HCA 2215/2008
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO. 2215 OF 2008
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BETWEEN
MARK CLINTON SHARP
Plaintiff
and
WONG CHI LIK, STEVEN
1st Defendant
CHAN WAI LING, IRIS
2nd Defendant
____________
Before: Deputy High Court Judge L. Chan in Chambers
Date of Hearing: 19 November 2009
Date of Decision: 19 November 2009
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D E C I S I O N
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1. This is an appeal by the defendants from an order of Master Marlene Ng given on 23 October 2009 dismissing the defendants’ application for security of costs. The defendants also apply for extension of time to file their notice of appeal.
Extension of time to appeal
2. The deadline for filing of the notice of appeal was Friday, 6 November 2009, but the notice was only filed on the following Monday, 9 November. The reason being that the solicitor handling the case for the defendants was out of town from 24 October and only came back in the afternoon of 9 November. Since the delay was very short and has been explained, I am prepared to exercise my discretion to extend the time to 9 November 2009 for the filing of the notice of appeal.
Ground of application for security for costs
3. I now deal with the appeal. The defendants applied for security for costs in the sum of HK$766,767 to cover their costs up to the pre-trial review. The application was made under Order 23, rule 1 of the Rules of the High Court on the ground that the plaintiff is ordinarily resident out of jurisdiction. This is not in dispute. There is also no dispute that the plaintiff does not have any assets within this court’s jurisdiction save his claim in this action.
Grounds of opposition
4. The plaintiff opposes the application on five grounds. First, the plaintiff says that his probability of succeeding in this action is very high. Second, the 1st defendant has a counterclaim against him, which is based on the same, or substantially the same, matters as his claim, thereby making the 1st defendant as much an attacker as he is. Third, the defendants have not adduced any evidence to show any difficulty in enforcing a costs order in the United States. Fourth, the sum claimed is excessive. Fifth, there is already sufficient security in a sum of HK$200,000 paid by the plaintiff into court for fortification of an undertaking in damages given pursuant to the grant of a Mareva injunction by Deputy Judge Mayo in this action.
Background
5. The plaintiff and the 1st defendant used to be partners of a business which purchased goods from Asia for sale in the US. The partnership was formed verbally sometime in 1996, but it was not operated in the form of an independent business entity. Before forming the partnership, the plaintiff and the 1st defendant had their respective trading vehicles. They had mutual dealings through these vehicles. They continued with their respective businesses after forming the partnership. The partnership was dissolved by a notice served by the 1st defendant on 21 November 2008.
6. The plaintiff’s claim is for an account by the 1st defendant of the partnership assets after the dissolution. The plaintiff claims that the partnership assets have been misappropriated by the 1st defendant and he seeks payment by the 1st defendant of his share of the assets which he quantified at some US$4.2 million.
7. He also claims against the 1st defendant for constructive trust and breach of contract. The breach of contract claim is based on an agreement of the 1st and 2nd defendants to sell their flat in King’s Park Hill Road and apply the proceeds in partial satisfaction of the alleged debt owed by the 1st defendant to the plaintiff.
8. The 1st defendant also has a counterclaim for an account to be taken of the partnership assets. He claims that the plaintiff had been overpaid of his share by over US$1.1 million.
9. The 2nd defendant is the 1st defendant’s girlfriend. She is also a director, minority shareholder and operations manager of the 1st defendant’s company in Hong Kong.
10. The plaintiff’s claims against the 2nd defendant are framed as constructive trust, knowing receipt and breach of contract. The breach of contract claim is the same as that framed against the 1st defendant.
11. The parties agree that the partnership was formed over a telephone conversation between the plaintiff and the 1st defendant sometime in 1996. The agreement was that they would share the profits equally after expenses. At the beginning, the partnership business was financed by credit facilities made available by one Mrs Lee, through her company, Asia Global. Asia Global charged interest for the credit used on top of charges. This arrangement came to an end in early 1999 when Mrs Lee withdrew the credit facilities.
The plaintiff’s case
12. The plaintiff says that after the withdrawal of Mrs Lee, he then left his share of partnership profits in the 1st defendant’s control and for use as the partnership’s operating capital at an agreed rate of interest of 3.5% per annum. From 1999 onwards, the 1st defendant provided the plaintiff annual statements of expenses incurred in the partnership. The plaintiff made use of such information and the financial information in his possession and compiled annual pre-tax profit reports. The plaintiff delivered such reports to the 1st defendant in his annual visits to Hong Kong so that the 1st defendant knew how much profit had been earned to continue to build and finance the partnership. This practice continued over the years and no query was ever raised by either of them to the statement/reports supplied by the other.
13. In December 2007, the 1st defendant suddenly admitted to the plaintiff that he had spent the plaintiff’s share of partnership profits on bad personal investments, his three children and estranged wife who were living in San Francisco, and expenses of his companies which were not for the purpose of the partnership.
14. The plaintiff then arranged a dinner meeting in which two other mutual acquaintances also attended. In this dinner meeting, the 1st defendant admitted again that he had spent the plaintiff’s share of the net partnership profits on bad investments, his family in the United States and company expenses unrelated to the partnership business. The 1st defendant proposed to give the plaintiff legal ownership of his life insurance policy and the proceeds of his flat at King’s Park Hill Road upon sale.
15. He also sent the plaintiff a contemporaneous e-mail dated 21 December 2007 (“the first e-mail”). The first e-mail reads:
“Hello Mark,
Thanks for staying so long and everything.
I’m sorry for what had happened that is not fair for you and your family. I know I should tell you long time ago but I just didn’t. Nothing I can say but sorry now.
I will do what I did as I said. I am writing a letter for you so you can explain to Dee. A) Sell the house and give you the money. B) Will not change my insurance policy to your and Dee name (already did 8 years ago).
Please and sorry that you have to still work hard now to cover me…so I can work hard to pay you back. All income after Cane and Reed expense will pay you first which I told Danny (he agreed). He will still use his house to guarantee the bank loan $1.3 million to continue the business.
…”
16. Dee is the plaintiff’s wife. Danny is the 1st defendant’s brother who was running a business called Cane & Reed Trading Inc. in the US, in which he, the 1st defendant, and the 1st defendant’s wife were interested. Cane & Reed Trading appeared to be involved in the partnership business.
17. There was another meeting on 4 January 2008 in San Francisco of the defendants and the plaintiff and his wife. At the meeting, the defendants wrote and signed on a piece of paper a confirmation of their agreement to give their flat at King’s Park Hill Road or the sales proceeds thereof to the plaintiff and his wife. This document, (“the confirmation”), reads:
“Re: 72A King’s Park Hill Road, Kowloon, Hong Kong
We Steven Chi Lik Wong and Wai Ling Chan Iris owner of this above property will give all the ownership of us to (1) Mark C. Sharp and (2) Dee Sharp. If we will sell the house then we will give Mark or Dee Sharp all the money (beside owed the bank).
1/4/08
(signed) Steven Wong (signed) Iris Chan”
18. Also in January 2008, the 1st defendant transferred his legal title to his life insurance policy to the plaintiff and the plaintiff’s wife.
19. His brother, Danny, who was running Cane & Reed Trading in the US, also sent an e-mail to the plaintiff’s wife on 16 January 2008 (“the brother’s e-mail”) in response to the latter’s request for supply of accounting information. The brother’s e-mail reads:
“Hi Dee,
Today our Sandy asked me about why Dee (you) wanted her to send all our company’s accounting information to you like a IRS audit. She told me what you asked her to send you. I did not tell her why you needed all these information. The thing is, I do not have any intention to tell anyone in my company the issue between Steve and Mark (or you). I do not want to make my people here nervous or wondering what is going on.
Dee, I hope that you understand our situation here. Steve owed you and I understand it completely, and we have promised to shrink down all expenses to pay you/Mark in near future as promised. Some of our accounting are done for bank to look at and some of them are not explainable, you know.
I just need you to understand this, and please do not let anyone of my company to know what is going on. Do not reply me through e-mail. I will delete this e-mail after it is sent to you in a moment.”
20. On 9 July 2008, the 1st defendant sent one Miss Rene Taylor (the “accountant of the plaintiff’s company”) an e-mail (“the second
“Subject: Re: account receivable checks
Hi Rene,
Thanks for your e-mail. And I am very sorry about what had happened and hurting all of us now relationship and all.
…
I know all of us like to know where the money goes and thinking of me (Steven Wong) burnt all of it! Let me explain we are together as a team but why we have no money. First of all, WGN took cash and commission 2 per cent (which is not in our agreement up front, our agreement was only half and half net profit) from the company is about 2 million which is round figure. I used about 2 million for my family in SF and investment I made and all bad beside WGN/Castco. Also about $700K for the house. … Only the tax each year should be more but even we took a lot of things out as extra expenses in H. K. (which how your cash money each year came from and my wrong investment money from) we still paid ten of thousand each year of taxes, otherwise last year alone will be $300K (when we make like 11 million all these years, make money need to pay tax even not make money still need pay tax is the law here). Some good year we make like almost million and half gross profit excluding expenses (best ever like last year) but some years we only have mirror so made only like 600K a year or so for a few years. …
OK, you understand now where the money goes,… I am stupid to make lots of wrong investment. I try to cure myself and give Sharp the life insurance. Now you guys holding the cheque and C n R is paying the interest.
One more time (after hundred of sorry) I am very sorry it has happened. …
Thanks for taking time to understand me too. Yes, I made mistake for wrong investment, I really hoped it make money not I am trying to just through it away, is not fun! Sometimes if not trying will not know it is bad. …”
21. The 1st defendant, after transferring the ownership of his life insurance policy to the plaintiff and the plaintiff’s wife, stopped paying the premium on the policy. He and the 2nd defendant also managed to sell their flat but without telling the plaintiff about it. That resulted in a Mareva injunction. The plaintiff and his wife later surrendered the insurance policy and obtained some US$140,000.
The defendants’ case
22. The 1st defendant said that when he and the plaintiff agreed to form the partnership in the telephone conversation, they only agreed to share the profits equally after expenses. It was an informal arrangement. There was no detailed discussion and they did not agree to restrict expenses to direct expenses only. He also had not agreed that the plaintiff’s company could charge 2% commission on the sales. He only found this out in 2003. The parties then agreed that this would be deducted from the plaintiff’s share of partnership profits.
23. After the withdrawal of credit facilities by Mrs Lee of Asia Global, the partnership had to incur expenses. He and the plaintiff did not ascertain their profit for 1999. There was no mention about operating capital, but that the money made by the partnership was required for the partnership’s day-to-day operations and to build the business.
24. He also pleaded in the defence that the credit line given by a bank to Cane & Reed Trading was also used for the partnership. He, therefore, disagreed that the plaintiff had left almost his entire profit in the partnership or that the plaintiff would have interest on the same at 3.5% per annum. He also said the plaintiff had taken about US$820,000 through the 2% commission and further withdrawals of US$1,209,000 odd. There is no dispute about the withdrawal, but the plaintiff disagreed that the 2% commission should be deducted from his partnership profits.
25. The 1st defendant also denied that he had provided the plaintiff with yearly expenses account statements of the partnership. He said those statements were provided by a bookkeeper of Cane & Reed Trading upon the plaintiff’s request but without his knowledge and the statements related to the direct expenses of a particular product only.
26. He also denied of having received from the plaintiff the yearly pre-tax profit reports. He denied that he owed the plaintiff US$4.2 million as the plaintiff’s outstanding share of partnership assets. He also pleaded in the defence that the plaintiff had been overpaid by at least US$1.1 million odd. He also denied of having made any admission at any dinner meeting that he had misappropriated the plaintiff’s share of partnership profits.
27. For the first and second e-mails and the confirmation, his overall explanation is that these documents were not his acknowledgements of indebtedness to the plaintiff. They were mere assurances that he would pay the plaintiff if he should indeed be indebted to him.
28. For the first e-mail, he said he sent it to the plaintiff at the plaintiff’s request to stop the plaintiff’s wife from worrying. But I find that this explanation cannot explain why this e-mail was so worded. It was an outright apology for his wrongdoing to the plaintiff and his wife. If he only promised to pay as may be found due, I see no reason why he should say that he would sell the house and give them the money. He could have simply said that if he should indeed owe them money, he would sell the house to pay them.
29. Counsel for the defendants submitted that the 1st defendant cannot express himself in perfect English. But even taking that into account, there still does not appear to be any reason for him to have written the first e-mail in the way he did if he had not wronged the plaintiff and did not owe the plaintiff substantial sums. It was in fact a sincere and sentimental apology with proposal to amend.
30. Regarding the transfer of legal ownership of the insurance policy, he said the plaintiff asked for it to ensure that there would be no change of beneficiaries as the plaintiff and the plaintiff’s wife had been named as beneficiaries in 2000 when he purchased the policy. He agreed and transferred the legal ownership to put the plaintiff’s mind at ease. But his case is that he was still not sure if he was indebted to the plaintiff and the plaintiff did not even give him any figure of debt save by saying that it was a substantial sum. If that was the case, I cannot understand why he should have transferred the ownership of the policy so as to deprive himself of any right or interest over it.
31. Regarding the confirmation that he and the 2nd defendant signed, he said they signed it after a long meeting of six hours. They were then very emotional as they were going to attend the rehearsal of his daughter’s wedding. He also said that the plaintiff did not say how much was owed by him. If that was the case, I again find it difficult to understand why he and the 2nd defendant would have written or signed the confirmation. It was an unconditional statement that they would give the plaintiff and his wife their flat in which they live or its net proceeds of sale.
Decision on first ground of opposition
32. The 1st defendant is an experienced businessman. He should have known the importance of promises made in writing. If he was not sure that he owed the plaintiff substantial sums, why did he agree to give the plaintiff and his wife the flat in which he and the 2nd defendant live?
33. There was also the second e-mail. It again contained an apology. It appeared to be something poured out from his heart. He explained how the money had disappeared. He referred to the disputed commission, which he then put at US$2 million, but he admitted to having spent another US$2.7 million on matters unrelated to the partnership business, which explained why there was no more funds in the partnership.
34. His indebtedness to the plaintiff, if any, was also not a secret between him and the plaintiff. His brother, Danny, also knew it as can be seen from the brother’s e-mail written by Danny. Danny also knew that the debt was substantial as can be gleaned from the contents of his e-mail.
35. I am sure that upon taking of the partnership account, there will be many disputes as to individual sums and items. However, it is just unlikely that the plaintiff and the defendant had no rough idea of how much money the partnership had earned in the course of its operation for some 11 years. As experienced business people, they should have some idea. Otherwise, they would not even know how much capital they have at their disposal for running the business.
36. Having said that, I would not want to resolve the many verbal disputes between the parties as referred to above. This is particularly so when the plaintiff’s evidence is through the hearsay of his solicitor and not by his own affidavits. Counsel for the defendants also pointed out that why was it for the plaintiff to finance the business and the defendants did not make any contribution? Counsel also raised the questions of why were the pre-tax profit reports delivered by hand and not by e-mail and why did the plaintiff accumulate so much profits in the partnership? All these questions may have to be canvassed at the trial. Whatever conclusion I come to here is not and cannot be my view for the final resolution of this action.
37. However, having considered the first and second e-mail, the confirmation and the brother’s e-mail, I am driven to the conclusion that the plaintiff has a very high probability in succeeding to prove that the 1st defendant does owe him substantial sums to the tune of millions of Hong Kong dollars.
38. I also find for the sake of this application that the plaintiff has a very high probability in succeeding to prove that the 2nd defendant was aware of the 1st defendant’s position vis-à-vis the plaintiff and had signed the confirmation for partial discharge of the debt owed by the 1st defendant to the plaintiff.
39. On the basis of these conclusions, I dismiss the defendants’ appeal against the order of Master Ng.
Decision on second ground of opposition
40. Regarding the plaintiff’s second ground that the 1st defendant has a counterclaim which is on the same basis and covering the same issues as the plaintiff’s claim, the plaintiff relied on the decision of the English Court of Appeal in BJ Crabtree (Insulation) Limited v GPT Communication Systems Limited (1990) 59 BLR 46. Counsel for the defendants, however, submitted that it was a case where security was not ordered for fear of stifling the plaintiff’s claim.
41. Putting the stifling issue aside, I think if the defendant is as much an attacker as the plaintiff, then the court should indeed consider whether it is just to order security to be provided by the plaintiff. In this case, both the plaintiff and the defendant are claiming for an account of the partnership assets and payment upon taking such account. If the 1st defendant should have started the claim first and the plaintiff then made his claim as a counterclaim, then I do not think it would be right to require the plaintiff to give security for costs for his counterclaim as the counterclaim is not separate and independent of the claim.
42. Now the plaintiff has moved first because he wanted a Mareva injunction, I do not think he should be made liable to pay security of costs simply because his having moved first. I therefore dismiss the appeal of the 1st defendant on this ground as well.
43. If I were wrong in dismissing the 2nd defendant’s appeal on the first ground, then I would apportion the 2nd defendant’s costs at 30 per cent of the overall costs of the defendants and would order security of that portion of the quantum that I may order.
Decision on third ground of opposition
44. For the third ground, the plaintiff said that there is no evidence of difficulty in enforcing costs order in the US. The parties do not dispute that there is no arrangement for reciprocal enforcement of judgments and orders between Hong Kong and the United States. If there is no security for costs and should the defendants succeed in their defence and obtain a costs order against the plaintiff, they will have to go to the United States and start an action from scratch to enforce such order. I think this is not a valid ground for opposing the appeal. There are in fact many decisions to this effect.
Decision on fourth ground of opposition and quantum
45. For the fourth ground, the plaintiff said that the sum claimed for security was excessive. I agree. I also adopt the written reasons of Master Ng on quantum. I also think that a senior junior counsel can handle the defence for the defendants and it does not justify a leading counsel. If I were wrong in dismissing the appeal, I would also assess the quantum at HK$450,000.
Decision on fifth ground of opposition
46. Lastly, the plaintiff argued that the HK$200,000 paid into court by the plaintiff as fortification of the undertaking in damages for the Mareva injunction can cover the defendants’ costs if they should succeed in getting a costs order. I disagree. That sum is to cover the damages that the defendants may be entitled to should they succeed in their defence. That sum is not and should not be treated as security for costs. The basis of ordering its payment was also not to secure the defendants’ costs as that was not an application for security for costs.
Costs
47. Finally, I order the defendants to pay the plaintiff the costs of this appeal.
(Discussion re gross assessment)
(L. Chan)
Mr Jonathan T Y Chang, instructed by Messrs Chan, Lau & Wai, for the Plaintiff
Mr José-Antonio Maurellet, instructed by Messrs Blank Rome, for 1st and 2nd Defendants