CHOW FU HSIEN v. K VISION INTERNATIONAL INVESTMENT (HK) LTD

HCA2884/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2884 OF 2004

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J U D G M E N T

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Introduction

1. This is an appeal from the Order of a Master dated 17 November 2009 and a later Order of the same Master on interest dated 2 March 2010.  The Master’s orders were made after hearing evidence.  He ordered, inter alia, the defendant to pay to the plaintiff the sum of HK$37,787,830.40 and made various declaratory orders to give effect to the plaintiff’s 35% beneficial interest in the defendant’s share in an investment in Beijing.  As for interest, the Master initially ordered simple interest, to run from 19 July 2007 to judgment; but later varied interest to run from the date of the writ until judgment but compounded on a yearly rest.

2. The hearing before the Master was in the nature of taking an account pursuant to the Order dated 19 July 2007.  That was an Order made under Order 14 rule 3.  I set out below the relevant part of that Order :

“IT IS THIS DAY ADJUDGED THAT :

1.  A declaration that the Declaration of Trust signed by the Defendant in favour of the Plaintiff in about 1998 (“Declaration of Trust”) is valid and subsisting and binding on the Defendant and that the Defendant holds 35% (“the Plaintiff’s Share”) of the Defendant’s interest in the Celebrity Plaza project (including all income and profits attributable thereto) on trust for the Plaintiff.  The Defendant is obliged to account to the Plaintiff all the income and profits generated from the Plaintiff’s Share;

2.  The Defendant do pay the Plaintiff the sum found due upon the taking of the said account with interest thereon at such rate and for such period as the Court shall determine at the taking of the account…”

3. In its amended notice of appeal, the defendant asks to be allowed to adduce expert evidence and to call the expert to give evidence, and further contends that the Master should have found, upon the taking of the account, that the plaintiff’s 35% interest in the investment in Beijing was of a negative value, and hence no sum was payable by the defendant to the plaintiff.  In the course of the hearing of the appeal, leading counsel for the defendant intimated that he was no longer pursuing the application for leave to adduce further evidence.  I formally dismiss that summons with a costs order nisi in favour of the plaintiff in respect of that summons.

Jurisdiction

4. At the commencement of the hearing, I invited assistance from counsel on whether the Court of First Instance had jurisdiction to hear this appeal.  This appeal is lodged pursuant to Order 44 rule 12.  This is on the basis that the Master’s order was made under Order 44 rule 11.  The commentary to rule 12 in the current edition of the Hong Kong Civil Procedure 2010 (§44/12/2) states that where an inquiry involves an assessment of damages or of the value of goods or an assessment of interest, appeal from the Master’s decision is to the Court of Appeal, whether or not the decision also involves a determination of other matters.  It cites as authority Order 58 rule 2.  That is the rule which provides that certain appeals from the Master can only be appealed to the Court of Appeal, thereby excluding those appeals from the jurisdiction of the Court of First Instance.  It may be said that what the Master did in this case was an assessment of the value of the 35% shares and if the notes of the Hong Kong Civil Procedure is correct, there may be a doubt as to whether it is the Court of Appeal which has jurisdiction to hear the appeal.

5. Having considered the matter, I am satisfied that I do have jurisdiction to hear this appeal under Order 44 rule 12 read with Order 58 rule 1, and that this appeal does not come within the exceptions specified in Order 58 rule 2.  The note in the Hong Kong Civil Procedure can be traced to the identical notes to the Supreme Court Practice 1999, §44/12/2 at p.779.  The latter is, however, based on a differently worded Order 58 rule 2(b) under the English rules.  The then English rule applied to appeals :

“on an assessment of damages or of the value of goods under Order 37 or otherwise, or an assessment of interest.”

6. Our current Order 58 rule 2(b) only applies to appeals “on an assessment of damages under Order 37 or otherwise”.  It would appear, therefore, that the suggestion in the Hong Kong Civil Procedure that an appeal from an assessment of value of goods or assessment of interest lies directly to the Court of Appeal may not be correct.  In any event, what the Master did in this case was the taking of an account, and not an assessment of value of goods.  This plainly does not lie within the exception in Order 58 rule 2(b).

7. Mr Coleman drew my attention to the decision of the Court of Appeal in Re Citrend Services Ltd [2007] 1 HKLRD 381, where at p.385, §14, Yuen JA observed that the rule that appeals from a Master (apart from specific exceptions) should in the first instance be heard by a judge in chambers was one made for good reasons and should be respected.  Mr Coleman argues that this suggests that the exceptions specified in Order 58 rule 2 should be narrowly construed.  That may be correct, but it may be observed that there is no real distinction between the nature of the present appeal from an appeal against an assessment of damages by a Master.  Both are appeals from decisions of the Master after what is in effect a trial.  Moreover, Order 44 rule 12(1A)(b) specifically provides that no fresh evidence (other than evidence as to matters which occurred after the date of the Master’s order) shall be admitted except on special grounds, thus incorporating the well known Ladd v Marshall restrictions on adducing fresh evidence in an appeal.  It is thus difficult to perceive why the rules draw a distinction between these two types of appeal.

8. Be that as it may, I am satisfied, for the reasons given above, that on a proper construction of the rules as they stand, I do have jurisdiction to hear this appeal.

Background

9. The background to this action can be found in the judgment of Saunders J dated 20 February 2008 when he dismissed an Order 14 appeal from the decision of the Master of 19 July 2007.  In short, the plaintiff claimed against the defendant for an account of her interest and entitlement under a deed made in 1998 (referred to in the Order set out in paragraph 2 above) whereby the defendant acknowledged and agreed that the plaintiff shall have 35% in the defendant’s interest in a joint venture company called “K Vision” in Beijing (“Beijing K Vision”).  Beijing K Vision was the developer of a development project called “Celebrity Plaza”.  The defendant agreed to give this 35% interest to the plaintiff in consideration of her agreement to provide her experience and expertise in the project and for further development of the joint venture project.   

10. It is not in dispute that at the time of the deed, the defendant had an 80% interest in Beijing K Vision.  The other 20% was then held by the joint venture partner, referred to as “Beijing Residential”.  It is also not in dispute that subsequent to entering into the deed, the defendant made two disposals, namely 55% to a company called Sino Science International Trust Co. Ltd (“Sino Science”) and another 25% to a company called Far East Petroleum Company (“Far East”).  These disposals would have exhausted its 80% in Beijing K Vision; but the defendant also acquired back 20% from its joint venture partner, Beijing Residential.  Thus, at the time of the hearing before the Master, the defendant was still left with 20% in the project.

11. Pursuant to the Order of 19 July 2007, the plaintiff sought an account to be taken of the profits and income derived from the disposal of the 55% and 25%.  The plaintiff’s evidence was that she was involved in the making of the agreements for the disposal of the defendant’s share in Beijing K Vision, but that she was not aware of what happened to the proceeds.

12. The project was completed in about 2004.  In December 2004, the defendant commenced an arbitration against Sino Science.  Far East was also joined.  In the arbitration, the defendant complained that after Sino Science acquired a controlling interest in Beijing K Vision, it practised false accounting and deprived the defendant of its rights and interests in the joint venture.  Sino Science countered that the defendant was guilty of misrepresentation and breach of warranties in the agreement.  It also claimed that parts of the sums stated to be payable under the agreement (including the sum of RMB105,690,000) were in fact loans, rather than agreed payment for the transfer of shares.  The Arbitral Tribunal engaged a firm of accountant to carry out an investigation into the accounts of the joint venture company and to report thereon.  In the result, the Tribunal ordered Beijing K Vision to be wound up and made orders declaratory of the defendant’s remaining entitlements in the project which were also reflected in the Master’s Order of 17 November 2009.  No issue arises as to those parts of the Order. 

13. The plaintiff explained why she had not started these proceedings earlier.  Her case was that she was not aware of any misfeasance or breach of trust by the defendant until she was told of the arbitration.   

Absence of documents

14. The taking of the account was severely handicapped by the absence of primary documents and, in particular, the accounting records of the defendant.

15. Mr Qu Hong, who is the director and major shareholder of the defendant (holding 97%) deposed that neither the defendant nor he had in their possession custody or control the relevant accounting documents.  He claimed that such documents were kept by a Miss Lam, who was the financial controller as well as a minority shareholder of the defendant.  Disputes have arisen between Mr Qu and Miss Lam resulting in litigation between them.  Mr Qu alleged that documents which were kept in the Beijing office of the defendant were moved to Hong Kong by Miss Lam when the defendant closed its Beijing office in 2000.

16. Mr Qu obtained an Order in HCA2710/2004 for inspection and making copies of documents kept in the defendant’s registered office.  He said however that not all the accounting documents of the defendant were kept in that office.  He said he had requested Miss Lam to make an affirmation on behalf of the defendant to comply with an Order for disclosure dated 12 November 2007.

17. Miss Wong SC, for the plaintiff, pointed out that Miss Lam’s solicitors intimated in correspondence that they were waiting to hear from the defendant’s solicitors as to the mechanism for the filing of an affirmation by Miss Lam, but that this was not followed up.

18. The consequence of all this is that the Court does not have any primary document to assist it in the taking of the accounts.  What it does have consist principally of :

(a)  two balance sheets of Beijing K Vision dated 31 August 1995 which were the subject of two audit reports commissioned by Sino Science, at the time when Sino Science was conducting due diligence into Beijing K Vision;

(b) the report by the auditor commissioned by the Arbitral Tribunal; and

(c)  the Arbitral Award.   

The plaintiff’s accountant, Mr Tam, derived his information from these documents.   

Issues

19. With the application for leave to adduce expert evidence withdrawn, the appeal focused on the question whether the Master was correct in ordering the defendant to pay the sum of HK$37,787,830.40 to the defendant.  To understand the issues arising on this debate, I shall need to explain how this figure was arrived at and the basis of the challenge.

20. The other remaining issue concerns interest.  I shall return to this after resolving the first issue.

The first issue

21. The first issue relates to the assessment of the sum of HK$37,787,830.40 which the Master ordered the defendant to pay to the plaintiff.  This sum is 35% of the sum of HK$107,965,229.69.   

22. The sum of HK$107,965,229.69 was the amount that the Master found to be the net amount that the defendant received from the disposal of the 55% to Sino Science and the 25% to Far East, after making provision for tax liability.  In so doing, the Master relied on the evidence of Mr Tam.  The Master refused to allow the defendant to adduce the evidence from its accountant, a Mr Yuen.  This was originally the subject of a challenge by the defendant in its notice of appeal but, as mentioned above, was no longer pursued.   

23. The amount which the Master accepted to be the “net profit” from the defendant’s sale of its shareholding in Beijing K Vision after deducting the total costs for the project was HK$142,289,710.94.  This figure came from Mr Tam’s report and is analysed in the table set out in the judgment of the Master at §17.  I reproduce this table below :

Description	Amount in US$	Amount in RMB	Unsettled Items
(1) Sale of 55% shares
- Amount received in accordance to the First S & P Agreement	22,000,000.00	105,690,000.00
- Property rights entitled to be received from Sino Science Plaza			3,000 sq.m. of the completed office building of the Celebrity
(2) Sale of 25% shares
- Amount received in accordance to the Second S & P Agreement	16,826,100.00
- Amount not received and shall be applied to offset to the amount due to Far East	411,900.00
(3) Remaining 20% shares
- Amount to be determined by the liquidation committee of Beijing K Vision			26.7% of the net asset value of Beijing K Vision (exclude the service apartment premises)
(4) Total costs
(i) Contribution to Beijing K Vision	(12,000,000.00)	(156,353,563.74)
(ii) Payable to Far East
- public construction cost		(2,950,057.08)
- interest up to 15-3-2005		(1,231,902.93)
- interest from 16-3-2005 until settlement			To be determined
(iii)Payable to Far East
- land transfer fee and its penalty charge		(449,455.00)
- 七通一平 cost		(4,290,130.00)
- interest up to 15-3-2005		(1,745,768.79)
- interest from 16-3-2005 until
- settlement			To be determined
- offset of consideration	(411,900.00)	3,409,090.00
(iv)Audit fee receivable from Sino Science		50,000.00
(v)Arbitration fee receivable from Sino Science	(24,086.30)	296,999.73
(vi)Counter claim arbitration fee payable to Far East
Total	26,802,013.70	(57,574,787.81)
Net profit denominated in HK$(assumed exchange rate HK7.75 to US$1 & HK$1 to RMB0.88)			HK$142,289,710.94

24. The figures in the first two rows are the amounts payable or received by the defendant in the disposal of the 55% interest in the project to Sino Science and 25% interest in the project to Far East respectively.  The figures in the fourth row under “total costs” are the capital contribution and other payments or costs which the defendant had to pay in the project.   

25. The Order of 19 July 2007 required the defendant to account to the plaintiff “all the income and profits” generated from the plaintiff’s share.  Leading counsel for the plaintiff accepted both before the Master and before me that the defendant is entitled to deduct any cost or expenditure, including capital contribution, in the project.

26. The only figures I need to mention for the purpose of this appeal are first, the sum of RMB105,690,000, being part of the consideration payable to the defendant by Sino Science under the sale and purchase agreement that the defendant had with Sino Science, and secondly, the sum of RMB156,353,563.74 as “contribution to Beijing K Vision”.

27. It is not in dispute that RMB105,690,000 was payable by Sino Science.  It was further common ground that this sum was paid by Sino Science in three tranches to the following parties :

(1)     RMB20 million to Beijing Residential;

(2)     RMB62,201,000 to Beijing Land Management Bureau, and

(3)     RMB23,489,000 to Beijing K Vision.

These are referred to as “the 3 payments”

28. As for the sum of RMB156,353,563.74, this appeared as “Capital Reserve” in Beijing K Vision’s accounts.

29. Before the Master, and as submitted by the plaintiff in Miss Wong SC’s skeleton, the issue was whether this “Capital Reserve” already included the 3 payments.  In so framing the issue, Miss Wong SC appears to have implicitly assumed that the 3 payments were made either towards capital contribution or costs, and thus deductible; the only question was whether they had already been taken into account.

30. Mr Tam in his report treated the Capital Reserve as constituting the entire investment by the defendant in Beijing K Vision, thereby including the 3 payments.  The defendant’s contention is that this is erroneous.  The defendant’s argument is that the 3 payments were not included in the Capital Reserve.  The defendant’s case is that these sums should be deducted from the sum of HK$142,289,710.94.

31. The Master recorded in paragraph 25 of his judgment that the plaintiff accepted that the first two payments (items (1) and (2) referred to in paragraph 27 above) were for building costs and fees for land use.  Miss Wong SC informed me that what the plaintiff accepted was merely that if they were costs incurred for the project, the plaintiff would accept that they can be deducted.  Mr Coleman’s junior who appeared before the Master, confirmed that this was so.  I was also told that the plaintiff’s testimony was to the effect that she was not aware of how these sums were expended.  In the circumstances, I shall proceed on the basis that the plaintiff has not made any admission or concession that these payments were deductible as costs incurred in the project.

32. Mr Coleman submitted that the Master should not have relied on Mr Tam’s evidence.

33. First, he pointed out that Mr Tam’s opinion that the 3 payments had already been taken into account in the figure of RMB156,353,563.74 was based on his assertion that the figure of RMB173,463,089 in the “prepayments” [预付帐款] under “current assets” [流动资产] in the balance sheet as at 31 August 1995 had already included the first two payments.  Mr Coleman argued that that could not be correct since it was agreed that the payments were only made in October 1995, and could not therefore be part of the “prepayments” recorded in a balance sheet as at 31 August 1995.  Secondly, Mr Tam was unable to support his opinion by any evidence.  Mr Tam was asked in cross-examination why he assumed that the Capital Reserve included the second payment, and he admitted that this was purely an assumption without any factual basis.  Likewise, he accepted that he “assumed” that the first payment to Beijing Residential was included in the capital reserve, and that it was an assumption which was not supported by any documentary evidence.

34. Mr Tam stated in another part of his oral evidence that the accounting practice in the mainland was that the actual cost already incurred would be listed as development cost of the construction, and that accounts due but unpaid would be listed as current assets.  That was said to lead to a deduction that, in this case, the balance sheets were drawn up in the way it was, i.e. treating the unpaid item (namely the RMB62 million land cost) as prepaid items.  He later clarified however that he was not suggesting that there was any difference of treatment in accounting practice between Hong Kong and the Mainland.

35. The Master accepted Mr Tam’s evidence on this.  He said that Mr Tam had already clarified the meaning of the entry预付帐款as the amount that should be paid but not yet paid.  He pointed out that there was no evidence to rebut Mr Tam’s evidence.

36. The Court is not bound to accept an assertion from an expert merely because there was no evidence adduced by the other side to rebut it (see Full Wisdom Holdings Ltd v Traffic Stream Infrastructure Co.  [2004] 3 HKC 1, 11I).  The Court must consider the correctness of such an assertion having regard to the reasoning proffered for the opinion, and whether it is inconsistent with other evidence and commonsense, although it must always do so with care and must not commit the error of “playing expert” itself.  In the present case, what Mr Tam was in effect saying was that under the accounting practice in the Mainland, items which are in fact liability (account payable) would be treated as current asset (prepayments).  At the same time, he was saying that there was no difference in the accounting treatment between Hong Kong and the Mainland.  This aspect of the evidence was not covered in his report, and no other evidence has been adduced by the plaintiff to explain or justify the rationale behind the so-called practice.  I cannot accept that it is proper accounting practice, whether in Hong Kong or elsewhere where the practice is no different from ours, to treat an item of liability as an asset in a balance sheet.  In my view, the learned Master was in error in accepting the assertion as to Mainland accounting practice in support of Mr Tam’s conclusion.

37. That was, however, not the only reason the Master found in the plaintiff’s favour.  The Master considered that the strongest evidence to determine whether the final figure in the table (i.e. HK$142,289,710.94) has taken into account the costs for the project was the Arbitral Award.  In that award, the Tribunal found that the defendant had made a profit of RMB35,167,437 from the sale of the 55% of its shareholding in Beijing K Vision to Sino Science.  In the course of his evidence, Mr Qu confirmed he accepted the Award.

38. The Arbitral Tribunal had this to say regarding the agreement between the defendant and Sino Science (quoting from the certified translation) :

“…The value which the Applicant owned 80% equity interest in the registered capital of the Cooperative Company comprises the registered capital US$12 million (equivalent to RMB102,997,200 yuan) and the capital common reserve funds RMB156,353,563.74 yuan contributed into the Cooperative Company by the Applicant, plus the gains generated for the period, totaling RMB259,350,763 yuan (excluding gains expected for the period).

The transfer monies RMB294,518,200 exceeds the RMB259,350,763 yuan contributed by the Applicant upon the transfer by RMB35,167,437.  Such premium shall be deemed as gains expected for the period, representing 13.55% of the total contributions.”

39. The Master analysed the position thus :

“According to the Arbitral Award, the profit of RMB35,167,437 was arrived at by subtracting from the sales proceeds of the defendant’s shares to Sino Science of RMB294,518,200 the US$12 million (RMB102,997,200) registered capital and the capital reserve of RMB156,353,563,74.  If the costs of the project remained outstanding, the Tribunal should have taken into account such costs before arriving at the profit.  Since the Tribunal had arrived at the profit of RMB35,167,437, the cash proceeds of the sale of the defendant’s shares to Sino Science must, by common sense, have been cleared of all costs.  Obviously the subsequent payments to the three respective parties as described in paragraph 24 supra cannot be double-counted as any additional costs.”

40. The Master observed that the defendant was unable to argue against the above analysis at the hearing.

41. In response, Mr Coleman submitted that the calculations by the Arbitral Tribunal were based on the same source materials (namely the two balance sheets) that Mr Tam relied on, and hence, the reliance placed by the Master on the Tribunal’s finding was circular.  I shall have to come back to address this argument later in this judgment after setting out what, in my view, is the correct approach to the problems presented in this appeal.

Correct approach

42. In my view, the starting point is that the defendant is under a duty to account as trustee, and it is his duty to keep proper accounts.  Miss Wong SC so submitted, relying on Lewin on Trusts, 18^th ed., (2008) p.800 §23-22.  Mr Coleman has not disputed that.

43. Furthermore, in the context of the present dispute, it is important to remember that the defendant does not dispute that under the agreement with Sino Science, it was entitled to the consideration stipulated therein, the monetary parts of which comprised US$22,000,000 and RMB105,690,000. 

44. Insofar as the defendant contends that the RMB105,690,000 it received had been used for the discharge of liabilities which had not been reflected in the accounts, the burden is plainly on the defendant so to prove.

45. The balance sheets which Mr Tam relied on only took a snapshot of the financial position of Beijing K Vision as at a particular date, i.e. 31 August 1995.  The Court does not have the evidence to assess the reliability of the information contained therein.  In the course of the hearing, attention has been drawn to the following statement in the audit report (Zhong Yu (1995) Shen Zi No.360) :

“Pursuant to Article 4 of the Equity Transfer Contract entered into between K Vision International Investment (H.K.) Limited and Sino Science International Trust Investment Co. Ltd., the resolutions of the Board of Directors of K Vision International Investment (H.K.) Limited dated 31 August 1995 and the decision set forth in the Letter of Discussion and Determination regarding the Payments of Capital Injection, Beijing K Vision Building Construction Co Ltd shall convert the amount in the sum of RMB189,832,223.31 Yuan payable to K Vision International Investment (H.K.) Limited into a part of the registered capital and capital reserve of Beijing K Vision Building Construction Co. Ltd.”

46. Article 4 of the Equity Transfer Contract was a reference to a clause in the agreement between the defendant and Sino Science, by which the defendant gave certain warranties and declarations, including a declaration and warranty that the land transfer fee (土地出讓金) had been fully discharged.  The defendant has not been able to produce the other documents referred to, namely, the resolutions of its board of directors dated 31 August 1995, or the decision set forth in the Letter of Discussion and Determination regarding the Payments of Capital Injection.

47. The parties agree that as at 31 August 1995, only a part of the land transfer fee (RMB41,481,000) had been paid.  This figure appears in the breakdown of development costs which formed part of the figure for “development costs” of RMB61,188,286.24 in the balance sheets.  A balance of some RMB62,000,000 was still payable.  Without either the documents referred to in the audit report, or an explanation from the defendant, one is left to speculate whether those balance sheets were drawn up on the footing that the land transfer fee had been fully paid or not.  What is of relevance is that Sino Science did complain in the arbitration of misrepresentation and breach of warranties, but none of these allegations were found substantiated by the Arbitral Tribunal.  The Court, however, cannot indulge in speculation.  It can only proceed upon the basis that the burden rests firmly on the defendant to satisfy the Court that he is entitled to make deductions for the 3 payments.

48. I return to consider the implications of the Arbitral Tribunal’s observations quoted above, and in particular, the remark made by the Tribunal that the sum of RMB35,167,437 should be “deemed” as gains expected for the period.  The Master’s reasoning that if the costs of the project remained outstanding, the Tribunal should have taken into account such costs before arriving at the profit seems at first blush to be rather attractive. However, it does not really support Mr. Tam’s approach as the Tribunal did not proceed upon the assumption made by Mr Tam.  It did not seek to proceed on an assumption that any of the 3 payments made by Sino Science was included in the “prepayments” of RMB173,463,089.  There are, also, problems with reliance on the observations of the Tribunal.  First, findings made by a court in a previous litigation are not admissible in later proceedings as evidence of the facts so found, in the absence of issue estoppel or cause of action estoppel : see Secretary of State for Trade and Industry v Bairstow [2004] 1 Ch.1.  The same principle must apply to findings by an arbitral tribunal.  These are in reality no more than the expressions of opinions by that tribunal on the evidence presented before it.  If the same materials are adduced before this Court, this Court may arrive independently at the same findings; but then again, this Court may reach a completely different conclusion.  Either way, the opinion by the previous tribunal does not assist from an evidential perspective, and is, in law, not admissible.  Secondly, the observations by the Arbitral Tribunal did not appear to be conclusions reached in the context of a dispute which it had to resolve, but almost in passing to justify its views on the adjustment of the defendant’s rights to 6,000 square meters of office building.  Thirdly, the calculations made by the Tribunal appear to be rather crude in that it proceeded to compare 100% of the capital and reserve of the joint venture company, with the consideration payable by Sino Science, when what Sino Science was purchasing (and thus paying for) was not 100%, but only 55% of the shares in joint venture.  In the circumstances, I do not consider it right for me to place any reliance on the Arbitral Award.

49. The plaintiff also relies on the fact that Mr. Qu said in the witness box that he was happy with the Award.  In my view, this is much too general to be of assistance.  I do not consider it proper to read from that general statement an admission that the defendant did make a profit to the extent “deemed” by the Arbitral Tribunal.

Has the defendant discharged his burden of proof?

50. Mr Qu has given evidence that all the 3 payments were made for the costs of the project.  His evidence was however rejected by the Master who has the advantage of receiving his evidence first hand.  As these are findings of primary fact, I am duty bound to follow the guidance laid down by the Court of Final Appeal in Ting Kwok Keung v Tam Dick Yuen (2002) 5 HKCFAR 336.  I ask myself whether, even though I do not enjoy the advantages enjoyed by the Master, I am nevertheless satisfied that the conclusions of the Master on the facts are plainly wrong.

51. Before proceeding to consider each of the 3 payments, I should add to the observations I made in paragraphs 14 to 18 above on the absence of documentary evidence.  The Master has noted in the context of Mr Qu’s explanation for the absence of documents that there was no evidence that the defendant attempted to get another accountant to sort out the accounts for this hearing.  Nor was there any evidence of any attempt by the defendant to make enquiry with the liquidator of Beijing K Vision in relation to the payments made by it.  I have noted above that the defendant did put in some evidence from a Mr Yuen, which was ruled inadmissible by the Master as he considered that such evidence to be no assistance.  In my view, the Master was entitled to take these matters into account, but the question remains whether the defendant has discharged its burden of proof.

52. Mr Qu claimed that the first payment to Beijing Residential was paid pursuant to clause 5 of the agreement made between Beijing Residential and the defendant dated 23 April 1994.  I note however that under clauses 5 and 6 of that agreement, the payments were all due between May 1994 and May 1995, and the amounts payable were either 10% or 20% of RMB213,000,000.  Apart from Mr Qu’s assertion that there had been some delay in making the payments due to cashflow constraint of the defendant, there is no evidence in support.  I am not satisfied that the Master could be said to be plainly wrong in not accepting his evidence on this payment.  Virtually nothing is known as regards the state of account between the defendant and Beijing Residential or the state of account between the defendant and Beijing K Vision.  The mere fact that the defendant may have directed Sino Science to pay RMB20 million to Beijing Residential does not establish that this payment was made towards the cost of the project.

53. In my view, the same applies to the third payment of RMB23,489,000.  Mr Qu’s evidence consisted of a bare assertion that this sum was paid into the account of Beijing K Vision for developing the Celebrity Plaza which was incorporated for such sole purpose.  The Master commented that Mr Qu was unable to give a reasonable and satisfactory explanation as to why the defendant should further inject this sum into Beijing K Vision for the project, it being only a minority shareholder holding only 20% of the interest in the project.  The Master further reasoned that there was no increase of the defendant’s shareholding and Mr Qu could not explain what return he obtained from the investment of RMB23,489,000.  Mr Coleman submitted that this was to turn logic on its head, arguing that there was no reason for such payment other than for the purpose of the project.

54. With respect, the flaw in that argument is that the Court is simply not provided with the necessary information to judge.  I have already noted that the Court does not have information as to the state of account between the defendant and Beijing K Vision.  It is apparent from the two balance sheets as at 31 August 1995 that the defendant had from time to time made advances to the joint venture company.  Presumably, there would have been repayments from time to time.  The mere fact that the defendant instructed the Sino Science to make a certain payment to Beijing K Vision is insufficient in my view to give rise to an inference that the money was used for the project or that this sum had not been taken into account.  This could be a temporary advance from the defendant which was repaid, one just does not know.  Without knowing the true state of account between the defendant and Beijing K Vision, it is simply impossible to draw the inference that this sum should be treated as an additional cost for the project which had not been taken into account.

55. As for the second payment, it was on its face a payment to Beijing Property Management Bureau for the balance of the land transfer fee.  That is what Mr Qu’s said.  He claimed that this payment of RMB23,489,000 was capital injection to Beijing K Vision in addition to the sums of US$12,000,000 and RMB156,353,563.74.

56. On the facts as agreed, namely that this sum of RMB62,201,000 was the precise amount of the balance of land transfer fee, and that it was paid to Beijing Land Management Bureau, this payment was, prima facie, one which ought to have been deducted unless there is evidence that this sum had already been included in the amounts stated as capital or reserve in the balance sheet as at 31 August 1995.  As to this, I should bear in mind that the defendant’s evidence was unsatisfactory.  So was his discovery.  But even taking that into account, it remains difficult to say that there was any evidence that this payment had been taken into account in the amounts stated for capital and capital reserve in the balance sheets dated 31 August 1995.  In the circumstances, it does seem to me that the defendant has discharged the burden of showing that this second payment ought to be deducted from the income and profit of the defendant.  In my view, this sum of RMB62,201,000 should have been deducted.

Provision for tax

57. The Master accepted that on the footing that the defendant had made a profit from the disposal of its investments in the project, it would have been liable to pay tax in the Mainland.  In arriving at the amount he ordered, he made an allowance by way of provision for tax.

58. The parties are agreed that in the event that I come to the conclusion that either part or all of the sum of RMB105,690,000 should be allowed to be deducted, I shall leave the matter to the parties to try to agree a figure for tax, with liberty to the parties to apply.  I so order.

Interest

59. I turn to the question of interest.  Two sub-issues were debated.  The first is whether interest should run from the date of the writ (as contended for by Mr Coleman), or from the date when the defendant received the consideration for disposal of its shares from Sino Science and Far East (as Miss Wong SC contends).  The second sub-issue is whether interest should be compounded. 

60. On the first question, I find for the defendant.  I accept Mr Coleman’s submissions that because the project was on-going, the duty to account what is in effect the net profits from disposal did not arise immediately upon receipts of payment.  Whether interest should be compounded is a matter for the Court’s discretion.  Hanbury & Martin, Modern Equity, 18^th ed., p.690 suggests that compound interest is charged where that fairly represents what the trustee may reasonably be treated as having received.  In my view, this is the position of this trustee.  I therefore dismiss both the appeal and the cross-appeal on interest.

Orders

61. In the result, I make the following Orders :

(1)     The appeal is allowed to the extent that the Master’s Order of 17 November 2009 be varied by deleting the figure of HK$37,787,830.50 in paragraph (1) of that Order and substituting therefor a figure to be agreed between the parties in accordance with this judgment, and that failing agreement, the parties be at liberty to restore this appeal for the determination of that figure.

(2)     The Master’s Order of 17 November 2009 is otherwise affirmed.

(3)     The appeal and cross-appeal against the Order of 2 March 2010 be dismissed.

(4)     There be general liberty to apply.

62. As to costs, the defendant has succeeded only in part.  I make an order nisi that the defendant should have 30% of its costs of the appeal, and that there be no order as to the costs of the cross-appeal.  As recorded above, the defendant shall pay to the plaintiff the costs of the summons dated 8 June 2010.