CHENG YU PIK LILIBETHE v. YAU YI KWONG

DCCJ 3436/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3436 OF 2010

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JUDGMENT

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Background

1.  The 1^st defendant is and was at all material times a dentist.  He was the sole proprietor of Dr Yau Yi Kwong & Associates (“Dr Yau & Associates”) which carried on the business of providing dental services. In November 2005, the 1^st defendant, the plaintiff and a Ms Jessica Leung established 2I Dental Centre Limited (“2I Dental”), the 2^nd defendant herein, to take over the business previously carried on by Dr Yau & Associates.

2.  The plaintiff worked for the 1^st defendant since her graduation from secondary school in 1998.  Initially, she worked as an assistant nurse and later, she also assumed the role as clinic manager.

3.  In late 2002, some form of arrangement was agreed between the 1^st defendant, the plaintiff and Ms Jessica Leung.  In the Statement of Claim in this action, the plaintiff described the arrangement as a “quasi partnership”.  The 1^st defendant preferred to describe the same as merely an incentive profit sharing arrangement.  Notwithstanding the difference in description, the parties agree that arising from the agreed arrangement, they were entitled to share the profit of Dr Yau & Associates in the proportion of 50%, 25% and 25% respectively.

4.  In November 2005, the 1^st defendant, the plaintiff and Ms Jessica Leung expanded the business of Dr Yau & Associates by the incorporation of 2I Dental.  Initially, the 1^st defendant, the plaintiff and Ms Jessica Leung were allotted with respectively 5,000, 2,500 and 2,500 shares in 2I Dental out of a total of 10,000 shares.  They were also appointed as directors of 2I Dental.  Apart from being appointed a director, the plaintiff was also employed by 2I Dental as its clinic manager.

5.  Since around mid-2008, the relationship between the parties turned sour. The plaintiff was excluded from participating in 2I Dental.  Initially, her work hours in 2I Dental were reduced.  The plaintiff’s employment by 2I Dental was terminated on 25 August 2008.  Eventually, the plaintiff was purportedly removed as a director of 2I Dental on 21 October 2008.

6.  In April 2009, the plaintiff commenced HCMP 712/2009 pursuant to Section 168A of the Companies Ordinance, Cap 32 against 2I Dental and its other shareholders.  In those proceedings, the plaintiff claimed that the affairs of 2I Dental had been conducted in a manner unfairly prejudicial to her interests therein.  The plaintiff sought an order that her shares in 2I Dental be bought out by the remaining shareholders.  Initially, those proceedings were hotly contested.  However, they were eventually settled before trial.  The plaintiff’s shares in 2I Dental were bought out and she was granted the costs of those proceedings.

7.  HCMP 712/2009 only resolved the issues concerning the shares owned by the plaintiff in 2I Dental.  Those proceedings did not resolve the disputes between the plaintiff and the 1^st defendant relating to Dr Yau & Associates, and those between the plaintiff and 2I Dental (in relation to shareholder’s loan owed by it to the plaintiff).  The plaintiff therefore commenced this action on 7 October 2010.

8.  The plaintiff’s claim against the 2^nd defendant has already been settled.  This trial only concerns the plaintiff’s claim against the 1^st defendant and the 1^st defendant’s counterclaim against her. 

Plaintiff’s position in this action

9.  In this action, the plaintiff claims against the 1^st defendant the sum of HK$243,967.02, which is made up as follows:-

(1)  It is not in dispute that the total amount of net profit before tax made by Dr Yau & Associates during the years ended 31 March 2004, 31 March 2005 and 31 March 2006 was in the sum of HK$2,005,052.07.  The plaintiff claims that in accordance with the agreed arrangement, she is entitled to a share of HK$501,263.02 (ie HK$2,005,052.07 x 25%).  In other words, the plaintiff claims to be entitled to 25% of the net profit before tax.

(2)  It is common ground between the parties that a sum of HK$257,296.00 was paid by the 1^st defendant on behalf of the plaintiff to the 2^nd defendant as part of the plaintiff’s agreed investment in the 2^nd defendant.

(3)  The plaintiff therefore claims the balance in the sum of HK$243,967.02.

1^st defendant’s position in this action

10.  By his counterclaim, the 1^st defendant claims against the plaintiff the sum of HK$172,898.80, which is made up as follows:-

(1)  The 1^st defendant claims that the agreed arrangement was for the 1^st defendant, the plaintiff and Ms Jessica Leung to share the net profit of Dr Yau & Associates after tax.  The plaintiff’s 25% share of the net profit after tax amounted to HK$421,333.90.  After deducting the agreed investment by the plaintiff in the 2^nd defendant in the sum of HK$257,296.00, the balance amounted to HK$164,037.90. 

(2)  Between 19 January 2004 and 16 January 2006, the 1^st defendant had drawn in favour of the plaintiff 12 cheques in the total sum of HK$185,000.00 as payment of the plaintiff’s entitlement to the agreed 25% share of net profit in Dr Yau & Associates.  Thus, the plaintiff has been overpaid a sum of HK$20,962.10.

(3)  Between 2 August 2007 and 5 November 2007, the 1^st defendant caused cheques to be issued by the 2^nd defendant in favour of the plaintiff for the total sum of HK$131,936.70.  It is the 1^st defendant’s case that the said sum of HK$131,936.70 was part of his income receivable from the 2^nd defendant and was deposited into the plaintiff’s bank account for investment purposes.  The 1^st defendant further claims that this sum has never been repaid to him.

(4)  The 1^st defendant further claims that he has, at the request of the plaintiff, lent a sum of HK$20,000.00 to the plaintiff by transferring the same to the plaintiff’s Hang Seng Bank account on 8 August 2008, which sum has not been repaid by the plaintiff.

Profits to be distributed before tax or after tax

11.  In paragraph 5(2) of the Statement of Claim, the plaintiff simply pleaded that the profit of Dr Yau & Associates would be distributed amongst the 1^st defendant, the plaintiff and Ms Jessica Leung in accordance with their respective shares in the partnership.  There is no averment of any express agreement whether the profit should be distributed before tax or after tax. 

12.  Similarly, the 1^st defendant frankly agreed under cross- examination that there was no discussion or express agreement between himself, the plaintiff and Ms Jessica Leung that distribution of profit in Dr Yau & Associates was to be made after tax.  The 1^st defendant only referred to a “common understanding” that it should be so based on his past business experience.  But the 1^st defendant agreed that he did not have any previous dealing with the plaintiff of a similar nature. 

13.  However, either as a matter of construing the agreed arrangement or the implication of a term from the surrounding circumstances, I have no hesitation in finding that the plaintiff is only entitled to a 25% share of the net profit in Dr Yau & Associates after tax.

14.  On the plaintiff’s case as pleaded in the Statement of Claim, each of the “quasi partners” would be entitled to be distributed the profit of Dr Yau & Associates in accordance with their respective shares in the partnership.  If it is also the plaintiff’s case that each of the “quasi partners” would be entitled to be distributed their respective shares of the profit before tax, who is going to pay for the profits tax on the partnership?

15.  From the notices of assessment and demands for profits tax for the years of assessment 2003/04, 2004/05 and 2005/06, it is apparent that the 1^st defendant was assessed by the Inland Revenue Department to be liable to pay the profits tax on Dr Yau & Associates for those years.  It cannot be right that the profits tax liability should fall only on the 1^st defendant.

16.  In short, the term implied that the plaintiff should only receive her share of the net profit in Dr Yau & Associates after tax represents the obvious, but unexpressed, intention of the parties [see: Chitty on Contracts, 30^th edition, Vol 1, paragraph 13-004].  Furthermore, such a term is more consistent with the plaintiff’s own description of the agreed arrangement as a “quasi partnership”. 

Whether HK$185,000.00 paid as bonuses or distribution of profit

17.  In this regard, the plaintiff’s evidence is that no agreement had been reached on “bonus payments” before the commencement of business of Dr Yau & Associates in 2002.  It was only sometime towards the end of 2003 that she, the 1^st defendant and Ms Jessica Leung agreed to it when they found the business of Dr Yau & Associates to be good.  Only the plaintiff and Ms Jessica Leung were paid such bonuses.  The amount of each “bonus payment” was not fixed but depended on the workload.  It is of significance to note that such “bonus payments” have not been included in the plaintiff’s income tax returns to the Inland Revenue Department.  It is the plaintiff’s case that the release of the “bonus payments” has no relation to the profit remaining in Dr Yau & Associates as shown in its financial statements, which should be distributed as per the agreed proportion of 25% to the plaintiff.

18.  Again, I have no hesitation in rejecting the plaintiff’s assertions.  I agree with Mr Edward Shum, counsel acting for the 1^st defendant, that there is ample evidence relating to the surrounding circumstances of this case leading to such a conclusion.  First, the plaintiff never mentioned in her Petition in HCMP 712/2009 or any of her affirmations in support thereof that she was entitled to “bonus payments” unrelated to distribution of profit. Second, the plaintiff was constrained to admit under cross-examination that the alleged arrangement on “bonus payments” is unreasonable and unfair to the 1^st defendant.  However, the plaintiff was unable to explain why the 1^st defendant would agree to it.  She merely reiterated in re-examination that the 1^st defendant had agreed to it.  I find the plaintiff’s story to be inherently improbable.  Third, the plaintiff was unable to give any plausible explanation as to why she never included the “bonus payments” in her income tax returns.  If the plaintiff’s story were true, it would mean that not only she and Ms Jessica Leung were paid bonuses to which the 1^st defendant was not entitled, they would also receive such bonuses without having to pay any salaries or other tax on them. 

19.  The plaintiff sought to rely on an “excel file” stating the payments as bonuses to bolster up her claim.  I agree with Mr Shum that this is a self-serving document.  It was only during cross-examination that the plaintiff mentioned for the first time that she had sent the excel file to Ms Jessica Leung by email.  This was categorically denied by Ms Jessica Leung when she gave evidence.  Again, the distinct impression is that the plaintiff was making up her story as she went along.  Anyhow, the plaintiff accepted under cross-examination that the description of items in the “excel file” were her own choice of words.  For the foregoing reasons, I attach no weight to the “excel file”.

20.  Mr Jerry Chung, counsel acting for the plaintiff, submitted that objective fairness in the arrangements alleged by the plaintiff played no part in this trial.  I disagree.  The story of the plaintiff is, in my view, inherently improbable.  I reject the same.

Has the sum of HK$131,936.70 been repaid

21.  The plaintiff disputed that the payments made to her between August 2007 and November 2007 were for investment purposes.  According to the plaintiff, in mid-2007, the 1^st defendant requested the plaintiff to receive certain payments which were overdue from the 2^nd defendant to the 1^st defendant.  The plaintiff understood from the 1^st defendant that the purpose of his request was to keep secret money that would not be revealed to his wife.  Despite her initial reluctance, the plaintiff eventually agreed.

22.  In this regard, on a balance of probabilities, I would accept the 1^st defendant’s version and reject the plaintiff’s version.  If the intention of the 1^st defendant was to keep the money secret so that it would not be revealed to his wife, the 1^st defendant could have simply deposited the funds into a new bank account not known to his wife.  I find the plaintiff’s story incredible.

23.  Anyhow, regardless of the reasons why the funds were deposited with the plaintiff in the first place, it is the plaintiff’s case that she had made repayments totalling HK$132,000.00 in cash to the 1^st defendant on various occasions between 13 August 2007 and 11 January 2008.

24.  Again, I find the plaintiff’s evidence regarding those alleged cash repayments lacks credibility and I reject the same.

25.  In her Amended Answers to Request for Further and Better Particulars of the Reply and Defence to Counterclaim, the plaintiff alleged that she had made 16 cash repayments to the 1^st defendant in the total sum of HK$132,000.00.  To substantiate her case, the plaintiff produced her HSBC bank statements which purported to show the relevant cash withdrawals.  It was, however, obvious that many of the relevant withdrawals were recorded on the HSBC bank statements not as cash withdrawals but as transfers made to the plaintiff’s bank account maintained with the Hang Seng Bank.  The plaintiff, in her examination-in-chief, referred to her Hang Seng Bank records and stated that money was transferred from her HSBC account to her Hang Seng Bank account and she then withdrew cash from her Hang Seng Bank account in order to repay the 1^st defendant.

26.  Significantly, under cross-examination, contrary to the plaintiff’s claim that she withdrew cash from her Hang Seng Bank account in order to repay the 1^st defendant, after being confronted with the banking codes in small print appearing on the records denoting the nature of the relevant transactions, the plaintiff agreed that some of the relevant withdrawals from her Hang Seng Bank account were transfer withdrawals, not cash withdrawals.  At the time, the plaintiff failed to give any explanation for such discrepancy. However, on the following day, when the plaintiff was re-examined by Mr Chung, the plaintiff gave evidence that she might have borrowed cash from her mother to repay the 1^st defendant and therefore transferred money from her Hang Seng Bank account back to her mother’s account.

27.  Frankly, I find the plaintiff’s evidence quite incredible.  Again, I got the impression from the plaintiff as a witness that she was making up her story as she went along.  If she really had to borrow money from her mother on various occasions in order to repay the 1^st defendant, such incidents would not likely be forgotten by her.  It should not have taken her overnight to come up with the explanation, which I do not accept as being true.

28.  The plaintiff sought to fortify her case by referring to a notebook in which handwritten entries were alleged to have been made by the plaintiff regarding her cash repayments to the 1^st defendant.  The plaintiff claimed that the notebook was kept for reminding her of matters of importance to her.  However, apart from being a self-serving document, the plaintiff had to admit under cross-examination that no entry was made in this notebook regarding the 1^st defendant’s repayment of a loan advanced by the plaintiff in the sum of HK$155,000.00.  Some of the repayments by the 1^st defendant took place during the same period of time.  In the circumstances, I am not prepared to give much weight to this notebook as evidence in support of the plaintiff’s case.

29.  For the reasons stated above, I hold that the plaintiff has failed to discharge the burden of proof on her to show that the sum of HK$131,936.70 or any part thereof has been repaid to the 1^st defendant.

Was the sum of HK$20,000.00 a loan or reimbursement of personal expenses

30.  There is no dispute that the plaintiff had received a sum of HK$20,000.00 by way of bank transfer from the 1^st defendant on 8 August 2008.  The 1^st defendant’s case is that he had lent this sum to the plaintiff and this was never repaid.

31.  On the other hand, it is the plaintiff’s case that the said sum was paid to her to “settle the personal expenses of the 1^st defendant during the business trip to U.S.A. with the plaintiff in November/December 2007 for which the plaintiff had paid on the 1^st defendant’s behalf”.

32.  In support of her assertions, the plaintiff adduced at trial various receipts issued in November 2007 for the total amount of US$1,169.60.  The plaintiff also produced copy of a cheque stub for a cheque dated 12 November 2007 drawn in favour of Eastrip Travel Insurance for the sum of HK$1,730.00.  However, it can be noted that none of these documents on their face shows that the expenses were incurred on behalf of the 1^st defendant. 

33.  As to the balance, the plaintiff gave evidence under cross- examination that she had exchanged some US dollar notes for the 1^st defendant prior to the departure from Hong Kong.

34.  I agree with Mr Shum that the plaintiff’s case in this regard is incredible, and I reject the same on the balance of probabilities.  The plaintiff has never recorded such overseas expenditure in her notebook.  Further, it is simply hard to believe that the 1^st defendant would require the plaintiff to settle his own personal expenses by her credit card.

Conclusion

35.  For the foregoing reasons, I would dismiss the plaintiff’s claim against the 1^st defendant in this action and allow the 1^st defendant’s counterclaim. 

Order

36.  I give judgment in favour of the 1^st defendant against the plaintiff for the sum of HK$172,898.80. 

37.  Interest on the said sum of HK$172,898.80 shall be paid by the plaintiff to the 1^st defendant at the rate of 1% above HSBC’s best lending rate from the date of the original Defence and Counterclaim of the 1^st defendant (ie 24 November 2010) until judgment, and thereafter at the judgment rate until payment.

38.  The 1^st defendant shall have the costs of this action and the counterclaim against the plaintiff, including any costs reserved (if any).  Such costs shall be taxed, if not agreed, with certificate for counsel.

39.  The above orders as to interest and costs are nisi and shall become absolute in the absence of any application within 14 days to vary the same.

40.  Lastly, I thank counsel on both sides for their helpful assistance in this matter.