KIND CHEER INDUSTRIAL LTD. v. TANG CHEE KEUNG

DCCJ 16464/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO.16464 OF 2000

-----------------------------------------

--------------------------------------

---------------------------------------

JUDGMENT

---------------------------------------

Background:

[1] The Plaintiff is a limited company incorporated in Hong Kong. The Defendant is the shareholder of 49% of all issued shares of the Plaintiff company and at the relevant time one of two of its directors.

[2] In or about the middle of 1995, Mr. Kwan Ngai Keung Kenneth ("Mr. Kwan"), the other director of the Plaintiff Company, acquired a right to operate a toy factory, located in Huang Bu Xiang, Guangzhou (the "Huang Bu Factory") from its owner. The agreement included the payment of yearly operating fees and quarterly rental payments on the factory buildings. The other 2 existing shareholders of the Plaintiff company withdrew from the company and the Defendant purchased 49% of the shares for a sum of HK$110,000.00 from Mr. Kwan.

[3] The Defendant was responsible for productions and the day-to-day operations of the Huang Bu Factory, while Mr. Kwan was responsible for sales and the Hong Kong office operation.

[4] One of the usual business of the Plaintiff was to source moulds for plastic toys on behalf of clients who wanted to contract the toy productions to the Plaintiff Company.

[5] The Plaintiff alleged that the Defendant breached his duties as director by failure to account for cash payments, which he received to conduct the Plaintiff's business and for deliberately inflating the mould making fees.

[6] The Plaintiff claimed that the Defendant had withdrawn a total sum of HK$1,716,442.00 as payments to suppliers and as other expenses incurred in connection with the business of the Plaintiff. However, the Plaintiff discovered that HK$417,693.83 had not been paid to mould suppliers and the sum of HK$31,690.17 has not been accounted for by the Defendant. The Defendant was removed as a director of the Plaintiff company and the Plaintiff filed this claim against the Defendant, for breach of fiduciary duty, claiming damages for the sum of HK$449,384.00. There was also allegation against the Defendant that he refused to sign company cheques; however, there was no claim that any damage was caused by the Defendant's refusal.

[7] The Defendant's defence was in essence a denial of the Plaintiff's case and put the Plaintiff to the strict proof. The Defendant also counterclaimed against the Plaintiff for arrears of wages and sought repayment of HK$225,077.70 for expenses and employee's wages he incurred for and on behalf of the Plaintiff. The Defendant also sought reimbursements for mobile phone, pager and travel expenses, in a sum to be assessed, from the Plaintiff.

[8] Prior to the hearing, I reminded Mr. Pang, solicitor for the Defendant, that the Defendant's counterclaim for arrears of wages is within the exclusive jurisdiction of the Labour Tribunal. Mr. Pang then withdrew items (1) and (2) of the counterclaim. Mr. Lo, solicitor for the Plaintiff, had no objection and I granted leave for the withdrawal.

[9] In essence, this claim is a dispute between shareholders of a limited company. Although the Plaintiff Limited Company was the named Plaintiff, it was clear from the start that the complainer was really Mr. Kwan, the other shareholder and director of the Plaintiff Limited Company. Fundamental to the Plaintiff case was that a sum of HK$1,716,442.00 was withdrawn, paid or received by the Defendant for conduct of the Plaintiff's company business. Only after the Plaintiff can establish by balance of probability that the Defendant had received such sum of money, will it be necessary to investigate whether the money had been spent for company business.

[10] As evidence, the Plaintiff produced close to 900 pages of documents, however, only 3 pages of the Huang Bu Factory's books of account had been included in the documents. None of the Plaintiff's Hong Kong office books of account had been included in the Plaintiff's evidence. The main part of the plaintiff's evidence was copy (sometimes multiple copies) of receipts, bank account statements and other unexplained correspondence. Of the 826 pages, the parties referred to only 40 pages of documents during the hearing. The indiscriminate inclusion of all these documents would have been excusable if the audited accounting statements, auditor's reports or other statements were included to explain the documents submitted; however, the documents were simply submitted without any attempts to explain the same either by way of submission or testimony.

[11] Essential to the Plaintiff's case was the hand written and typewritten lists, purportedly listing all cash taken by the Defendant, either from the Hong Kong office (the "HK Cash W/D List") or from Huang Bu Factory (the "Factory Cash W/D List").

[12] Mr. Kwan's testimony was that whenever the Defendant needed money to pay for expenses for the Huang Bu Factory or payments to mould suppliers, the Defendant would request a sum of money, then Mr. Kwan would instruct the Plaintiff's bookkeeper, Ms. Ho to prepare a cheque in the same amount endorsed in "CASH". Mr. Kwan and the Defendant would sign the cheque and the Defendant would take the cheque to the bank to obtain the cash. Mr. Kwan would then enter the amount taken by the Defendant into the HK Cash W/D List. Later when the Defendant brought in the receipts, it would be recorded next to the corresponding cash withdrawal.

[13] In relation to the Factory Cash W/D List, Mr. Kwan's testimony was that approximately monthly, the bookkeeper for the Huang Bu Factory would give him the books of accounts for the factory. On top of the books, would be a note on special items or occurrences. One of the items was the cash withdrawn by the Defendant for the period. Mr. Kwan would check the figures and make his own notes. Mr. Kwan would then give his notes to Ms. Ho to be copied onto the Factory Cash W/D List.

[14] The problem with the Plaintiff's case was that it relied on hearsay evidence. First, the Factory Cash W/D List was clearly hearsay, because it relied on the entries of the factory bookkeeper and his monthly notes. Although Mr. Kwan testified that he checked the factory's books of account, but Mr. Kwan admitted that he was never trained in accounting or bookkeeping and had no experience in the preparation of accounts. Mr. Kwan is not in a position to testify to the accuracy of the factory accounts. Second, there was certain controversy on who actually prepared the two typewritten lists of accounts exhibited in pages 1 and 8 of the Agreed Bundle of documents.

[15] At first, Mr. Kwan testified that the data on both lists of accounts were entered by Ms. Ho, the bookkeeper, based on notes he prepared from the Huang Bu Factories' bookkeeper's monthly notes. Later, after I asked Mr. Lo whether that would make pages 1 and 8 of the document bundle triple hearsay evidence (Mr. Lo had correctly pointed out that it was only double and not triple hearsay), Mr. Kwan changed his testimony and stated that he had prepared all of the data, Ms. Ho had merely typed out the data he provided to her.

[16] So far as the weight to be attached to these evidences was concerned, Mr. Pang, submitted that on 14/9/2001, the Defendant had filed notice requiring the makers of item 1 of the Plaintiff's list of documents to testify in the trial. Item 1 of the Plaintiff's lists of documents was:

"1. Summary of Mr. Tang Chee Keung's drawings from Kind Cheer Industrial Limited together with accounting records for the period from October 1996 to April 1999." (Emphasis added)

[17] Yet the Plaintiff had failed to make Ms. Ho and the bookkeeper for the Huang Bu Factory available as witness. Plaintiff's failure to have Ms. Ho and the bookkeeper testify in court however, did not affect the admissibility of the lists of accounts, it goes to how much weight I should attached to these documents.

Section 49 of the Evidence Ordinance, Cap. 8, states:

"(1) In estimating the weight, if any, to be given to hearsay evidence in civil proceedings the court shall have regard to any circumstances from which any inference can reasonably be drawn as to the reliability or otherwise of the evidence.

(2) For the purposes of subsection (1), regard may be had, in particular, to the following-

(a) whether it would have been reasonable and practicable for the party by whom the evidence was adduced to have produced the maker of the original statement as a witness;

(b) whether the original statement was made contemporaneously with the occurrence or existence of the matter stated;

(c) whether the evidence involves multiple hearsay;

(d) whether any person involved had any motive to conceal or misrepresent matters;

(e) whether the original statement was an edited account, or was made in collaboration with another or for a particular purpose;

(f) whether the circumstances in which the evidence is adduced as hearsay are such as to suggest an attempt to prevent proper evaluation of its weight;

(g) whether or not the evidence adduced by the party is consistent with any evidence previously adduced by the party.

[18] I will consider each of the factors listed in subsection 2 against the facts of this case.

2(a) Whether it would have been reasonable and practicable for the party by whom the evidence was adduced to have produced the maker of the original statement as a witness:

[19] Mr. Lo submitted that the Defendant had made the request late and it was not reasonable nor practicable to arrange the bookkeeper to travel from the Mainland to testify. My review of the court file however, revealed that on 27/8/2001, His Honour Judge Lok ordered that all notices requiring witness to attend under the Evidence Ordinance was to be served within 21 days. The Defendant's counter-notice was clearly within the time limit set by Judge Lok. Furthermore, there was no evidence that the Plaintiff had ever attempted to get the bookkeeper to testify at all. No witness statement of the bookkeeper was ever taken or filed. I do not accept Mr. Lo's explanation, I found it was reasonable and practicable in the circumstances for the bookkeeper to testify at the hearing, but the Plaintiff failed to comply with the Defendant's request.

2(b) Whether the original statement was made contemporaneously with the occurrence or existence of the matter stated:

[20] Mr. Lo submitted that the handwritten lists were made contemporaneously with the Defendant's withdrawal of funds. Given Mr. Kwan's testimony, that could only be true for the HK Cash W/D List. For the Factory Cash W/D List, Mr. Kwan had to rely on the Huang Bu Factory account books and the bookkeeper's notes as evidence of the Defendant's withdrawal. The typewritten lists were of course recorded much later by Ms. Ho, based on Mr. Kwan's instructions. These lists were not recorded contemporaneously.

2(c) Whether the evidence involves multiple hearsay:

[21] I have already explained that the Factory Cash W/D Lists was a double hearsay and very little weight can be attached to this part of the Plaintiff's evidence.

2(d) Whether any person involved had any motive to conceal or misrepresent matter:

[22] As stated earlier, this was really a dispute between two shareholders of a limited company. Mr. Kwan owes or controls 51% of the issued shares, with the Defendant holding the remaining 49%. There was no written shareholders' agreement between Mr. Kwan and the Defendant. It was however clear from the evidence that both Mr. Kwan and the Defendant had withdrawn cash from the Plaintiff's account. Although the Plaintiff, under the control of Mr. Kwan, now brings an action against the Defendant for unaccounted withdrawals. The audited account of the Plaintiff may disclose other unaccounted for cash withdrawals.

[23] Whenever there are only two shareholders and directors in a limited company and the limited company, under the control of the majority shareholder, brings an action against a former director and minority shareholder, the court must be vigilant to ensure that there is full disclosure of the company's books and records. Otherwise, the litigation process may be used as a tool of oppression by the majority shareholder.

2(e) Whether the original statement was an edited account, or was made in collaboration with another or for a particular purpose:

[24] With the sole exception of the HK Cash W/D List, which Mr. Kwan alleged that he made all entries himself, all other lists relied on by the Plaintiff were edited accounts. The Factory W/D List was edited by Mr. Kwan from the bookkeeper's notes and the factory's books of account. The typewritten lists were edited by Ms. Ho from Mr. Kwan's notes.

2(f) Whether the circumstances in which the evidence is adduced as hearsay are such as to suggest an attempt to prevent proper evaluation of its weight:

[25] Perhaps the strangest part in the Plaintiff's evidence was in the absence of the Plaintiff's audited financial statements. The Plaintiff is a limited company, an audited financial statement is a yearly requirement. The production of the auditor's report and comments would have clearly and definitively stated the amount withdrawn by the Defendant and unaccounted for. As it was, the Plaintiff's only evidence was Mr. Kwan's testimony. In essence, Mr. Kwan is saying: "Trust me, the lists are a true representation of the state of the Plaintiff's account." I am afraid I cannot agree with Mr. Kwan. Proper evaluations of the evidence must necessarily require a full disclosure of the Plaintiff's accounts, properly audited. The audited account will include both withdrawals by Mr. Kwan and by the Defendant, together with all other pertinent information that a proper evaluation of the evidence will require.

2(g) Whether or not the evidence adduced by the party is consistent with any evidence previously adduced by the party:

[26] As defence to the Defendant's counterclaim, Mr. Kwan testified that there was never any agreement between the Defendant and himself to draw remuneration from the Plaintiff Company. Paragraph 3 of Mr. Kwan's witness statement stated:

"In about 1996, the Defendant asked me whether he was entitled to receive remuneration for being a director of the Plaintiff. I said since the Plaintiff has just been restructured, no profit is guaranteed for the payment of remuneration to directors. I said if the Plaintiff made profit in the future, perhaps each director could enjoy a certain amount of remuneration. Thereafter, neither the Defendant nor I mentioned about this again. Further, the financial situation of the Plaintiff had no improvement until the date of issuing the writ herein."

[27] However, page 3 of the bundle of documents was a list of withdrawal stating that Mr. Kwan had clearly withdrew a sum of HK$12,000.00 per month for the period from April 1998 to October 1998. The same document also listed withdrawals by the Defendant of HK$10,000.00 per month for the period from April 1998 to June 1998. Contrary to the Mr. Kwan's witness statement there is clear evidence of an agreement to withdraw remuneration from the Plaintiff company. Mr. Kwan was clearly not presenting the true extent of the agreement between himself and the Defendant.

Conclusion:

[28] Accordingly, I am of the view that the various lists presented by the Plaintiff as evidence cannot be relied upon as evidence that the Defendant had withdrawn the sum of HK$1,716,442.00 from the Plaintiff. Without evidence of the amount withdrew by the defendant, the Plaintiff has failed to prove its case and the claim must be dismissed.

The Counterclaim:

[29] I now turn to the Defendant's counterclaim. The Defendant alleged that there was a verbal agreement between him and Mr. Kwan that the Plaintiff would repay him wages and meals expenses he had incurred, in the total sum of HK$225,077.70, together with mobile phone, pager and travel expenses.

[30] The Defendant's claim depended on the truthfulness of his testimony; however, the Defendant admitted that he had on numerous occasions forged Mr. Wu's signatures on receipts he produced to the Plaintiff. The Defendant also admitted that he had procured a forged chop of Mr. Wu's business in order to perpetuate the deceit on the Plaintiff. Although under oath, the Defendant had freely admitted his deceptions, I am of the view that the Defendant cannot be trusted. The counterclaim is dismissed.

Order:

(1) The Plaintiff's claim is dismissed.

(2) The Defendant's counterclaim is also dismissed.

(3) There shall be no order as to costs.