MODERN GALA (MODELS) LTD v. TSE TSANG YAO AND OTHERS

HCA 1320/2015 and
HCA 1777/2015

(Consolidated)

[2024] HKCFI 514

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1320 OF 2015 AND 1777 OF 2015

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(Consolidated by the Order of Master S Kwang in Chambers dated 2 December 2016)

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J U D G M E N T

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A. INTRODUCTION

1.  This is the trial of Modern Gala (Models)  Limited’s (“P” or “MGML”)  claim against:

(1)  Tse Tsang Yao, one of P’s two beneficial shareholders (“D1” or “Tse Senior”), and P’s former sole director and General Manager;

(2)  Ng Siu Fun, D1’s wife (“D2” or “Madam Ng”); and

(3)  Tse Fung Chiu, D1’s and D2’s son (“D3” or “Tse Junior”), one of P’s two legal shareholders, holding the share on trust for Tse Senior, and P’s former assistant General Manager.

2.  D1 also pursues a counterclaim against P.

B.  RELEVANT FACTUAL BACKGROUND

3.  P is and was at all material times a company:

(1)  incorporated in Hong Kong on 25 August 2009;

(2)  in the business of selling, inter alia, model trains that were manufactured in a factory in Shenzhen (“Factory”); and

(3)  owned by two shareholders, Kwok Cheung Hing (“Kwok Senior”)  and Tse Senior, who each beneficially owns one of the two issued shares.  Their shares are held on trust by their respective sons, with Kwok Junior holding Kwok Senior’s share, and Tse Junior holding Tse Senior’s share.

4.  Tse Senior was the sole director of P since its incorporation until 27 March 2014, and one of the two directors of P together with Kwok Senior from 27 March 2014 until Tse Senior resigned from his directorship on 26 November 2014.  Kwok Senior has been the sole director since 26 November 2014.

5.  Tse Senior was employed by way of an oral agreement as P’s General Manager.  Tse Senior held that position from 25 August 2009 until early May 2015, when he was dismissed from that position.

6.  Tse Junior was employed by way of an oral agreement as P’s Assistant General Manager from 25 August 2009 until 29 May 2015, when he was dismissed from that position.

7.  Madam Ng was never an employee or a director of P, and was never involved in P’s operations.

8.  Kwok Senior became a director of P on 27 March 2014 and became P’s sole director on 26 November 2014, and remains in that position.

9.  Kwok Junior played no role in P save for the minimum role required of a legal shareholder.

10.  It is Ds’ case that P was a “Quasi-Partnership” between the Kwok Family and the Tse Family, while P denies this.

C.  MODERN GALA INTERNATIONAL LIMITED (“MGINT”)

11.  There is no dispute that MGINT was the “precursor” to P (see: §4(f)  of the Amended Defence and Counterclaim).

12.  MGINT was set up by Kwok Senior in November 2003 and on P’s case he was MGINT’s sole beneficial shareholder in light of a proposition by Tse Senior to enter into business with Kwok Senior.  Tse Senior indicated that he had a factory in Shenzhen for making model trains (ie the Factory).  Tse Senior was employed as MGINT’s General Manager in light of his experience in model trains and his factory became MGINT’s supplier.

13.  It is P’s case that Kwok Senior was the sole beneficial owner of MGINT and it was only on the creation of P that Tse Senior was “brought in” as a beneficial owner.  On P’s case, the assets of MGINT were contributed by Kwok Senior to P while Tse Senior would need to match this with his own capital contribution.

14.  By contrast, it is Ds’ case that Tse Senior was an equal partner in MGINT and the Quasi-Partnership began with MGINT.

D.  THE PLAINTIFF’S CLAIMS

15.  P claims that D1, in breach of his duties as director and/or employee of P, caused loss to P by:

(1)  Causing P to purchase insurance policies (“Policies”)  for himself, for D2 and for D3 to which they were not entitled.

(2)  Causing P to issue cheques to himself between 27 November 2009 and 28 November 2012 (“Tse Senior Cheques”), to D2 on respectively 28 January 2014 and 16 July 2014 (“Madam Ng Cheques”)  and to D3 on respectively 26 February 2013 and 7 March 2013 (“Tse Junior Cheques”)  to which they were not entitled.

(3)  Causing P to enter into problematic transactions with third parties, resulting in unrecoverable receivables (“Problematic Transactions”).

16.  P seeks the return of the sums paid under the Tse Senior Cheques and a declaration that the sums received by him (HK$4,650,000)  were and are held by him on trust for P.  P further claims that D1 has been unjustly enriched by the value of the Tse Senior Cheques and seeks repayment of their value.

17.  P seeks orders that D1 also compensates P in equity or damages for the sums paid under the Madam Ng Cheques (HK$750,000)  and the Tse Junior Cheques (HK$2,300,000)  also issued in breach of D1’s duties to P.

18.  P further claims against D1 the loss on the Policies being the difference between the sum paid by P in premium and the sum recovered as the Policies’ surrender value (at a loss of HK$1,504,427.67).

19.  P seeks damages against D1 for the sums payable to P but unrecoverable under the Problematic Transactions in the sum of HK$1,010,901.09 as a result of his breach of his duty to P to exercise reasonable skill and care.

20.  Finally, P further seeks an order that D1 do return P’s property (as specified below), which P claims was taken by D1.

21.  As against D2, P claims that D2 has been unjustly enriched by the value of the Madam Ng Cheques and seeks repayment of their value.

22.  As against D3, P claims for the return of the sums paid under the Tse Junior Cheques and a declaration that the sums received by D3 were and are held by him on trust for P.

23.  P further claims against D3 for breach of his employment obligations and in damages in respect of the sums paid under the Tse Junior Cheques and the sum of HK$607,819.31 in respect of loss on the Policies that were in Tse Junior’s name.

E.  LIFE INSURANCE POLICIES

24.  At a meeting between Kwok Senior and Tse Senior at Fortress Hill in July 2014, Kwok Senior suggested P’s operational costs be reduced by reducing the amount P spent on employee insurance. Tse Senior stated that the amount spent on employee insurance could not be reduced as it constituted employee benefits.  Kwok Senior asked to see the insurance policies in respect of which P was paying the premium.

25.  In October 2014, Tse Senior finally provided Kwok Senior with seven life insurance policies issued by Manulife.  By that time, the beneficiary of these insurance policies had been changed from Madam Ng to Kwok Senior.  Kwok Senior then called the insurance agent to inquire about the change of beneficiary, and learned that Tse Senior had changed the beneficiary of the Policies to Kwok Senior, in around September 2014 ie between Kwok Senior’s request for the Policies and the same being provided, accounting for the delay in the Policies being provided.

26.  Kwok Senior was unaware that P had been paying to purchase investment-linked products for Tse Senior and for his family and this was neither permitted nor justified.

27.  As the products were purchased using P’s money, Kwok Senior instructed Tse Senior to assign the Policies to P. In or around January 2015, Tse Senior instructed two insurance agents to attend Kwok Senior’s office to effect the change of beneficiary of the Policies. Tse Senior signed the documents at that time.  Tse Junior did not attend the meeting but the insurance agent arranged for Tse Junior to sign the transfer documents later, which Tse Junior did.

28.  Once assigned to P, Kwok Senior arranged for the cancellation of all the Policies (save for one policy which was terminated by Tse Senior), in order to limit the financial loss associated with the Policies.  As a result of the cancellation, P received a partial reimbursement from the insurer, and sustained a loss of HK$1,504,427.67.  This amount corresponds to the difference between the premium paid by P over the years on the Policies (HK$4,540,917), and the amount received as a partial refund by the insurer (HK$3,036,489.68).

29.  It is important to understand the nature of the Policies.  While these are referred to as Life Insurance Policies, the Policies appear to be investment linked assurance schemes.

30.  D1 and D3’s answer is that the Policies constituted employee benefits agreed to by Kwok Senior under an unwritten agreement between P, D1 and D3.

F.  THE DEFENDANTS’ CASE

31.  It is the defendants’ case that Tse Senior advanced loans to the Factory for P throughout the years, given that there was an agreement that P was a “carry on” of MGINT and agreed to bear all expenses of the Factory.

32.  Arrangements had been made to repay Tse Senior’s loans to P.  Since November 2009, instalment repayments of HK$150,000 per month were made by Kwok Senior by issuing cheques of P.  As a result, a total of 30 instalments were made, making a total repayment of HK$4,650,000, which reflected the repayments on the initial HK$3.3 Million loan and a partial repayment on the further loans advanced by Tse Senior.

33.  Tse Junior Cheques and Madam Ng Cheques were also repayment of loans that had been made to P for the purpose of funding the operation of the Factory.

34.  The taking out of the Policies were authorised by P and/or Kwok Senior and the same were fringe benefits for Tse Senior and his family.

35.  The total amount of loans advanced by Tse Senior to the Factory for P was HK$18,832,688.80.  After deducting repayment totalling HK$4,650,000.00, D1 counterclaims the sum of HK$14,182,668.80 (see: §63 of Ds’ Closing Submissions).

G.  PURPORTED REPAYMENT OF LOANS ALLEGEDLY MADE BY THE DEFENDANTS TO THE PLAINTIFF (ISSUE 2 OF THE AGREED LIST OF ISSUES)

36.  Both P’s claim for the sum of HK$4,650,000 paid to D1 and D1’s counterclaim for approximately HK$14 Million are two sides of the same coin.

37.  The determination of these issues raises three sub-issues:

(1)  Whether D1/Tse Senior paid over HK$18 Million to Modern Gala Industrial (Shenzhen)  Company Limited (“MGI Shenzhen”), which operated the Factory;

(2)  If so, did any of those payments to MGI Shenzhen constitute a loan to P/MGML (or MGINT for earlier loans), such that it is repayable by P/MGML; and

(3)  Whether D1/Tse Senior can establish that the loans or any of them remain outstanding.

38.  Identical issues arise as to whether D2/Madam Ng should repay the sum of HK$750,000 and whether D3/Tse Junior should repay the sum of HK$2.3 Million.

G1.  Whether Ds have established that money was paid to MGI Shenzhen

G1.1  Tse Senior’s payments to MGI Shenzhen

39.  P submits that D1’s evidence that he had made various payments to MGI Shenzhen is unreliable.

40.  Since 15 April 2019[1], D1 has based his defence and the counterclaim solely on the daily Cash and Bank Deposit Reports for MGI Shenzhen (“Reports”)  prepared by one Wang De Hong (“Ms Wang”), who gave evidence at trial.  Essentially, Tse Senior has “reversed engineered” his claim, in that any amount described as a loan from Tse Senior in the Reports has been claimed as a loan repayable by MGML.

41.  Prior to the amendment in 2019, and as late at December 2018, the only evidence relied upon by D1 was P’s Audited Financial Statements for the year ended 31 March 2014 (“Accounts”)  that showed an amount due to the director of HK$12,114,473.  When the auditors reduced the entry for loans owed to Tse Senior to a few thousand dollars and subject to proof, Tse Senior no longer relies on the Accounts.

42.  Tse Senior’s evidence at trial was that at least some of the claimed payments to MGI Shenzhen (such as the sum of RMB1,170,000 recorded as being received on 12 June 2007)  were directly transferred to MGI Shenzhen’s bank account.  The bank account statements for Tse Senior’s account and MGI Shenzhen’s account would have shown whether these payments were made/received.  Neither set of statements were disclosed, and no explanation has been given of any attempt to obtain them.

43.  The last payment to MGI Shenzhen that Tse Senior includes in his claim is a purported payment of RMB1.25 Million in February 2015.  Tse Senior cannot provide an actual date for the payment; his own table shows the date merely as “2/2015”.  No Report is provided showing this payment nor any other supporting document.  Remarkably, Tse Senior denied under cross-examination that there was no Report for this “loan” despite the fact that his own witness statement makes clear that there is no such Report.  As the Reports are put forward by the defendants as the definitive (and only)  evidence of payments to MGI Shenzhen, I agree the fact that Tse Senior cannot produce a Report showing this payment must resolve this payment against him.

44.  Tse Senior admitted that some sums he claimed he loaned to MGI Shenzhen were provided by unnamed third parties when he was questioned as to the source of funding, given his HK$50,000 or lower monthly income.  The circumstances of how these funds were provided to MGI Shenzhen is unknown.  The question arises as to whether Tse Senior has any standing to bring a claim for these sum or whether the proper claim is by these unnamed third parties against MGI Shenzhen.

G1.2  Madam Ng’s payments to MGI Shenzhen

45.  There are four “loans” referred to by Madam Ng in her witness statement and each was settled by P.

46.  The first “loan” was paid to Xinhai (Hong Kong)  Limited (“Xinhai”).  Remarkably, neither the pleadings nor Madam Ng’s witness statement provide any explanation of why this constitutes a payment to MGI Shenzhen.

47.  Tse Senior did claim in re-examination that Xinhai was an underground banker, however, Ms Wang did not name Xinhai as an underground banker that dealt with MGI Shenzhen.  Ms Wang only identified an individual (Lam)  but not any corporate entity.

G1.3  Tse Junior’s payments to MGI Shenzhen

48.  Reliance is again placed on the Reports.  The Reports for respectively 26 February 2013 and 28 February 2013 show receipts in cash by MGI Shenzhen for the sums of RMB803,000 and RMB1,043,900.  These are said to be the sums that constitute Tse Junior’s loans to MGML.

49.  An extract of Tse Junior’s bank account statement (“Bank Statement”)  has been provided on discovery. However, the Bank Statement does not show HK$2.3M being paid to MGI Shenzhen.  Rather it shows:

(1)  A transfer to Ms Wang’s personal account in the sum of RMB603,000 on 27 February 2013 and a cash withdrawal of RMB200,000; and

(2)  A transfer to Ms Wang’s personal account in the sum of RMB500,000 on 1 March 2013 and a cash withdrawal of RMB300,000 on the same day and a further cash withdrawal of RMB243,900 on 4 March 2013.

50.  There is no evidence to explain how the payments to Ms Wang’s personal account and the cash withdrawals constituted cash payments to MGI Shenzhen.

51.  Nor is this addressed in the pleadings where the payments are described simply as being “to the Factory”, nor in Tse Junior’s witness statement where each payment is simply said to be “a loan to MGML”.

52.  There is a gap in the evidence to explain how money purportedly for MGI Shenzhen was not paid directly to MGI Shenzhen but transferred to Ms Wang/withdrawn in cash and whether that money ever arrived at MGI Shenzhen as claimed (and as RMB803,000 and RMB1,043,900 in cash as Ms Wang claims).

G1.4  Accuracy of the Reports

53.  There are very good reasons for the court to have doubts about the reliability and accuracy of the Reports, and thus not accepting the same as sufficient evidence to prove payments to MGI Shenzhen.

54.  The Reports are divided into two sections.  The top section records the sums of money received in by MGI Shenzhen (with these rows collectively described as “Daily Income”)  and this is then split into sums received in cash (HKD and RMB)  and sums received into MGI Shenzhen’s various bank accounts.  The bottom section records money paid out by MGI Shenzhen (with these rows collectively described as “Daily Expenditure”).

55.  Each Report has an opening balance for the cash and cash at bank and a closing balance for the same.  The end of day cash balance is merely the product of the transactions throughout the day.

56.  The Reports, however, cannot withstand close scrutiny.  For example:

(1)  In respect of the payment made on 12 June 2007, Tse Senior was adamant that this was made by direct bank transfer (and therefore would show in the Daily Income as a deposit in one of MGI Shenzhen’s bank accounts).  However, it is entered under the Cash (RMB)  column.  By contrast, Ms Wang who prepared the Reports was equally adamant that sums entered into the Cash (RMB)  column were received in cash (ie, physical notes), including large sums.  Both witnesses cannot be correct.  Further, it is not a matter of merely being mistaken, it is a matter of credibility.  If Tse Senior had regularly attended a bank in the PRC to withdraw and take to the Factory huge amounts of cash he would remember (three of the Reports show cash received of RMB1 Million or more).  Similarly, Ms Wang must remember if she had to deal with such significant sums of cash (and the practical security concern).  It is difficult to imagine how they could be “mistaken”.  The more likely alternative is that there were no such payments and Tse Senior and Ms Wang simply failed to co-ordinate their story on how these “payments” were “received”.  The question remains: did the money in question come in at all?

(2)  The money that was said to be Tse Junior’s first loan was shown in the relevant Report to have been received as RMB803,000 in cash on 26 February 2013.  The money for Tse Junior’s second loan was shown in the relevant Report to have been received as RMB1,043,000 in cash on 28 February 2013.  That is demonstrably inconsistent with contemporaneous banking documents.  It is clear from the Bank Statements that the money said to have been received by MGI Shenzhen on 26 February 2013 was only withdrawn on 27 February 2013.  The money said to have been received on 28 February 2013 was only withdrawn on 1 March 2013 and by cash on 4 March 2013.  No sensible explanation was given for this.

57.  The defendants’ case on payments to MGI Shenzhen is founded on the Reports.  Ms Wang was brought to court to attest to the accuracy of the Reports, yet she has demonstrated that the Reports are not accurate and flatly contradicted Mr Tse’s evidence on the basic question of how these funds were received.  If the defendants put forward the Reports as documentary proof of their case (without the support of banking documents in corroboration), the defendants have to show the Reports to be completely accurate, which they have failed to do.

G2.  Whether payments to MGI Shenzhen were repayable by MGML

58.  It is important to look at how the defendants have framed their case given that there are separate legal entitles involved: MGML (and previously MGINT)  on the one hand and MGI Shenzhen on the other.

59.  It is the defendants’ pleaded case that all the payments made by them are loans to P.

60.  The fact is that none of the payment or “loans” were actually made to P.  Putting the defendants’ case at its highest:

(1)  Tse Senior paid the funds to MGI Shenzhen;

(2)  Tse Junior paid funds to Ms Wang and withdrew cash which were then paid to MGI Shenzhen; and

(3)  Madam Ng paid the money to Xinhai for onward payment to MGI Shenzhen.

61.  The prima facie position must be that any payment/loan paid to MGI Shenzhen is repayable by MGI Shenzhen.

62.  For the “loans” from Tse Senior and Tse Junior, there is no pleaded case as to where/how P requested such loans, directed such payments to MGI Shenzhen, or agreed that it would repay the same.  The defendants could have pleaded that a payment was made to the Factory at the direction of MGML, but this is not the defendants’ case.

63.  Indeed, the heart of the defendants’ case is pleaded at §4 of the Amended Defence and Counterclaim, as follows:

“(a)  It was agreed between Kwok Senior and the [sic] Tse Senior, inter alia, that they became equal shareholders and “partners” of MGINT and the Plaintiff. It had been agreed that each party and each of the party’s son shall have equal rights in the management of the Plaintiff/MGINT. In short, the Plaintiff is a quasi-partnership between the two families (“the Quasi-Partnership”).

(b)  Tse Senior was the General Manager of MGINT first and then of the Plaintiff. In October 2006, Tse Junior was appointed as the Assistant General Manager of MGINT first and then of the Plaintiff, whilst Kwok Senior was and is in charge of and responsible for all financial matters of MGINT first and then of the Plaintiff in pursuance of the Quasi-Partnership.

(c)  It was also agreed that the Plaintiff shall carry on MGINT and to manage, operate and pay for the Factory’s overhead expenses, its workers and purchase of materials.

(d)  All working capital (including but not limited to the payment of the Factory’s payroll)  was provided by the Plaintiff.

(e)  Tse Junior and Kwok Junior became the shareholders of the Plaintiff and the Plaintiff was incorporated in accordance with the laws of Hong Kong on 25^th August 2009.

(f)  At about the same time, the Plaintiff took over the business (including the assets and liabilities)  of MGINT.

(g)  At all material times, each of Kwok Junior and Tse Junior was and is holding 1 share of the Plaintiff.

(h)  Tse Junior was and is holding the share of the Plaintiff for the benefit of and on behalf of Tse Senior.

(i)  Chiu Kam Hung was and is the sole director and sole shareholder of BGL. Chiu Kam Hung is holding the share of BGL as a trustee for the benefit of the Plaintiff.

(j)  Tse Senior was appointed the Legal Representative of the Factory on 30^th May 2012 in place of the ex-Legal Representative, Leung Ping Hon (梁平漢).” (Emphasis supplied)

64.  As put in §35 of the Defendants’ Closing Submissions:

“35. In essence, it is the D’s case that monies transferred to MGI Shenzhen/the Factory made by Tse Senior and Tse Junior, as well as monies transferred to Xinhai Limited by Madam Ng were loans made to P as there was an agreement between Kwok Senior and Tse Senior that P will pay for MGI Shenzhen/the Factory’s expenses prior to the incorporation of the P. …” (Emphasis added)

65.  Ds do plead that under the terms of the “quasi-partnership” between Kwok Senior and Tse Senior (on Ds’ case):

(1)  “It was also agreed that [P] should carry on MGINT and to manage, operate and pay for the Factory’s overhead expenses, its workers and purchase materials.” and

(2)  “All working capital (including but not limited to the payment of the Factory’s payroll)  was provided by [P].”

66.  However, as submitted by P, this does not bridge the separate legal entities issue as neither of these terms (even if established)  make P responsible for money paid to MGI Shenzhen.  There is no suggestion of a blanket agreement that any payment made by Kwok Senior/Tse Senior/Tse Junior to MGI Shenzhen would automatically become a loan to P and repayable by P.  Nor is there pleaded any “loan by loan” agreement. The agreement pleaded in §4 of the Amended Defence and Counterclaim is an agreement between Tse Senior and Kwok Senior.  There is no pleading that P was a party to the agreement.

67.  Tse Senior’s description of the quasi-partnership in his witness statement, although more detailed than in pleadings, contains no suggestion that P agreed to be liable for payments made to MGI Shenzhen.  Tse Senior’s oral evidence served only to show that his alleged agreement with Kwok Senior was confused, even as to the most basic elements, such as when this agreement was reached, but still did not describe how/when P agreed to repay any sum paid to MGI Shenzhen.

68.  This is not mere technicality. P’s liability requires P’s agreement (as opposed to agreement between the shareholders).  It is not pleaded anywhere that P is even a party to any agreement.

69.  Although this issue had been put squarely in issue, Ds’ Closing Submissions provide no answers.  As mentioned above, Ds merely say that it is Ds’ case that “monies transferred to MGI Shenzhen/the Factory … were loans made to P as there was an agreement between Kwok Senior and Tse Senior that P will pay for MGI Shenzhen/the Factory’s expenses prior to the incorporation of the P.” (Ds’ Closing Submissions at §35).  That misses the point.  At its highest, it places an obligation on P to provide funds to MGI Shenzhen[2], but not to repay payments unilaterally made to MGI Shenzhen.  In particular, there is no averment by the defendants of any agreement, whether express or implied, on the part of P to repay funds allegedly advanced by Tse Senior, Tse Junior or Madam Ng to MGI Shenzhen, nor is there evidence that P had pre-approved or ratified such advances.

70.  Of course, that is taking Ds’ version at its highest; it is P’s case that it had no responsibility towards MGI Shenzhen save to pay for the goods it ordered.

G3.  Were the loans paid back (at least in part)

71.  Tse Senior was specifically asked to confirm that none of the alleged loans had been repaid save for the sum of HK$4,650,000 paid by MGML (that P now seeks to recover)  and that none of the loans that add to HK$14.1 Million claimed in the counterclaim had been repaid (including confirmation that there was no repayment by MGI Shenzhen).  Tse Senior confirmed this to be the case.

72.  Yet, the Reports show that further sums totalling RMB 1,215,000 have been repaid (see: paragraphs 44 to 50 of the plaintiff’s Closing Submissions).

73.  At the very least, Tse Senior’s counterclaim must accordingly be reduced by RMB 1,215,000 (which the defendants have not acknowledged in their Closing Submissions).  Perhaps more significantly still, this again cast further doubt on the veracity of the defendants’ case on Issue 2 of the Agreed List of Issues, which I reject for all the reasons stated above.

H.  WHETHER PLAINTIFF WAS A “QUASI-PARTNERSHIP” (ISSUE 1 OF THE AGREED LIST OF ISSUES)

74.  The above discussion is sufficient to dispose of P’s claim regarding payments to Ds, and D1’s counterclaim for approximately HK$14 Million.

75.  However, it is still necessary for the court to make a finding on whether P was a quasi-partnership, being Issue 1 of the Agreed List of Issues, and a topic extensively dealt with in the parties’ closing submissions.

76.  At the outset, it is important to note that it is Ds’ case that a quasi-partnership was created.  This is not part of P’s case and it is therefore for Ds to establish.

77.  However, it is unclear how the quasi-partnership factors in Ds’ case.  As pointed out above, the heart of Ds’ case is contained in §4 of the Amended Defence and Counterclaim (set out at paragraph 63 above), and an agreement in terms of §4(c)  and (d)  can exist with or without MGML being a quasi-partnership.

78.  Anyhow, Ds identify three factors that may give rise to a quasi-partnership (Ds’ Closing Submissions at §33).  It is not sufficient to merely state these factors, Ds must establish these factors (or enough thereof to create the quasi-partnership).

79.  One difficulty in dealing with this argument is that it is not clear whether Ds’ case is that the quasi-partnership was formed around but before the incorporation of MGINT in 2003 or around but before the incorporation of MGML in 2009 and who are the members.  Tse Senior’s position on these matters after his oral evidence remains confusing and entirely inconsistent.

80.  The first factor of a quasi-partnership cited is whether the association was formed or continued on the basis of a personal relationship, involving mutual confidence.  It is difficult to believe that if the quasi-partnership was formed in or about 2003 it was on the basis of a personal relationship; Kwok Senior and Tse Senior had just been introduced to each other.  However, by 2009 (on P’s case)  Tse Senior had worked as MGINT’s general manager (and was involved in that role only)  and had established a relationship with Kwok Senior.  As such, as a matter of fact, a quasi-partnership was at least possible in respect of MGML on the basis of a relationship, but it appears to be Ds’ case that it started in 2003 in respect of MGINT.

81.  The second factor is that there is an agreement that all active shareholders have the right to participate in the conduct of the business.  It is pleaded in §4(a)  of the Amended Defence and Counterclaim that Kwok Junior and Tse Junior would “have equal rights in the management of the Plaintiff/MGINT” (emphasis added). Kwok Junior and Tse Junior only became shareholders when MGML was incorporated.  There could be no agreement that Kwok Junior and Tse Junior would have equal rights in the management of MGINT.

82.  The third factor is a restriction on shareholders selling their stake in the company.  There is no suggestion that this was part of the agreement; it is not even clear that the legal shareholders are parties to the agreement.  While Ds’ pleaded case suggests that the agreement was between the Kwok family and the Tse Family, Ds’ Closing (at §34)  says the agreement was between Kwok Senior and Tse Senior only.  It is fundamentally impossible for Ds to argue that a quasi-partnership was established without stating categorically who its partners were.

83.  For the reasons set out above, I hold that the defendants have failed to establish the quasi-partnership as alleged.

I.  WHERE D1, D2 AND D3 WERE NOT ENTITLED TO RECEIVE THE PAYMENTS FROM P, IS D1 LIABLE FOR ALL THE PAYMENTS OR ONLY THOSE PAYMENTS RECEIVED BY HIM (ISSUE 3 OF THE AGREED LIST OF ISSUES)

84.  At the trial, counsel for the defendants orally conceded at the closing submissions that if it is found that D1, D2 and D3 were not entitled to receive the payments from P, then D1 would be liable for all the payments paid to the defendants.

85.  In the circumstances, no further discussion is required on this issue.

J.  LIFE INSURANCE POLICIES (ISSUES 4 TO 6 OF THE AGREED LIST OF ISSUES)

86.  The relevant factual background relating to these issues have been set out at paragraphs 24 to 30 above.  As the Life Insurance Policies (“LIP”)  are claimed as a contractual entitlement, it is for Ds to establish.

87.  The only defence pleaded is that payment of the various premium for the LIP constituted “fringe benefits for Tse Senior and his family” (emphasis added).  This would suggest that the Tse family was independently entitled to LIP.  Hence, it follows that the two LIP naming Tse Junior as owner (then corrected to only one LIP in recognition of an error and amended)  belonged to Tse Junior and for which he was responsible for any loss.

88.  Ds’ evidence has not been consistent on the simple issue of whether this was Tse Senior’s own employee benefit.  Initially, Tse Senior was clear that Tse Junior was entitled to his own LIP as a benefit for his own employment but gave conflicting evidence on whether this was from 2006 (when Tse Junior was employed with MGINT)  or only available when he started work with MGML (end of 2009).  Tse Senior changed his position on this later.

89.  By contrast, Tse Junior was adamant that any entitlement to an LIP was solely Tse Senior’s benefit.  If this was the case, then Tse Junior should have pleaded in the Defence that he was not personally responsible for the LIP even if in his name - he did not do so.

90.  Further, cross-examination of Tse Senior revealed that:

(1)  There was no agreement as to how many LIP that Tse Senior could take out or how much could be spent in premium;

(2)  There was no explanation as to why the first LIP was obtained in 2007 when this valuable benefit was awarded to Tse Senior in 2003; and

(3)  There was no agreement and no reason as to why Tse Senior took out the additional LIP as and when he did.

91.  More damaging still is the fact that Tse Senior was unable to explain why some of the LIP had at times named Kwok Senior as a co-beneficiary prior to the decision to change all LIP to Kwok Senior (who ultimately changed the beneficiary to MGML).

92.  If the LIP were a fringe benefit for Tse Senior there was no reason why Kwok Senior would feature at all as a beneficiary, nor was there any reason why Kwok Senior would be “very dissatisfied” with Tse Senior holding the LIP.  Both are inconsistent with the LIP being given to Tse Senior as his employee benefit.

93.  Further, the manner in which the LIP were ultimately dealt with is also inconsistent with this.  If the LIP were genuinely given to Tse Senior, the accruing benefit (represented by surrender value)  belonged to Tse Senior as these were his investments.  If P could no longer afford to pay the premium on the LIP, the surrender value should go to Tse Senior.  However, inexplicably, Tse Senior’s response to Kwok Senior’s request for copies of the LIP was to make Kwok Senior the beneficiary of all the LIP.

94.  There is also before the court the Apology addressed to Kwok Senior and signed by Tse Senior.  The terms of the Apology and the reasons why it was written are, at best, confusing and remained confusing despite Tse Senior being given the opportunity to explain during cross-examination.  As noted by the court, the issue addressed in the Apology seems to be directed at “the company’s insurance policy” being transferred into Tse Senior’s name.  Although no explanation was given, the Apology appears to suggest that the LIP should have been in P’s name and Mr Tse wrongly transferred them to his own name/Tse family members’ names.

95.  However, one thing is clear, the Apology is wholly inconsistent with Tse Senior having received the LIP as an employee benefit.  Whether or not the same can be properly described as an admission, it must be weighty evidence against the defendants’ case, having been written by Tse Senior himself.

96.  For all the reasons set out above, I reject the defendants’ case on the LIP.

97.  As to the quantum of the loss, this is supported by evidence from Kwok Senior and was not challenged on cross-examination as well as being supported by documentary evidence of the surrender values.

K.  PROBLEMATIC TRANSACTIONS (ISSUES 7 TO 9 OF THE AGREED LIST OF ISSUES)

98.  P has identified five sales with five different customers in the combined sum of HK$1,010,901.09.  The Problematic Transactions have similar features:

(1)  While each invoice is on P’s letterhead, they are stamped with the company chop of MGINT.

(2)  The delivery notes were issued by Modern Gala Industrial Limited, a company that ceased to exist in April 2011.

(3)  P has no acknowledgment of receipt of the goods delivered under these transactions.

99.  It is P’s case that Tse Senior is responsible for P’s loss for the Problematic Transactions, as he failed in his duties to P as a director and as an employee to act in P’s best interests and to exercise an appropriate level of skill and care as expected of his knowledge and experience.  This must at least include issuing the necessary documentation in an accurate manner.

100.  In answer, Tse Senior submits that, first and foremost, in relation to the Problematic Transactions, the absence of any proof of demand note, payment and/or non-payment suggests a fundamental flaw in P’s claim.  There is no evidence whatsoever that suggests the five companies did not pay or refuse to pay because of the “problems” as alleged by P.

101.  Secondly, although Tse Senior was the general manager at the material time, there is no evidence showing that Tse Senior directly or indirectly handled or caused the transactions.  None of the delivery notes and invoices exhibited in the trial bundle shows Tse Senior’s signature or involvement.  Rather, the delivery notes and invoices were signed off by different persons.

102.  As a matter of fact, Kwok Senior agreed that Tse Senior was not the one who handled the Problematic Transactions under cross-examination and Kwok Senior became the co-director of MGML/P on 27 March 2014.

103.  In response, P submits that even if Tse Senior was not the one who directly handled the Problematic Transactions, he cannot ignore the fact that the “buck stops” with Tse Senior as P’s general manager.

104.  I do not accept P’s position. In my view, there is simply insufficient evidence in this case to show the precise role played by Tse Senior as the general manager of the company.  In particular, how much was he involved in the day-to-day management of P.  In the absence of such evidence, a breach of duty on his part is not established.

L.  MISAPPROPRIATION OF PLAINTIFF’S DOCUMENTS (ISSUE 10 OF THE AGREED LIST OF ISSUES)

105.  The property in question are P’s corporate and company records as particularised (“Documents”).

106.  It is P’s case that after Tse Senior was terminated as general manager, up to which point he had carried out the day-to-day operations of P, it was discovered that the Documents were missing.

107.  On the other hand, as stated in Tse Senior’s witness statement:

(1)  Both Tse Senior and Tse Junior were dismissed by MGML/P and they did not attend MGML/P’s office since May 2015.

(2)  Tse Senior and Tse Junior did not possess any of the missing Documents and MGML/P’s office was under the control of Kwok Senior.

(3)  Tse Senior and Tse Junior did not know that there were Employees Performance & Yearly Assessment Record.

(4)  There was no safe in MGML/P’s office.

108.  In my view, looking at the entire circumstances, P has simply failed to prove that it was more likely than not that the Documents in question were removed by Tse Senior.

M.  DISPOSITION

109.  As against the 1^st defendant:

(1)  An order that the 1^st defendant do pay the plaintiff the sum of HK$4,650,000.

(2)  Further or alternatively, an order that the 1^st defendant do compensate the plaintiff in equity for breach of his duties, including compensating the plaintiff for the loss of HK$4,650,000, HK$2,300,000 and HK$750,000 in respect of the Tse Senior Cheques, the Tse Junior Cheques and the Madam Ng Cheques, and HK$1,504,427.67 for the loss on the LIP.

(3)  An order that the 1^st defendant’s counterclaim be dismissed.

110.  As against the 2^nd defendant:

(1)  An order that the 2^nd defendant do pay the plaintiff the sum of HK$750,000.

(2)  Further or in the alternative, damages in the sum of HK$750,000.

111.  As against the 3^rd defendant:

(1)  An order that the 3^rd defendant do pay the plaintiff the sum of HK$2,300,000.

(2)  Further or alternatively, an order that the 3^rd defendant do compensate the plaintiff in equity for breach of his duties, including compensating the plaintiff for the loss HK$2,300,000 in respect of the Tse Junior Cheques.

112.  As against all defendants:

(1)  Regarding the 1^st defendant,

(a)  Interest on the sums of HK$4,650,000, HK$2,300,000 and HK$750,000, at the rate of HSBC’s best lending rate plus 1% from the respective dates of payment to Judgment.

(b)  Interest on the sum of HK$1,504,427.67, at the rate of HSBC’s best lending rate plus 1% from the date of Writ to Judgment.

(2)  Regarding the 2^nd defendant,

(a)  Interest on the sum of HK$750,000 at the rate of HSBC’s best lending rate plus 1% from the date of payment to Judgment.

(3)  Regarding the 3^rd defendant,

(a)  Interest on the sum of HK$2,300,000 at the rate of HSBC’s best lending rate plus 1% from the date of payment to Judgment.

113.  I further order that the costs of these proceedings (including all costs reserved, if any)  be paid by the defendants to the plaintiff, such costs are to be taxed if not agreed.

114.  The above order as to costs is nisi and shall become absolute in the absence of any application within 14 days to vary the same.

115.  Lastly, I express my gratitude to counsel on both sides for their helpful assistance in this matter.