CHOW CHIK CHUNG AND ANOTHER v. WESLEY SCOTT CRAWFORD AND ANOTHER

HCA 1263/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1263 OF 2003

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J U D G M E N T

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1.  In March 2001 the plaintiffs, who are brothers, entered into a joint venture (the Joint Venture) with the defendants, who are father (the 2^nd defendant) and son, to undertake together the merchandising of toys.  Business operated profitably and harmoniously until October 2002, when there was a serious falling out.  The defendants accused the plaintiffs of misappropriation and locked them out of the office and took away their signing rights at the Joint Venture’s bank.

2.  But it is the plaintiffs’ case that the wrongdoing was all on the other side.  Without authority, the defendants stripped the Joint Venture’s bank account of US$1.12 million, which were funds set aside for meeting accounts rendered by suppliers of merchandise.  With those accounts unpaid, a creditor’s petition issued in December 2002, and this led to a winding up order of November 2003.

3.  By this action, the plaintiffs sue for breaches of fiduciary duty owed them by the defendants in the Joint Venture, damages and/or other relief.

Background

4.  The plaintiffs engaged in the sourcing of toys and similar merchandise for sale in the US.  Business was carried out through a company called Grandville Industries Limited (Grandville).  The shares were held in the names of relatives, but the beneficial owners and those in control were the plaintiffs.

5.  In mid 2000 the plaintiffs began to represent as their local agents companies called Randtag Limited and Randtag (HK) Limited (Randtag), owned and controlled by Crawford Senior, the 2^nd defendant, on commission.  These companies also engaged in trading in toys in the US.

6.  In December 2000 the defendants together incorporated another company for trading in toys, called Blue Sky Industries Limited (Blue Sky) allotting to themselves one each of the two shares issued.

The Joint Venture

7.  The Joint Venture came into being in March 2001 when the parties decided to join forces.

8.  Although the terms were not reduced to writing — it was all along an oral arrangement — the pleadings in this action reveal that nearly all of the terms are not in dispute.  These are as follows:

(1) trading would be undertaken through Blue Sky.  The profits would be shared equally;

(2) Randtag would cease operating, and transfer its business to Blue Sky;

(3) the plaintiffs would not charge Blue Sky any commission hitherto charged Randtag for business introduced;

(4) the plaintiffs would cause to be transferred to the defendants 50% of the shareholding of Grandville and would split with them 50% of Grandville’s profits;

(5) the plaintiffs were to have day to day management of Blue Sky and to have signing rights on its bank account at the Bank of China;

(6) the Joint Venture was to be operated upon trust between the plaintiffs and defendants.

9.  That which was contested in the pleadings was the plaintiffs’ claim that the defendants would transfer 50% of their shareholding in Blue Sky to them; that the 2^nd defendant would hold his share on trust for the plaintiff, and the 1^st defendant his on trust for the defendants.  The defendants denied that was a term.

10.  But there was a positive averment upon which the plaintiffs’ rely in the statement of defence:

“All profits to be made by Blue Sky were to be placed back into Blue Sky until a time when the plaintiffs and defendants would by agreement distribute the some.”

The Joint Venture Gets Underway

11.  The defendants were based in the US and there promoted the business and attracted customers.  The plaintiffs in Hong Kong sourced suppliers, met the orders, undertook day to day management and operated the bank account.

12.  The accounts were managed and audited by a company both sets of the parties had used in the past when they operated independently; namely, High Glad Accountancy Services Limited (High Glad) under the supervision of one of its accountants called Li Siu Lok.  Mr Li was to play another role in events as they transpired which I shall come to.

13.  By all accounts business was brisk, and successful.  Staff of High Glad handled the books and audited the accounts for 2001.  These were tabled at a meeting of the parties conducted in Hong Kong in August 2002.  On the unchallenged account of the 2^nd plaintiff both defendants approved the figures and the meeting was in all respects harmonious.  He said there was a further meeting held in October when cash flows and so on were discussed.  There was then some US$2 million in the coffers reserved for meeting accounts receivable.  The defendants were told of this.  Again there was goodwill amongst the parties, with no indication of what was to come.

The Locks are Changed

14.  The plaintiffs in mid-October returned from a short trip to a trade exhibition in Mainland China to find they were locked out of the office and their signing rights on the bank account were cancelled.  This was to signal the end of their management of Blue Sky.  The 2^nd defendant accused them of wrongfully withdrawing money for their own use.

15.  And High Glad did not escape the falling out.  At a meeting held in late October between Mr Li, the accountant in charge, and the defendants, Mr Li was accused of assisting the plaintiffs to defraud them.  The upshot was that High Glad was relieved of its duties and the books of account were returned to the defendants.

16.  As I have stated Mr Li of High Glad was wearing another hat, and that was as director of a company called Enrich Industries Limited (Enrich).  Enrich was a supplier to Blue Sky and was one of its creditors, due to be paid out of the funds reserved for the accounts receivable.

17.  But no payment was forthcoming.  Enrich petitioned to wind up Blue Sky.  Many of the other suppliers also unpaid joined in support.  This resulted in Blue Sky’s bank account being frozen in December 2002.  Meanwhile subsequent investigation revealed that prior to that freezing the defendants had caused to be paid out of Blue Sky’s bank account a total of US$1.12 million to four separate companies, none of whom were suppliers of Blue Sky, none of whom were creditors and none of whom had links with Blue Sky.  It later transpired that all were connected to the 2^nd defendant, including a company he owned called Smoking Joe Limited to whom US$650,000 was paid.

18.  Following a trial in which the defendants unsuccessfully opposed the petition to wind up Blue Sky, Blue Sky was put into liquidation in November 2003.

19.  By then the defendants had taken the books of account and all other records of Blue Sky.  Since then they have declined to release them to the liquidator or otherwise assist in the winding up.  In fact Mr Li of High Glad and Enrich told me that he is on the Committee of Inspection and knows that the defendants having returned to the United States cannot now be traced.

20.  In addition to mounting this action the plaintiffs have lodged a complaint with CCB Hong Kong; the investigation is pending.

This Action

21.  The plaintiffs issued their writ in April 2003.  Their claim is for a declaration that the 2^nd defendant held his share in Blue Sky in trust for the plaintiffs, and an enquiry of accounts or alternatively damages.

22.  The defendants denied liability and counterclaimed in damages and/or an account for profits.

23.  The plaintiffs applied for summary judgment but that was dismissed on a clash of affidavits.  Thereafter the defendants took no steps.  They failed to file witness statements by a deadline or an extension of that deadline.  Their solicitors came off the record.  They took no part in the trial.

The Evidence

24.  The plaintiffs’ case was adduced by the plaintiffs themselves and Li Siu Lok.  All had made comprehensive witness statements spelling out the history I have already outlined.  In the absence of involvement by the defendants that evidence came in unchallenged.

25.  In addition, I was asked to rule on a summons brought under O. 38 r. 2 of the Rules of High Court in which the plaintiffs sought leave to adduce evidence in affirmations made by the plaintiffs in support of their application for summary judgment; in particular one made by the 2^nd plaintiff of 5 June 2003.

26.  The purpose of this application was to introduce as evidence exhibited an affidavit made by the 1^st defendant in his opposition to the winding up of Blue Sky.  I did not rule on this during the trial, but now do so in favour of the plaintiffs.

27.  In the affidavit, the 1^st defendant recorded at paragraph 4 details of the Joint Venture.  Referring to Blue Sky as “the Company” he stated:

“Like the Company, Grandville Industries Limited was agreed to be owned in equal shares by myself and my father on the one hand and Dominic and Eddy Chow [the plaintiffs] on the other …”

28.  This provides support for the evidence of both plaintiffs that the mechanics of the parties joining forces required each of the companies formerly wholly owned by each side to be shared.

Discussion

29.  Mr Barlow invited me to find on the evidence, which included the sworn testimony of the 1^st defendant, that the plaintiffs became beneficial owners of 50% of Blue Sky; that Blue Sky had sufficient funds set aside to meet its accounts receivable in October/November 2002 and otherwise to continue to trade profitably; that the defendants by paying or transferring funds to companies that were not creditors of Blue Sky or otherwise had any connection with Blue Sky amounted to an unauthorised distribution of profits to the tune of the amount paid out; namely US$1.12 million; that this was in breach of the positive averment pleaded by the defendants not to distribute until the parties had agreed to do so, and that the defendants acted in breach of the fiduciary duty owed the plaintiffs. 

30.  Insofar as the remedies prayed for, Mr Barlow realistically made the point that the lack of records available for inspection and otherwise the paucity of information to hand, and the defendants having gone to ground in the US or elsewhere, would suggest that an attempted accounting might prove expensive, difficult and, in the end, perhaps not possible.  Accordingly he sought the declaration of ownership of 50% of the shares in Blue Sky prayed for, and recovery of 50% of the unauthorised payment, that is US$560,000, as damages for breach of fiduciary duty. 

31.  He also submitted that in the calculation of interest the appropriate rate should be 1% over prime, to be compounded, with yearly rests, quoting as his authority the English Court of Appeal case of Wallersteiner v Moir (No. 2) [1975] 1 QB 373.  In that case the more generous (for the payee) calculation of interest was awarded because a company’s director was found to have profited from his fiduciary position at the company’s expense.  And this practice is observed in Hong Kong; see the White Book 6/L/1 page 72.

32.  Mr Li had calculated what that interest should be up to the date of the hearing which was 28 August 2006.  I repeat verbatim his calculation:

“Schedule of Calculation of interest on damages for breach of fiduciary duty
Compound Interest is calculated as follows :-
Period	Days	Principal	Rate	Interest	Total Amount
		(US$)		(US$)	(US$)
4/12/2002 - 3/12/2003	365 days	$560,000	6%	$33,600	$593,600
4/12/2003 - 22/9/2004	294 days	$593,600	6%	$28,610
23/9/2004 - 15/11/2004	54 days	$593,600	6.125%	$5,364
16/11/2004 - 3/12/2004	18 days	$593,600	6%	$1,752	$629,326
4/12/2004 - 20/3/2005	107 days	$629,326	6%	$11,069
21/3/2005 - 22/5/2005	63 days	$629,326	6.25%	$6,789
23/5/2005 - 4/7/2005	43 days	$629,326	6.75%	$5,004
5/7/2005 - 20/7/2005	16 days	$629,326	7.25%	$2,000
21/7/2005 - 10/8/2005	21 days	$629,326	7.5%	$2,716
11/8/2005 - 21/9/2005	42 days	$629,326	7.75%	$5,612
22/9/2005 - 2/11/2005	42 days	$629,326	8%	$5,793
3/11/2005 - 3/12/2005	31 days	$629,326	8.5%	$4,543	$672,852
4/12/2005 - 14/12/2005	11 days	$672,852	8.5%	$1,724
15/12/2005 - 1/2/2006	49 days	$672,852	8.75%	$7,904
2/2/2006 - 29/3/2006	56 days	$672,852	9.00%	$9,291
30/3/2006 - 9/8/2006	133 days	$672,852	9.25%	$22,679
10/8/2006 - 28/8/2006	19 days	$672,852	9.00%	$3,152	$717,602
		Total Interest		$157,602 =======

Prime Interest Rate

From 8/11/2002 to 22/9/2004	5%
From 23/9/2004 to 15/11/2004	5.125%
From 16/11/2004 to 20/3/2005	5%
From 21/3/2005 to 22/5/2005	5.25%
From 23/5/2005 to 4/7/2005	5.75%
From 5/7/2005 to 20/7/2005	6.25%
From 21/7/2005 to 10/8/2005	6.5%
From 11/8/2005 to 21/9/2005	6.75%
From 22/9/2005 to 2/11/2005	7.00%
From 3/11/2005 to 14/12/2005	7.50%
From 15/12/2005 to 1/2/2006	7.75%
From 2/2/2006 to 29/3/2006	8.00%
From 30/3/2006 to 9/8/2006	8.25%
From 10/8/2006 to up-to-date	8.00%”

33.  Mr Barlow said further that he had instructions from the plaintiffs to undertake on their behalf that they would cause 50% of the shares of Grandville to be transferred to the defendants.

The Outcome

34.  I am satisfied on the evidence adduced that what the plaintiffs and Mr Li have told me is true and correct.  The plaintiffs have made out their case and are entitled to the relief they seek, including interest, as follows:

(1) There will be a declaration that the share the 2^nd defendant holds in Blue Sky Industries Limited (in liquidation) is so held in trust for the plaintiffs;

(2) for breach of fiduciary duty the plaintiffs are entitled to damages in the sum of US$560,000, together with interest as hereafter calculated;

(3) the interest to the date of this judgment (5 September 2006) is US$158,929; the judgment debt is thus US$718,929; hereafter interest shall run on the judgment debt at the judgment rate;

(4) costs are to the plaintiffs.