.  Indeed, it is difficult to understand why the Defendant should be unable to prove whether and if so, when, the capital reserve was paid.  One would have thought evidence of payment could have been obtained from, for example, a bank.

51.  Mr Coleman's main submission was that the capital reserve of RMB156,353,563.74 and the capital of US$12,000,000 (equivalent to RMB102,997,200), totalling RMB259,350,763.74, were not sufficient to cover the liability of the Defendant under the CDA, which required the Defendant to pay RMB103,681,000 as the land price as well as the building cost of RMB213,000,000 (See Clause 5), totalling RMB316,681,000.  The short fall is RMB57,330,236.6.

52.  There is a short answer to Mr Coleman's submission.  This point was not taken before the learned Master.  Nor apparently before the learned Recorder.  Nor had Mr Tam been cross-examined on it.   In such circumstances, I do not believe we can place any weight on it.

53.  Nor do I believe the point to be valid.  The facts are too confusing for one to draw any firm conclusion.  There was no evidence that the cost of development was indeed RMB213,000,000. 

54.  In the Equity Transfer Contract (Article 4), the Defendant had also warranted that the development had completed "seven connections and one leveling", meaning that the development had been completed, and paid for.  But the warranty that the development had completed "seven connection and one leveling" was unlikely to be true, since the CDA was only entered into in April 1994 and the Grant was made in December 2004.  I also note the Grant provided that:

"22.   The Grantee shall break the ground and commence construction … within 60 days from the signing date of [the Grant], and shall complete the amount of construction no less than 30,000 square meters of the floor area prior to 1 June 1996.

23.   The Grantee shall complete construction before 31 December 1998 …"

55.  Nor is it likely that Sino Science was not aware that the development had not been completed.  One must wonder why the parties seemed content to enter into an agreement which contained warranties which were untrue to the knowledge of both.

56.  In relation to the second payment the learned Recorder also said:

"55.   As for the second payment, it was on its face a payment to Beijing Property Management Bureau for the balance of the land transfer fee.  That is what Mr Qu’s [sic] said. He claimed that this payment of RMB23,489,000 was capital injection to Beijing K Vision in addition to the sums of US$12,000,000 and RMB156,353,563.74."

57.  In para 55, the learned Recorder was dealing with the second payment of RMB62,201,000, which he mistakenly referred to as a payment of RMB23,489,000.  But more significantly he thought Mr Qu had said that the second payment:

"55.   … was capital injection to Beijing K Vision in addition to the sums of US$12,000,000 and RMB156,353,563.74."

58.  This is what Mr Qu said:

"11(3)  … I note that in paragraph 2.3 of [Mr. Tam's affirmation], [Mr. Tam] alleged that the Defendant has never paid anything to Beijing K Vision save and except the sums of US$12,000,000 as capital and RMB156,353,563.74 as capital reserve.  The payment of the said sum of RMB23,489,000 is capital injection to Beijing K Vision in addition to the said sums of US$12,000,000 and RMB156,353,563.74."  (Para 11 of the 6^th Affirmation of Mr Qu Hong)

59.  But Mr Qu was referring to the 3^rd payment on which the Recorder has agreed with the Master.  Mr Qu had not said in his affirmation that the second payment RMB62,201,000 was a capital injection in addition to the US$12,000,000 or RMB156,353,563.74. 

60.  The learned Recorder, with respect, has mistaken the evidence of Mr Qu.

61.  The learned Master was criticized for relying on Mr Qu's evidence that he was happy with the result of certain arbitral proceedings in the Mainland.  I will deal with this briefly because little turned on it.

62.  It may be recalled from Mr Tam's report quoted in para 12 above, that the Defendant's entitlement to 6,000 sq m of the completed office building under the Equity Transfer Contract was reduced to 3,000 sq m by an Arbitration Award.

63.  There were arbitral proceedings between the Defendant, and Sino Science and Far East in the Mainland.  For the present purpose, I need only mention that Sino Science's case in the arbitration was that the RMB105,690,000 paid under the Equity Transfer Contract was not part of the consideration for the 55% interest, it was a loan to Beijing K Vision. That was rejected by the Arbitral Tribunal.  However, on the basis that the costs to the Defendant of the 55% was only the capital of US$12,000,000 and the capital reserve, the Arbitral Tribunal reduced the Defendant's entitlement from 6,000 sq m of the completed office building to 3,000 sq m.  

64.  In his evidence before the Master, Mr Qu had said that he was happy with the award.  That was an equivocal statement.  It could be that he was happy because Sino Science's defence was rejected.  However, Mr Coleman has confirmed that, it was not part of the Defendant's case in the arbitration that the RMB105,690,000, or any part of it, constituted capital contributed by the Defendant in addition to the US$12,000,000 and the capital reserve.  Nor apparently was that point taken or reflected in the audited report commissioned by the Arbitral Tribunal at the Defendant's request.

65.  We have not been supplied with a transcript of Mr Qu's evidence.  We have his 5^th and 6^th affirmations. In these affirmations, the only explicit claim by Mr Qu that there was additional capital related to the 3^rd payment: See para 11(3) of his 6^th Affirmation quoted above.  The Master did not accept Mr Qu's evidence in relation to the 1^st and 3^rd payments, and the Recorder has rightly not interfered with the Master's decision.

66.  For the above reasons, I would allow the Plaintiff's appeal in relation to the 2^nd payment and restore para (1) of the order of the Master dated 17 November 2009 as varied by the order dated 2 March 2010.  The Defendant's appeal in relation to the 1^st and 3^rd payments should be dismissed.  I also make an order nisi that the Plaintiff should have the costs of the appeal to be taxed unless agreed.  I make no order in relation to the Defendant's appeal on interest since little time was spent on it.

Interest

67.  Miss Lisa Wong SC submitted that the Plaintiff should be given interest from the dates when the considerations for the 80% were received by the Defendant.  The Master and the learned Recorder had ordered interest to run from the date of the writ.

68.  According to Halsbury's Laws of England (Vol 1), para 88:

"… Merely retaining money which the agent ought to pay over, but which he has never been required to pay, is not sufficient to entitle the principal to interest, in the absence of fraud: Turner v Burkinshaw (1867) 2 Ch App 488."

69.  If the Defendant had earned interest on moneys which it ought to have paid over, it maybe that it should be required to account for such interest in the taking of the account.  We are not concerned with that.

70.  I can see no reason to disturb the decisions on interest. 

Hon Fok JA:

71.  I have had the advantage of reading Tang Ag CJHC's judgment in draft and, with respect, agree fully with it and the Orders he proposes.

Hon Chu J:

72.  I agree with the reasons and the proposed order of the acting Chief Judge.