SUPER ELECTRIC MOTOR LTD. v. PAI CHUNG YING and Another

1993, No. A1916

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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J U D G M E N T

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1. The 1st Defendant was a director and general manager of the Plaintiff. In late 1988 and early 1989, the 1st Defendant alone could withdraw money from the bank accounts of the Plaintiff. On or about 11th February 1989, the 1st Defendant withdrew a sum of $2,282,901.07 from the Plaintiff's bank account opened with the National Commercial Bank Ltd's Kwun Tong branch. It is the Plaintiff's allegation that the 1st Defendant had withdrawn that sum for his own use and had failed to account it to the Plaintiff and was therefore in breach of his fiduciary duty as director.

2. The 1st Defendant admits having withdrawn that sum. His defence is that in or about February 1989 at a directors' meeting Lau Yen Tak (manager of the Kwun Tong branch of the National Commercial Bank) advised that the political situation in PRC was volatile and there could be a confidence crisis resulting in bank run of the Chinese banks. To protect the Plaintiff he advised that monies the Plaintiff kept with NCB should be withdrawn in cash and kept in a safe deposit box.

3. Pursuant to that advice the 1st Defendant on or about 11th February 1989 withdrew the deposit of US$292,867.36 together with interests totalling HK$2,282,901.07 and placed the same in a safe deposit box at NCB's Kwun Tong branch under the name of the 2nd Defendant (his wife).

4. Those cash placed in the safe deposit box in the name of the 2nd Defendant were later removed and deposited either in the 2nd Defendant's account or the account of Trinitrade Company ('Trinitrade') which was a trading firm in which the 1st and 2nd Defendants were partners.

5. The 1st Defendant said the said sum of $2,282,901.07 was later repaid by "inextricably bound up" running accounts between the Plaintiff and Trinitrade and between the Plaintiff and the 2nd Defendant.

6. The 2nd Defendant applied to be joined so that the 2nd Defendant and 1st Defendant can set off the accounts as partners of Trinitrade with the Plaintiff.

7. In the pleadings there was a counter claim by Trinitrade against the Plaintiff and the Plaintiff by way of counter claim to counter claim, counter claimed against Trinitrade.

8. At the trial, as the counter claim and counter claim to the counter claim involved inextricable accounts between the Plaintiff and Trinitrade, the parties at my suggestion agreed that those accounts would best be dealt with by taking of accounts by an auditor. At the end of the day any amount found due by one party should then pay that amount to the other party.

9. The parties having agreed to my proposal, the Defendants' counter claim and the Plaintiff's counter claim to counter claim are therefore adjourned sine die with liberty to restore. The only remaining issue is whether the 1st Defendant was in breach of his fiduciary duty when he took that $2,282,901.07 and if so whether that sum had been repaid and whether execution should be stayed pending the outcome of taking accounts.

10. Since the 1st Defendant admitted that he had withdrawn the said sum, the onus is on him to prove the allegations stated in his defence.

11. The 1st Defendant gave evidence which is at variance with his own defence. He said it was not at a directors' meeting that Lau Yen Tak advised of the volatile political situation and the possibility of a bank run by Chinese banks. It was at a dinner in a restaurant in Tsimshatsui East when his Indonesian brother-in-laws (shareholders of the Plaintiff) were present that Lau told him of this in either late 1988 or earlier 1989. In January 1989 Lau went to his office and reminded him again and advised him to withdraw money from Chinese Banks. So he withdrew the money and put them into the safe deposit box. The money was gradually transferred to Trinitrade's account or 2nd Defendant's account.

12. When cross examined by Mr Ho of counsel for the Plaintiff about the meeting pleaded at para 5A of the defence, 1st Defendant said the meeting was not in 1989 but earlier i.e. latter part of 1988, as by November 1988 the political situation in China was not stable. He further said that during the meeting there was no particular mention of that sum of money, nor was political instability mentioned.

13. When counsel put to him that he was not authorised to put the money into his partnership account, he said approval from other directors was not necessary.

14. 1st Defendant also did not agree that he had never repaid that sum and said that his wife and Trinitrade were treated as one entity and had repaid the sum to the Plaintiff. He even said a $2.20 million stated in the pleading was in fact the $2,282,901.07.

15. The 2nd Defendant gave evidence and said the directors of the Plaintiff agreed to place the money to Trinitrade. She had pledged her residence and office premises and US$30,000 from Hartanto Tjondro to Dah Sing Bank as security for Trinitrade to have more flexibility in respect of opening of Letter of Credit and overdraft as Plaintiff had to open Letters of Credit issued by Dah Sing Bank.

16. She produced a letter from Dah Sing Bank to prove her point. This may well be the case but that letter was issued by Dah Sing Bank on 24th November 1989 whereas the money was taken by the 1st Defendant on or about 11th February 1989 which was almost 10 months earlier. So the increased flexibility by Trinitrade to open Letter of Credit and overdraft had nothing to do with the taking of the $2,282,901.07 by the 1st Defendant.

17. The accountant of the Plaintiff was called to give evidence. He agreed that he accompanied the transfer of the money and acted as the body guard.

18. The last witness called by the Defendants is Lau Yen Tak. He said by March 1988 he was transferred from the National Commercial Bank in Kwun Tong to the head branch in Hong Kong Island. As branch manager of the bank, he only dealt with the business of the bank. He did not have any inside information concerning political situations. He only learnt about political matters from newspaper. He said he had not attended any directors' meeting of the Plaintiff. He only knew the 1st Defendant had taken the money out afterwards because he was no longer in that branch. He had not attended dinner with the 1st Defendant and the Plaintiff's directors in Tsimshatsui East. He said Hartanto came to Hong Kong between 1988 and 1989 once or twice and he invited him for dinner in Telford Garden. Hartanto went along with some Indonesian friends. It was just a social gathering.

19. With the evidence of the Defendants, it is not surprising that the Plaintiff elected not to call evidence.

20. The main reason according to the 1st Defendant as to why he withdrew the money from National Commercial Bank was because of the advice given by their branch manager Lau Yen Tak who told him the political situation in China was volatile and there was possibility of a bank run in Chinese banks. He believed Lau because of his insider information.

21. His evidence is completely shattered by his own witness Lau Yen Tak who said that he did not have any political information from the bank. He was already transferred away from Kwun Tong branch some 9 months before the 1st Defendant withdrew the money.

22. On balance I am satisfied that the 1st Defendant had taken the sum of $2,282,901.07 from the Plaintiff without justification. It could not have been in the interest of the Plaintiff to have such a large sum of money taken away from its account thus depriving the Plaintiff of the entitlement to interests derived from that money nor for that matter use the said sum for the advancement of the Plaintiff's business. Hence I am satisfied that the 1st Defendant was in breach of his fiduciary duty as director when he withdrew that amount.

23. Then I come to consider whether Trinitrade had repaid that amount back to the Plaintiff on 1st Defendant's behalf. Apart from para 11(2) of the re-amended defence and counter claim to which it was pleaded that a round sum of HK$2,200,000.00 intended to represent the sum of HK$2,282,901.07 there was never any mention of the repayment of $2,282,901.07 to the Plaintiff.

24. The items set out in the counter claim and the Plaintiff's counter claim to counter claim as had been pleaded by the Defendants are inextricable accounts between the Plaintiff and Trinitrade. In the premises on balance I find that neither the 1st Defendant nor the Defendants in the name of Trinitrade had repaid the amount the 1st Defendant took from the Plaintiff.

25. In the premises the 1st Defendant is indebted to the Plaintiff in the sum of $2,282,901.07.

26. In re Pennington and Owen Ltd [1925] 1 Ch 825, the liquidator in the winding up of a company sought to set off against debt due by the company to a creditor a debt alleged to be due to the company by a partnership firm of which the creditor was a member. It was held that the alleged debt of the partnership firm being a joint and not a joint and several debt could not be set off against the separate debt due by the company to the partner.

27. In Jones v. Fleming [1827] B & C 217 a partnership owed salary to an employee. The employee owed a debt to one of the partners individually. The employee sued the partners for salary. It was held that the partner could not set off the debt owed to him individually.

28. Based on the authorities above Trinitrade being a partnership, debts, if any, by Plaintiff to the Trinitrade cannot be set off against a separate debt due to the Plaintiff by the 1st Defendant, (a partner) as Trinitrade's account is a joint and not a joint and several account.

29. The debt owed by the 1st Defendant to the Plaintiff being a separate debt, I see no reason why there should be a stay of execution pending the outcome of taking accounts between the Plaintiff and Trinitrade.

30. In the premises there be the following orders:-

1) Judgement for the Plaintiff against the 1st Defendant in the sum of $2,282,091.07 together with interests at 8% p.a. from 11/2/89 until judgment and costs.

2) Taking of account by a mutually agreed public certified accountant. In default the parties be at liberty to apply for directions.

3) Payment of the amount found due.

4) Cost of the taking of accounts to the party to which the final balance is found due.

(Wesley Wong)

Deputy Judge of High Court