KAO, LEE & YIP (a firm) v. DONALD KOO HOI YAN AND OTHERS

HCA 8847/1993

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 8847 OF 1993

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J U D G M E N T

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I.       INTRODUCTION

1.  On 2 April 2003 Ma J held that Mr. Koo had breached his fiduciary duty to Kao Lee & Yip (KLY).  The breach was the result of Mr. Koo setting up a firm (Koo & Partners (KP)) while still a KLY partner.  Ma J found that Mr. Koo had diverted legal work involving the Bank of China Group (BOC) from KLY to KP. 

2.  Ma J ordered that Mr. Koo account to KLY for all profits earned by KP on BOC work between 1 October 1993 and 31 September 1994 (the Accounting Period).  Such account was to make:-

“due allowance against the [BOC] profits in respect of the expenses and overheads incurred in relation to such profits, including relevant salaries and an assessment, in monetary terms of time spent by solicitors and staff of [KP] (including that of [Mr. Koo])”.

3.  The Accounting Period corresponds with the first 12 months of KP’s existence as a firm.

4.  This is the hearing of the account ordered by Ma J.

5.  The efforts of the parties and their legal advisers have meant that much in relation to the account which was originally in dispute has been resolved.  There remain 7 discrete issues for me to decide.  Those issues will be dealt with in this Judgment today.

II.      GENERAL APPROACH

6.  Ma J set out the principles of an account in his Judgment (especially at §§140-145).  I will not repeat what he said there.

7.  Ma J stressed flexibility as “[p]erhaps the most important guide for the Court” in the taking of an account.  I would like briefly to amplify on that aspect of the Court’s approach where, as here, there is an absence of detailed time records.

8.  On 21 January 1994 Mayo J directed that Mr. Koo “maintain an account of all work which is undertaken by [KP] in relation to any former client of [KLY] until trial or further order”. 

9.  Despite Mayo J’s Order, for whatever reason, KP failed to take adequate records of its work for BOC.  In particular, KP failed to compile time sheets for work done during the Accounting Period.  KP also did not contemporaneously keep any accurate or detailed record of BOC work during the Accounting Period for which fees were waived.

10.  This failure has posed major problems for this accounting exercise. 

11.  For example, the Court has had difficulty in assessing how much of the working hours of each KP partner was spent generating profits for BOC work during the Accounting Period. 

12.  Further, in respect of files with missing or no bills, the Court has had difficulty in determining whether such absence is due to bills having been lost or merely to fees having been waived.

13.  Mr. Denis Chang SC (appearing for KLY) submits that, where there is doubt over what was or was not done in relation to a BOC file due to a lack of proper records, I should give KLY the benefit of the doubt.  Accordingly, where the lack of proper records means that Mr. Koo is unable to adduce evidence on a question, I must presume matters against Mr. Koo and in favour of KLY.

14.  Subject to a caveat, I agree with that general approach.  I should not penalise KLY by reason only of KP’s failure to maintain adequate records contrary to Mayo J’s Order. 

15.  The caveat is that the presumption cannot be my sole consideration.  The presumption is expedient.  But it does not license me to draw any inference whatsoever against Mr. Koo, however unreasonable or disproportionate.  I must still approach a disputed issue with a measure of realism and pragmatism.  I must always ask myself whether the result of any application of the presumption accords with common sense.

II.      DISCUSSION

A.      Issue 1: Accountable revenue on BOC Files with missing or no bills

16.  There are 367 BOC files for which bills are missing or non-existent.  The question is how much (if anything) should be accounted to KLY for work done on these files.

17.  Mr. Koo contends that fees for work done on all those files were probably waived.  That, he says, must be the reason why despite diligent search no bills have been found.

18.  KP undoubtedly did much free work for BOC and its associate companies.  Indeed, underlying KP’s phenomenal success as a law firm was its “bartering” arrangement with BOC.  This meant that, in return for KP advising BOC free of charge on a wide range of banking-related questions, BOC would direct a significant volume of billable work (especially conveyancing work) to KP.

19.  There were 4 main departments at KP: banking (BKG) (under Mr. Koo and Mr. Edwin Lau); aircraft and ship finance (ASF) (under Mr. Mohan Datwani); project and finance (syndication) (PNS) (under Ms. Vivien Fan); and conveyancing (CON) (under Ms. Lisa Lee).

20.  The usual (but by no means invariable or consistent) practice was for BKG, ASF and PNS not to charge in respect of banking-related advisory work for BOC.  Fees in relation to such work were regularly waived or (occasionally) significantly reduced. 

21.  For about the first 10 months of the Accounting Period, it was thought unnecessary to draw up bills for such free work.  However, even during this initial 10 month period, bills were raised and marked “waived”.  This was apparently done at times (but not necessarily always) to demonstrate to BOC officers (especially branch sub-managers) that KP was providing significant services to BOC for free. 

22.  Mr. Edwin Lau’s evidence was that, in practical terms, BKG functioned as BOC’s in-house lawyer.  BKG consequently never charged BOC in any substantive manner.  However, contrary to Mr. Lau’s recollection, disbursements (even small amounts) in relation to BKG work and nominal amounts for filing BKG-related documents seem to have been charged to BOC, at least from time to time.

23.  Following the first 10 months, the practice in BKG, ASF and PNS changed.  Although fees continued to be waived, bills were more regularly drawn up with fees specifically marked as having been “waived”.  It was thought that this new practice would promote the close relationship between KP and BOC as the bills would show that BOC was obtaining a substantial free benefit from KP.

24.  The practice in CON was different. 

25.  Because at the time the Law Society maintained a system of scale fees for conveyancing work, bills showing the scale fees payable for such work were regularly drawn up by CON.  But, where it was decided that work would be done for free, the relevant fees were marked “waived” on a bill.

26.  According to Ms. Lisa Lee, unlike BKG work, it was not the case that CON work on BOC-related matters was invariably waived. It was a matter of decision by Ms. Lee on a case-by-case basis whether KP fees would or would not be charged.

27.  According to Mr. Chang, the breakdown of the 367 files is as follows:-

(1)     67 CON files in respect of transactions which had “fallen through”

(2)     12 CON files without explanation.

(3)     3 CON files with forecast fees of $17,100.

(4)     25 ASF files.

(5)     15 PNS files.

(6)     26 LIT (litigation department) files.

(7)     7 CNC (corporate and commercial department) files.

(8)     211 BKG files.

(9)     1 BKG file with forecast fees of $35,000.

28.  Further investigation by Mr. Koo’s legal team, however, shows that of the 12 CON files said to be without explanation, the PPOS system has the following details:-

(1)     2 files: waived.

(2)     2 files: “fallen through” or instruction withdrawn.

(3)     1 file: KP was itself the client.

(4)     3 files: involved banking advice for BOC or preparation of documentation for BOC – as such fees are unlikely to have been charged (see below).

(5)     2 files (*): involved documentation for a mortgagor and mortgagee respectively.

(6)     1 file (*): no additional information.

(7)     1 file: duplicate of a file already accounted for.

29.  Thus, on the latest information, only 3 of the latter 12 CON files are likely to have given rise to fees.  Those have been marked with an asterisk (*) above.

30.  Mr. Jat Sew Tong SC (appearing for Mr. Koo) argues that the fact that no bills have been found in connection with the relevant files strongly points towards no fees being charged at all for these files.  Mr. Jat suggest that, as a matter of common sense, if significant amounts of fees had been billed, there would be a record of these.

31.  But I cannot wholly accept Mr. Jat’s submission.

32.  Records found in KP’s PPOS system suggest that, despite the absence of bills, KP forecast scale fees on at least 3 CON files comprising the 367 files.  Nothing in the 3 CON files indicates that the forecast fees were waived.

33.  In light of Ms. Lee’s evidence of the CON practice of drawing up bills whether or not charges were waived, one would have expected to find bills for many more (if not all) of the CON files comprising the 367 files. 

34.  Given the absence of KPS records of what was waived and what was not, the burden must then be on Mr. Koo to establish that CON fees were in fact waived.  In respect of the CON files comprising the 367 files, work was presumably done.  Prima facie, fees must have been charged for this work.  In the absence of CON bills evidencing waiver or some other cogent explanation for the absence of a bill, I cannot simply assume that nothing was charged on the CON files.

35.  The bulk of the 367 files relate to BKG matters (212 files).

36.  Here Mr. Lau’s evidence is that in general BKG advisory and other work was not charged to BOC in consequence of the bartering arrangement with BOC. I am prepared to accept this evidence.

37.  It is true that there are some discrepancies between Mr. Lau’s evidence and the available documents.

38.  For instance, Mr. Lau refers to having opened 130 BKG files for which fees were waived.  This would leave unexplained some 82 BKG files which have missing or no bills unaccounted for. 

39.  But I am not sure of the extent to which Mr. Lau’s figure of 130 files can be taken to be a hard (as opposed to merely an approximate or soft) figure of what he himself handled. Nor do I think that this discrepancy in detail detracts from his overall evidence as to BKG’s general practice.

40.  It may also be that, as mentioned above, Mr. Lau has forgotten that disbursements and nominal fees for filing documents (in the magnitude of $250) were charged to BOC.  Mr. Lau simply said that small disbursements were not charged.  That part of his evidence appears to be wrong. 

41.  But again I do not think that this lapse of detail on Mr. Lau’s part diminishes the thrust of what he said in Court about BKG’s general practice.

42.  Further, there is the discrepancy that, in some cases, bills do not appear for BKG work in the last 2 months of the Accounting Period.  According to Mr. Lau, in the last 2 months, even where fees were waived, bills ought to have been drawn up.

43.  But the fact that such bills are missing, whether through carelessness or otherwise, would again not alter the fact that the normal routine practice of BKG was not to charge BOC anything other than nominal sums.

44.  I have not lost sight of the fact that there is a BKG file where a fee of $35,000 appears to have been forecast.  Mr. Lau had no personal recollection of that charge. 

45.  On this BKG file, I am inclined to accept Mr. Lau’s suggestion that the forecast fee was probably a mistake of some sort. 

46.  Ultimately, then, the likelihood is that the practice of not charging BOC for BKG work was followed in respect of all BKG work.

47.  I am therefore left with 3 CON files with a forecast of $17,100 in fees and a further 76 files (that is: 3 CON files (of the 12 CON files said to be unexplained), 25 ASF, 15 PNS, 26 LIT and 7 CNC files) with no billing details.  I ignore the CON files relating to abortive or “fallen through” transactions.

48.  It is unclear, apart from conjecture in relation to cryptic file descriptions, whether or not the non-CON files of these 76 files relate wholly or in part to banking advice.  It is far from clear, for example, whether the file descriptions are or are not comprehensive of the work done on a file.

49.  What then is a practical method of approaching the valuation of the 3 CON files and further 76 files?

50.  I do not think that Mr. Jat’s wide contention of no revenue to be accounted for in relation to the relevant files is right.

51.  But, by the same token, I believe that Mr. Chang’s suggestion (to the effect that over $5 million should be attributed to the files with missing or no bills) is equally extreme.  Mr. Chang derives his $5 million+ figure by multiplying some 300+ relevant BOC files by the average amount of revenue earned on a KP file ($17,832).

52.  I think that a robust, but fair, method of proceeding would be to multiply the 76 files referred to above by the average income per file of $17,832 and then to add the $17,100 forecast for the 3 CON files.  This yields: [(76 files x $17,832 per file) + $17,100] = [$1,355,232 + $17,100] = $1,372,332.

B.      Issue 2: Treatment of donations

53.  Mr. Koo claims to deduct donations totalling $225,750 from the revenue for which he has to account.  Of that amount, $220,000 constitutes a donation to the victims of the Southern China flooding disaster in 1993.  That donation was made by KP at BOC’s request in order (Mr. Koo says) “to maintain the good relationship with BOC”.

54.  Mr. Jat submits that the donations should be excluded because they helped foster the business relationship with BOC and so would have helped bring in work during the Accounting Period.

55.  I do not think that the donations should be deducted from KP’s accountable profits.

56.  The donations would have come from KP’s available profits during the Accounting Period.  By Ma J’s Order KP must account to KLY for all available profits from BOC work during the Accounting Period. 

57.  That KP decides to use some profits for a charitable donation rather than some non-charitable reason, cannot alter the fact that the donation comes from accountable profits.  Those profits are not for KP to spend as it wishes but are rather amounts for which KP must answer to KLY.

58.  Mr. Koo suggests that the donation of $220,000 was actually in the nature of an “expense” because it was made at BOC’s request and helped cement KP’s close relationship with BOC. 

59.  It is possible that the donation may have had some intangible positive effect as between KP and BOC.  But, if that were the case, any effect would be likely to mature in the middle or long term, rather than immediately in the first year of KP’s business. 

60.  Consequently, even on the assumption that the $220,000 was somehow akin to an “expense”, I do not think that the sum can be regarded as an outlay incurred for the purpose of earning profits during the Accounting Period.

C.      Issue 3: Treatment of set-up fee

61.  KP paid a consultancy fee of $460,000 to K & P Services Limited (KPSL).  KP now claims to deduct this amount from accountable profits.  The question is whether it is entitled to do so.

62.  KPSL was KP’s service company.  In the month or so, before KP came into existence, KPSL worked to set up KP’s business.  This enabled KP to be fully operative when it started business on 1 October 1993.

63.  The Amount of $460,000 represented expenses incurred by KPSL in setting up KP’s business.  Of that amount, about $340,000 represents salaries paid to KPSL’s directors and employees (including Ms. Lisa Lee).  Other items of major expense included printing and stationery ($34,766), recruitment expenses ($21,333) and entertainment ($30,473).

64.  Mr. Jat submits that the $460,000 must be attributable to the generation of profits during the Accounting Period. 

65.  Mr. Chang, on the other hand, says that the $460,000 constitutes the payment of expenses incurred outside the Accounting Period.

66.  I do not think that the entire $460,000 can be deducted from accountable profits.  This is because the sum represents the expenses of setting up KP as a going concern in the long-term, not just over the Accounting Period.

67.  But I believe that some of the set-up expenses may be attributable to the profits earned in the Accounting Period.  This is because, unless KPSL had done the necessary ground work to set up KP, KP would not have been able to earn profits on Day 1 of its business (corresponding with Day 1 of the Accounting Period).

68.  Accordingly, it would be appropriate to deduct a portion of the $460,000 from accountable profits.  On a rough-and-ready approach, I think that one might assume a business life of (say) about 10 years as representing the long term.  Dividing the $460,000 evenly over that 10-year duration would mean that $46,000 could be attributed to the Accounting Period.

69.  I would thus allow a deduction of $46,000 from accountable profits.

D.      Issue 4: Treatment of loan interest

70.  KP financed its operations by a BOC overdraft facility and a BOC loan.  It claims to deduct as an expense the whole of the loan interest which it paid to BOC during the Accounting Period. The question is whether it is entitled to do so.

71.  Mr. Chang relies here on the evidence of Mr. Nangle (KLY’s accounting expert).

72.  Mr. Nangle points out that at least 65% (the actual figure being closer to 70%) of KP’s bank borrowing was incurred to finance the acquisition of fixed assets and to pay rental deposits of $890,000.  That 65% portion corresponds to about $420,000. 

73.  The 35% balance of borrowings from BOC (about $230,000) went towards the financing of working capital and partners’ drawings.

74.  Mr. Nangle concludes from these facts that it would be wrong to allow a deduction of 65% of the loan interest.  This is because such amount would be attributable to fixed assets or rental deposits contributing towards the earning of profits over KP’s life, not just in the Accounting Period.

75.  Mr. Nangle accepts that the remaining 35% of loan interest can be allowed as a deduction against allowable profits.

76.  Mr. Jat argues that the interest payable on the BOC loan, which was used to finance KP’s operations, must be wholly attributable to the earning of profits in the Accounting Period. Mr. Jat submits that this is because the loan interest is the cost incurred during the Accounting Period of financing that part of KP’s borrowings used to purchase fixed assets.

77.  I am unable to accept Mr. Jat’s submission.  In my view, Mr. Nangle’s approach (which differentiates between depreciation and loan interest) is basically correct.

78.  But I would add a refinement to Mr. Nangle’s approach.  In examination, Mr. Nangle said he would not quibble with my proposed refinement.

79.  The fixed assets and rental deposits acquired with 65% of the BOC loan would have brought in profits both during the Accounting Period and in the longer term.  Therefore, some of the 65% should be properly attributable to the Accounting Period.  The question is how much of the 65%.

80.  Following the approach used with the $460,000 set-up expenses, I would assume a business life of 10 years for KP.  This would mean that 10% of the cost of acquisition of fixed assets and the payment of rental deposits may be attributable to the Accounting Period.  This should then mean that 10% of the 65% portion of the BOC loan interest (that is, about $42,000) might properly be deducted from accountable profits.

E.      Issue 5: Monetary attribution of partners’ time

81.  There are 2 questions here.

82.  First, during the Accounting Period KP had 6 partners (Mr. Koo, Mr. Lau, Mr. Datwani, Ms. Fan, Ms. Lee and Ms. Maria Ng (joined CNC in April 1994)).  What is the notional amount (quasi-salary) which would have represented the cost to the firm of generating profits through their agency over the Accounting Period?

83.  Second, not all of the time which the partners spent on KP’s affairs can be attributed to the generating of profits in the Accounting Period.  Some time must have been spent developing business opportunities for the future.  The monetary equivalent of that time should not be deductible from profits in the Accounting Period.  Accordingly, what proportion of each partners’ quasi-salary should be reckoned as contributing towards profits in the Accounting Period?

84.  Note that I have stated the first question in terms of the cost to the firm.  There was some debate between Mr. Nangle and Mr. Jat over whether the relevant expense was that of a KP client or that of the firm.  In my view, Ma J’s Order allowed for the deduction from revenue of the expense to the firm of engaging solicitors (whether partners or salaried) to generate profit.

85.  On the first question, as far as Mr. Lau, Mr. Datwani, Ms. Fan, Ms. Lee and Ms. Ng are concerned, Mr. Nangle accepts that their monthly drawing of $80,000 represents a fair approximation of what they would have earned had they been paid a salary.

86.  On the first question, the dispute arises in respect of the quasi-salary attributable to Mr. Koo. 

87.  Mr. Nangle observes that, in his general experience, senior partners in professional firms (not just solicitors’ firms) typically have a charge-out rate of about 50% more than junior partners.  On this basis, Mr. Nangle thinks that a notional salary of $120,000 ($80,000 x 1.5) should be ascribed to Mr. Koo.

88.  Mr. Koo’s monthly drawing was actually $250,000 (which was the same as when Mr. Koo was a partner in KLY).  But Mr. Nangle thinks that would be excessive as a notional salary.

89.  Mr. Nangle emphasises that a partner’s drawing is not a salary but an advance on his share of profits.

90.  Mr. Nangle also stresses that there is a profit element incorporated into a solicitor’s hourly charge-out rate (that is, the rate payable by a client for an hour of work by the solicitor).  Consequently, where a client pays $x per hour for work done by a solicitor, some portion p of that charge must represent the firm’s profit for work done. 

91.  Since the whole point of the present exercise is to account for profits, it would be circular (and so wrong) (Mr. Nangle contends) to allow KP to treat p as an expense of generating accountable profits.  The portion p must be abstracted from whatever hourly rate is used to calculate a partner’s quasi-salary.

92.  In my view, Mr. Koo’s drawing of $250,000 represents a fair approximation of what his notional salary would have been.  In particular, I note that Mr. Koo was universally regarded in the Accounting Period as a “rain-maker,” that is, someone who brought in business to a firm.  A firm would thus be prepared to pay a premium as part of the cost of engaging such a “rainmaker” to work for the firm and generate profit.

93.  Let me now attempt a “reality check” on the appropriateness of $250,000 per month as a quasi-salary.

94.  Mr. Koo spent almost all of his waking hours on KP matters during the Accounting Period.  This is hardly surprising, given that the Accounting Period was KP’s first year of business.

95.  Nevertheless, assume that Mr. Koo worked only 40 hours per week (representing 8 hours per 5 day working week) on KP matters. If one takes $250,000 as his notional monthly salary, one arrives at an hourly wage of $1,562.50 (that is, [($250,000 ¸ 40 hours/week) ¸ 4 weeks]).  Of course, the more hours per week Mr. Koo actually worked, the lower would be the resultant hourly wage.

96.  One might compare the hourly wage just derived against Mr. Koo’s hourly charge-out rate of $3,000 while at KLY.   The notional hourly wage of $1,562 is slightly over half of this hourly charge-out rate. 

97.  Even on the assumption that the hourly charge-out rate incorporates a profit element p, such element p would plainly have been factored out of the hourly wage of $1,562.  The circularity against which Mr. Nangle warned would not be present in the hourly wage of $1,562.

98.  Consequently, in my judgment, it would be appropriate to take $250,000 as Mr. Koo’s notional monthly salary.

99.  The second question is more difficult.  By its nature the answer to this question must inevitably incorporate a subjective consideration.

100.  The starting point must be Mr. Nangle’s estimate that the junior partners would have spent some 60% of their time on work which would have brought a profit in the Accounting Period.  Mr. Nangle attributes the remaining 40% to set-up and forward-looking activities.

101.  Mr. Jat suggests 100% of all partners’ time should be attributable to the earning of profits in the Accounting Period. I do not think that is a realistic position, since (for example) even Ms. Lee accepts that some of her time was spent on client development activities.

102.  In the alternative, Mr. Jat suggests between 50%-85% for Mr. Koo; 80%-90% for Mr. Datwani, Ms. Fan and Ms. Ng; and 75% for Ms. Lee.

103.  Having heard the evidence of Ms. Lee and Mr. Lau, I think that Mr. Nangle under-estimates the percentage of time attributable to the generation of profits in the Accounting Period by KP’s junior partners.

104.  The evidence is that junior partners devoted a lot of time to getting their advice right in relation to any given work during the Accounting Period.  I believe that this desire to get things right would have meant spending more time in the scrutiny of ongoing work.  I am therefore prepared to attribute 70% where Mr. Nangle would only allow 60%.

105.  On the other hand, I do not think Mr. Jat is right to suggest that 100% of junior partners’ time should be reckoned as an expense in the Accounting Period.  I also believe that Mr. Jat’s alternative suggestions are still over-estimates.

106.  The evidence of Ms. Lee, for instance, is that she did spend some time on forward-looking activities including client relations.  She also worked on a continuous basis in developing model precedents for general use by the CON throughout the firm’s life (not just in the Accounting Period). 

107.  The development of precedents was particularly important since KP was starting from scratch without an extensive bank of previously tried and tested conveyancing templates.  Some of that work Ms. Lee did before October 1993, during the month or so when she worked for KPSL.  But (Ms. Lee said) the work continued even during the Accounting Period.

108.  Mr. Lau, on the other hand, rendered a lot of free advice to BOC.  That was not simply with an eye to generating profits during the Accounting Period, but also towards forging a closer relationship with BOC over the future life of the firm.

109.  By any yardstick, it cannot therefore be said that Ms. Lee and Mr. Lau were engaged in the generation of profits solely during the Accounting Period.

110.  I did not hear live evidence from the other junior partners.  But I doubt that their cases would have ben radically different from those of Ms. Lee and Mr. Lau.

111.  In contrast to the junior partners, the situation of Mr. Koo is easier to assess.  That is because Mr. Koo has previously filed affirmations in Court about the extent of his involvement in KP’s day-to-day affairs during the Accounting Period.

112.  Thus, Mr. Koo previously deposed as follows in a 15th Affirmation dated 27 January 2005:-

“My role at KP during the period fo the Account

29.    It is important for me to record that the first year of KP was a time when I was immensely busy dealing with structural and organisation issues for the firm.  Creating and organising a firm which was able to achieve a turnover of HK$31,200,664 in its first year operation (a figure extracted from Mr. Robinson’s evidence) was nearly a full time achievement for me during the period of the Account.  I had to attend to many administrative issues, which in later years were conducted by people specially recruited and employed to deal with such matters, and I conducted a great number of interviews with potential recruits for professional roles.  My objective was to advance the firm of KP in one year from its start to become a medium sized practice with potential growth.

30.    In paragraph 23 of my third affirmation, I noted that Emmanuel Kao [senior partner of KLY] handled the day-to-day management of KLY whilst Yip Wan Tak [another partner at KLY] concentrated on client development at KLY and, for this reason, they rarely supervised legal work performed by assistants.  At KP during the period of the Account, I had to conduct both day-to-day management of the firm and the client development.

31.    During the period of the Account, I recollect that I was engaged in establishing the strategy for the complicated banking files and in ‘troubleshooting’ the problems that arose to ensure that the work of others at KP could run smoothly.  I was also engaged in hundreds of telephone enquiries for smaller matters as bank officers contacted me. In particular BOC officers contacted me to ask me to endorse the views that had been given by others in the firm....  At paragraphs 22 and 23 of [my third] affirmation I describe my practice style at KLY.  I repeat that evidence, which correctly describes my professional style at KP when working on client matters and in developing business.”

113.  The paragraphs from Mr. Koo’s 3rd Affirmation dated 14 January 1994 mentioned in the foregoing quoted passage were as follows:-

“Background - My Practice Style as a Supervising Partner

22.    There were two main areas of my work. The first [was] to plan business development strategies for the Firm with the aim of gaining more banking and finance work.  This involved a great deal of contact with officers of BOC and its sister banks at different levels.  Secondly I had to guide my assistants in preparing banking advice and loan documentation.  I discussed their problems with them, wherever possible, on a daily basis.  As supervising partner my duty was to approve all drafts and advice of the Team since none of the assistant solicitors had authority to sign letters on behalf of the Firm.

23.    Consequently, I did not actively handle files on my own but rather supervised the handling of files by assistants.  I did not keep any files in my room because the files were all kept by the handling assistants, who dealt with the files on a daily basis....”

114.  In cross-examination, Mr. Koo sought to downplay these earlier remarks of his.  He suggested that the remarks were being read “out of context”.  But it seems to me that the remarks and their import are clear and unambiguous.

115.  I conclude from Mr. Koo’s own affirmation evidence that, in comparison to his junior partners, Mr. Koo did not spend as much of his time on the generation of profits in the Accounting Period (as opposed to the longer term).

116.  Mr. Nangle estimates that Mr. Koo spent 25% of his time on earning profits in the Accounting Period.  I think that is an appropriate starting point.

117.  But I would raise the apportionment to 30% to reflect the fact that, KP having just started, Mr. Koo probably spent a little more time in the scrutiny of his junior partners’ work on files during the Accounting Period.

118.  In summary, the monetary equivalent of partners’ time spent on earning profits during the Accounting Period would be as follows:-

(1)     Mr. Koo:  $250,000 per month x 12 months x 30% or $900,000.

(2)     4 junior partners: 4 x $80,000 per month x 12 months x 70% or $2,688,000.

(3)     Ms. Ng: $80,000 per month x 6 months x 70% or $336,000.

TOTAL: $3,924,000

F.      Issue 6: Treatment of profits tax

119.  The question is whether tax paid by KP on profits earned over the Accounting Period should be deducted from what must be payable by Mr. Koo to KLY.

120.  In my view, profits tax previously paid by KP is not deductible.

121.  Any profits tax was properly payable by KLY (not KP) in the first instance since the relevant profits belong to KLY and not to KP.  The amount of profits tax payable would then depend upon KLY’s (as opposed to KP’s) circumstances.  Once a sum is paid by KP to KLY pursuant to the Order of Ma J, it seems to me that such amount will be taxable in KLY’s hands. 

122.  Contrary to Mr. Jat’s position, I do not see any element here of punishing Mr. Koo.  It seems to me that KP may claim back any profits tax which it would have overpaid to the Inland Revenue in respect of the Accounting Period or, at any rate, if there is an applicable statutory limitation, KP (and thus Mr. Koo) could have previously protected its position in relation to the Inland Revenue.

G.      Issue 7: Interest

123.  The parties agree that interest should accrue at the rate of 1% over Hong Kong dollar prime.  There are, however, 2 outstanding questions in relation to interest.

124.  The first question is whether interest should be simple or compounded annually.

125.  Where money is misused by a person in a fiduciary position, he is normally asked to account for such money with compound interest.  The rationale is that the Court should not allow a fiduciary to benefit from his breach of duty.  See, for example, Wallersteiner v. Moir [1975] 1 QB 373.

126.  Mr. Koo was found by Ma J to have diverted a business opportunity.  He used the fruits of that diverted opportunity for his benefit.  He accepted in cross-examination that he had either invested accountable profits or placed them on bank deposit.  He would have at least earned compound interest on the latter and potentially more than simple interest on the former.  In those circumstances, I think it would be right on balance to direct that interest be compounded annually.  I fully appreciate Mr. Jat’s point that Mr. Koo is accounting for KP’s profits during the Accounting Period and not just his share of such profits.  But I believe, nonetheless, that in a rough-and-ready manner annual compound interest is appropriate here.

127.  The second question is whether any interest should be awarded for the period from mid-1996 to 2001 when (according to Mr. Jat) there was “virtual inaction” on the part of KLY in this action.

128.  An examination of the detailed chronology of this action (including connected proceedings between the same or related parties) suggests that not much took place to advance the present action between about March 1997 and April 2000.

129.  During the latter period, apart from the filing of a notice to change solicitors, a notice of intention to proceed, and a summons to re-amend the Statement of Claim, not much appears to have occurred.  The action seems to have become dormant.

130.  In those circumstances, I think it is appropriate to direct that no interest should accrue for a period of 3 years from 1 April 1997 to 31 March 2000.

IV.     CONCLUSION

131.  That deals with the 7 outstanding issues.  I shall now hear the parties on costs and consequential orders.