MEGAWELL FAREAST LTD AND ANOTHER v. TSE SU KIN BENNY AND ANOTHER

HCA313/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 313 OF 2002

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JUDGEMENT

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Background:

1.  The plaintiffs, (whom I shall collectively call “Megawell”), are two companies engaged in the toy trade.  The first and second defendants, (Benny Tse and Lucia Lam), each hold 25% of the shares in the two companies.  Two other persons, Anthony Tse and Vincent Tse, hold the other 50% of the shares, but not in equal proportions.  Although sharing the same surname, there is no direct relationship between the respective parties, although there is a marriage relationship, but that is irrelevant to the proceedings.

2.  The four individuals have known each other for some time, all having previously been engaged in the toy trade with another company.  They joined together in the 2^nd Plaintiff in early 1997, and formed the 1^st Plaintiff in mid-1999.  Unfortunately in late 1999, the relationship between the parties became sour.  As it was expressed in evidence, Benny Tse and his wife Lucia Tse stood on one side, with Anthony Tse and Vincent Tse on the other side.

3.  In early 2001 Anthony Tse and Vincent Tse discovered that, in relation to the sales of certain goods by both plaintiff companies, the invoices retained by the plaintiff companies stated purchase price sums less than those stated in the invoices sent to the buyer.  They also discovered that Benny Tse had requested the buyers to make payment for those invoices directly into a bank account, jointly held by himself and his wife,.  From that account sums had been withdrawn, in the amounts of the invoices retained by the plaintiff companies, and paid to the plaintiff companies, thereby apparently satisfying those invoices.  The difference had been misappropriated.

The position of Benny Tse:

4.  Benny Tse failed to appear at the hearing.  The evidence against him that he had fraudulently deceived the plaintiff companies and misappropriated, by way of the device of false invoices, the sums claimed, was overwhelming.  There was nothing to support his counterclaim.  In his absence I gave judgment to the plaintiff companies against him for the amounts claimed against him, together with costs on a party and party basis to be taxed if not agreed.  On the counterclaim, judgment was entered against him dismissing the counterclaim, with costs to the plaintiff companies in a party and party basis to be taxed if not agreed.

The claim against Lucia Lam:

5.  The plaintiff companies sought to pursue Lucia Lam in relation to the same sums for which judgment had been given against Benny Tse.  Other than the mere fact of the working relationships between the parties, and the fact of marriage between Benny and Lucia, the sole evidence upon which the plaintiffs relied comprised:

(i)	the fact that the sums received from buyers were paid into a jointly held bank account from which account sums were paid to the plaintiffs, the balance being misappropriated;
(ii)	that Invoice number 11667, (at the higher price), together with the relevant packing list were signed by Lucia Lam.

6.  Lucia Lam gave evidence.  She asserted that she knew nothing of her husband’s fraud, and that she did not use the jointly held bank account.  She said that while she had signed Invoice 11667, and the packing list, she knew nothing of an invoice and packing list at a lower price, having been asked by her husband from the company office to sign those documents.  She explained that the jointly held bank account had been opened at a time when they had a mortgage from the Heng Seng Bank. After the property that had been mortgaged was sold and the mortgage repaid, she no longer had any use for the account and did not use it.  She said that she was unaware that her husband had been using it for any purpose.

7.  There was no evidence at all to demonstrate that she had made either deposits to or withdrawals from the account.  Copies of remittance forms for the payments into the account from the buyers, prepared by the buyers, and obtained by the plaintiff’s, all contained the name, “Benny”, as the recipient of the funds.  There is no evidence at all that Lucia Lam was aware of the invoice and packing list, at a lower price, sent by her husband to Megawell.

8.  I found Lucia Lam to be a believable witness.  Other than the one invoice, which she has explained, there was no evidence at all to establish her involvement in the fraud. There was nothing in the documentation in relation to the bank account to demonstrate that she had participated in any payment into or out of the account for any purpose at all.

9.  The plaintiff's evidence is not sufficient to establish, on the balance of probabilities, that Lucia lam knew of or participated in the fraud perpetrated by her husband.  The plaintiff’s claim against Lucia Lam is dismissed.

Lucia Lam’s counterclaim:

10.  Lucia Lam also made a counterclaim against the plaintiff companies.  That claim was in three parts, first for commissions to which she said she was entitled, in a sum to be assessed, second for dividends to be assessed, and third for a sum of $31,781.30 by way of petty cash expended by her on behalf of the plaintiff companies.

The claim for dividends:

11.  The claim for dividends may be shortly disposed of.  I am satisfied on the evidence that no dividends have been struck by either of the plaintiff companies.  Lucia Lam remains a shareholder in the plaintiff companies, but there being no dividends struck, she must look to other means in order to realise her shares and any value they may have.  In this respect her counterclaim fails.

The claim for petty cash:

12.  As to the claim for petty cash, Lucia Lam said that she had submitted all of the relevant receipts to the plaintiff companies for recompense but they had failed to pay to her.  She said that she had kept a record of the payments in a notebook, but that the notebook was in a safe deposit box in Hong Kong and that she had left the key in the United States and was unable to bring the record to court.  To compound her position the notebook had not been discovered.  In those circumstances I took the view that she should not be given any time, and that she must face the fact that she had failed to properly prove the sum claimed.  As will be seen, a subsequent turn of events required me to change my view on that position.

The claim for commissions:

13.  The evidence established that there was a period of time in which commissions were paid, not only to the four partners in the two plaintiff companies, but also to staff members.  The amount available in the commission pool was determined each year by Anthony Tse.  He did that by assessing, at the rate of 1% per annum, on the total sales of the plaintiff companies, the sum available.  It appears that he did so four times a year.  The commissions were calculated each quarter with one half, (0.5%), being paid at the end of the half year.  The evidence is being that at the end of the calendar year the other half was paid.  The great bulk of the available sum was paid to the four shareholders, with the balance divided up amongst staff in varying portions dependent upon their seniority and responsibility of position.

14.  There was a significant difference in the evidence of Vincent Tse and Lucia Lam as to the basis on which these commissions were paid.  Vincent Tse said that they were not a fixed sum that was always due but a discretionary payment that was made depending upon the financial state of the companies.  Thus, he said, there was no absolute liability to pay commissions, and no commissions having been agreed for the relevant periods of Lucia Lam’s claim, nothing was due.

15.  Lucia Lam for her part contended that at the time the companies were established it was agreed that the 1% commission would be paid, that it was further agreed that 72% of the commission pool would be payable to the four partners, in percentages of, Anthony, 22%, Benny 18%, Lucia 18%, and Vincent 14%.  These percentages total 72% commission pool, and of that sum represent 50% to Anthony and Vincent, and 50% to Benny and Lucia.  The difference between Anthony and Vincent was said to reflect their different shareholding levels in the companies.  The balance of the commission pool was divided between the employees with the more important employees such as merchandisers receiving a higher rate, and staff with lesser levels of responsibilities lower rates.

16.  Documents were produced demonstrating the payment of commissions in previous years.  The allocation of commission payments accorded generally with the evidence of Lucia Lam.

17.  Lucia Lam said in evidence that the arrangement had been set out in a written document that was held by Anthony.  That document was plainly a crucial document.  She was obliged to acknowledge that no such document was referred to either in her pleadings or in her witness statement and that no such document had been sought by way of discovery.  She attempted to explain this by saying that she had forgotten about it until after all of the pleadings and witness statements have been completed.

18.  In the normal course of events such a response would be likely to lead a judge to disbelieve the evidence of the witness who made such a response, for it is inherently unlikely that a person would forget about a document containing such an arrangement, when such an arrangement is at the very heart of the counterclaim.

The minute recording agreement between the parties:

19.  The proceedings, however, did not follow the normal course of events.  In the course of her final submissions Lucia Lam told me that in relation to the claim for commissions she relied upon what she described as “the document at page 751 of the bundle”.  That was a document which had not been referred to at all in the course of the trial.  There was no suggestion that that document was the document referred to by Lucia Lam as the agreement held by Anthony Tse, to which I have referred in paragraph 18. An examination of the document at page 751 of the bundle demonstrated that it constituted the minutes of a meeting held between Anthony Tse, Vincent Tse, Lucia Lam, and one other person who is unidentified, but whom I assume was Benny Tse.  I will refer to it as “the minute”. The minute records the departure of Ms Lam from the two plaintiff companies and asserts that the shares in the company would be shortly sold.  The minute specifically records:

“

3.

Petty cash expenditure claim not yet paid and commissions of January-December 2000 would be settled when dealing with the share transfer”.

20.  It is a matter of serious concern that counsel for the plaintiffs did not put the minute, either to the plaintiff's witnesses for explanation, or to Lucia Lam.  On its face it constitutes a plain admission on the part of the Tse Brothers, both that there would be commission payable for the calendar year 2000, and that a sum of petty cash was due to Lucia Lam.  In the light of the minute I adjourned the proceedings to allow time for Lucia Lam to retrieve from her safe deposit box and bring to court the notebook in which she said she had recorded the amount of petty cash due.  This she did, and the hearing resumed on 22 June 2005.  It was necessary also to have the minute translated to English.  As a crucial document in the proceedings the solicitors for the plaintiffs are in serious default in not having had that document translated prior to the trial.

21.  The minute was made in February 2001, a time at which the turnover for the year 2000 would have been known.  It has contended by Megawell’s witnesses that the turnover for that period was insufficient to allow for commission to be paid.  I am confident that if that were the case, no agreement as recorded in the minute to pay commissions for the year 2000, would have been made in February 2001.  Lucia Lam was not cross-examined at all on the commission aspect of the minute.  She was cross-examined as to the petty cash issue and the notebook, a matter to which I will later refer.

22.  Counsel for the plaintiffs made no application to recall his witnesses to explain the position in relation to the commissions or to explain their plain position as recorded in the minute.  Having regard to the plain terms of the minute, and the circumstances in which it was made, I accept the evidence of Lucia Lam that it was agreed between the shareholders of the two plaintiff companies that a 1% commission would be paid based upon the turnover of the plaintiff companies, and that of the commission pool, 72% in total, would be payable to the four partners, with Lucia Lam receiving 18% of the total pool.  I am satisfied that that agreement is reflected in the agreement recorded in the minute to pay Lucia Lam commissions in the year 2000.  I reject the concept that the payment of commission was discretionary.

23.  There will accordingly be judgement for Lucia Lam against the plaintiffs for commission to be assessed in the sum of 18% of 1% of the total turnover of the two plaintiff companies for the calendar year 2000.  That is a sum which is capable of simple calculation and ought to be agreed between the parties.  In the event that agreement cannot be reached, leave is reserved to Lucia Lam to apply for an order pursuant to O. 43 for the taking of accounts.  Of course Lucia Lam must give credit for any part commission already paid.

Lucia Lam’s evidence as to the amount of petty cash due:

24.  I turn now to consider the claim for petty cash.  The notebook produced was in simple terms.  It merely recorded total sums and was admittedly made following a time when the dispute arose.  In the course of her evidence in cross-examination on the issue Lucia Lam became quite confused as to the sums contained in the notebook.  She variously asserted that she was paid $5,000 and $50,000 a month on account of petty cash.  She became quite confused when giving evidence as to whether the various sums, (which in total amounted to the amount of the counterclaim), recorded by her, which related to the months of December 2000, and January and February 2001, were the total amount of the petty cash incurred in those months, or an excess over $5,000, or an excess over $50,000.

25.  The onus is on a claimant to establish not only the right to a claim but also the amount due, that onus being on the balance of probabilities.  Having regard to the confused nature of Lucia Lam’s evidence as to the amount due for petty cash, while I am satisfied that she would have been entitled to any excess incurred by her over the sum advanced, she has been unable to satisfy me, even on a broad brush basis, as to what that some should be.  The claim for petty cash must therefore fail.

The result:

26.  In the result, Lucia Lam succeeds in resisting the claim made against her and succeeds in her counterclaim in so far as it relates to the commissions which are to be agreed, or failing agreement leave is reserved to Lucia Lam to apply for the taking of accounts pursuant to O. 43.

Costs:

27.  Lucia Lam was unrepresented at the trial, having been refused legal aid, but she had been represented by solicitors and counsel until a time some time prior to the trial.  She will have incurred costs in the usual way until her solicitors and counsel ceased to act.  There will be an order nisi, to be made absolute in 14 days that Lucia Lam is entitled to her costs on the claim, and on the counterclaim, on a party and party basis, to be taxed if not agreed, up to the time she ceased to have legal representation.

28.  In deciding costs I have had regard to the fact that the minute of 15 February 2001, contains a clear acknowledgement of liability for the payment of commission.  I have further taken into account the fact that in the course of the trial the plaintiffs did not disclose to me the minute of 15 February 2001, in which they acknowledged liability for petty cash.

29.  Further, it is plain from the minute of the meeting on 15 February 2001 that the Tse Brothers agreed to take steps to sell the shares in the two plaintiff companies.  The evidence established that they have not done so.  At the same time they have not declared dividends in relation to the two companies.  They have by these means effectively denied Lucia Lam the capital value of shares or the dividend profit made by those shares.  In all of the circumstances I am satisfied that Lucia Lam should not have to bear any part of the plaintiffs’ costs in these proceedings.