KUNG CHEONG KAI v. KUNG CHEONG KI AND OTHERS

HCA 704/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 704 OF 2013

____________

_____________

D E C I S I O N

_____________

Background

1. The plaintiff and the 1^st defendant are brothers and partners in the family business of Shu Kee 樹記 (“Partnership”) which has a long history of selling bean curd and other bean products since the 1950s.  The 2^nd defendant is the 1^st defendant’s wife.  The 3^rd defendant is a company carrying on business since March 2013 under the name of 百年荳府(Centenary Tofu) (“Centenary”).

2. This is the hearing of the plaintiff’s application for an interlocutory injunction, to restrain the defendants from selling the same bean products which the Partnership sells or offers to sell, and in so doing, conducting a business which competes with the Partnership business.  It is claimed that since late January 2013, the 1^st and 2^nd defendants had planned to set up a competing business in the same locality of the Partnership, and that since March 2013, the defendants have commenced their business of selling bean products, namely bean curd sheets, bean curd skin flakes, deep fried bean curd rolls, vegetarian chicken and vegetarian duck, etc which are exactly the products which the Partnership has been selling. 

3. The plaintiff claims that the 1^st defendant, as partner, has acted in breach of his fiduciary duties owed to the Partnership in carrying on the competing business, and has conspired with the 2^nd and 3^rd defendants to injure the plaintiff’s economic and business interests in the Partnership.  It is alleged that the 1^st and 2^nd defendants had solicited customers of the Partnership, and had interfered with the business of the Partnership by dismissing workers at the Partnership, stopping production of a popular product of the Partnership business (the vegetarian duck), and removing or withholding from the plaintiff the contact information or details of the Partnership’s suppliers and bulk purchasers.  The plaintiff claims that the defendants should be injuncted from continuing their competing business, and that they are liable to the plaintiff for damages, or to account to the plaintiff for profits. 

4. The 1^st defendant denies that he has any interest in the business of the 3^rd defendant, which he claims is his wife’s business.  The defendants deny all allegations made by the plaintiff that they had solicited the clientele of the Partnership, or had conspired to injure the plaintiff’s interests.

Is there a serious question to be tried?

5. It is not the function of the court at this interlocutory stage to resolve conflicts of evidence on affidavit as to facts on which the claims of either party may ultimately depend.  These are matters to be dealt with at trial.  It suffices for the plaintiff to establish that there is a serious question to be tried in relation to the claims he makes against the defendants in respect of the 1^st defendant’s breach of his fiduciary duties as a partner, and the defendants’ interference in his economic interests in the Partnership.

6. I am satisfied on the evidence that there is a serious question to be tried in relation to the plaintiff’s claim that the 1^st defendant has an interest in the business of Centenary, although only his wife and son are registered as the shareholders of the 3^rd defendant.  The investigators’ report shows his presence in the 3^rd defendant’s shop, and even a cursory reading of the transcript of the meeting held on 24 February 2013 (“Meeting”) between the partners and other family members suggests that the 1^st defendant has more interests in the business of Centenary than as he claims in his affirmation filed in opposition to the application for injunction.  The defendants have not filed their evidence in answer to the plaintiff’s claims made on the basis of the transcript and the matters stated at the family Meeting.  It may be that at trial, the 1^st defendant would be offering his explanations as to why he said various things at the Meeting, or what he had meant by the statements he made at the Meeting, but it is doubtful that serious disputes can be raised that the 1^st defendant did say the things which the transcript records him as saying at the Meeting.  The plaintiff has put emphasis on the statements made by the 1^st defendant at the Meeting as to his financial interests in the Centenary business, and the capital outlay he and his wife had put into the Centenary business.

7. It is beyond dispute that as a partner, the 1^st defendant owes a fiduciary duty of utmost good faith, trust and honesty to the plaintiff, and should not engage in any act to benefit himself at the expense of the Partnership.  The 1^st defendant also has the duty to make full disclosure of his interests to his co-partners and to account for profits of and benefits due to the Partnership. 

8. It is true that neither the plaintiff nor the Partnership has any right to restrict suppliers or manufacturers from supplying products to Centenary, or generally to restrict other parties from selling or offering the sale of bean products.  However, the plaintiff is entitled to restrain his partner, the 1^st defendant, from carrying on a business which competes with that of the Partnership and in that regard, to restrain the 1^st defendant from selling or offering the sale of products which compete with and are identical to the products sold in the course of the Partnership business. 

9. On the evidence made available at this stage, the plaintiff has more than amply shown that there is a serious question to be tried that the 1^st defendant acted in breach of his duties as a director, in carrying on or having interests in the competing business of the 3rd defendant.  It is the plaintiff’s claim that the 2^nd defendant has lent her name to the 1^st defendant to enable him to carry on the business of the 3^rd defendant in competition with the Partnership business.  The plaintiff’s cause of action against the 2^nd and 3^rd defendants is in relation to their assistance in the 1st defendant’s breach of his duties to the plaintiff, and their conspiracy with the 1^st defendant to act against the plaintiff’s economic interests. 

10. Irrespective of the remedies which may be granted to the plaintiff at trial in relation to what he claims to be the wrongful acts of the defendants, the contested issue before me is whether an interlocutory injunction should be granted against the defendants in the interim up to trial.  In this regard, the legal principles are clear, and I need only to refer to the summary set out in paragraph 29/1/11 of the Hong Kong Civil Procedure.  The relevant extracts are:

(1) The governing principle is that the court should consider whether, if the plaintiff succeeds at the trial, he would be adequately compensated by damages for any loss caused by the refusal to grant an interlocutory injunction. If damages would be an adequate remedy and the defendants would be in a financial position to pay them, no interlocutory injunction should normally be granted, however strong the plaintiff’s claim appeared to be at that stage.

(2) If, on the other hand, damages would not be an adequate remedy, the court should then consider whether, if the injunction were granted, the defendant would be adequately compensated under the plaintiff’s undertaking as to damages.  If damages in the measure recoverable under such an undertaking would be an adequate remedy and the plaintiff would be in a financial position to pay them, there would be no reason upon this ground to refuse an interlocutory injunction.

(3) It is where there is doubt as to the adequacy of the respective remedies and damages that the question of balance of convenience arises.

Will there be irreparable damage to the plaintiff?

11. The defendants are selling bean curd products and carrying on business under their own name, Centenary.  They have not used the name of the Partnership business.  It is not the plaintiff’s complaint that the defendants have adopted a similar get-up as the Partnership business in the defendants’ sale or supply of bean curd products.  Counsel for the defendants argued that despite the plaintiff’s assertions that there is damage to the goodwill and reputation of the Partnership, there is no evidence to support such claim that the plaintiff will suffer any irreparable harm.

12. The defendants therefore claim that even if the plaintiff can show that there is a serious question to be tried on his claims against the defendants, an account of profits from the defendants’ allegedly competing business, and monetary compensation, would be adequate to compensate the purely financial loss which may be suffered by the plaintiff as a result of the defendants’ breach.  It is therefore argued on their behalf that an interim injunction should not be granted. 

13. There is merit in the defendants’ argument.  In the usual case, a partner who carries on any business of the same nature as and competing with that of the partnership will be ordered by the court to account for and pay over to the firm all profits made by the partner in the competing business (section 32 of the Partnership Ordinance). 

14. On the facts of this case, however, I am not satisfied that if the plaintiff should succeed at trial on his claim against the 1^st defendant, the plaintiff can be adequately compensated by an order which the court makes for the defendants to account to the plaintiff for the profits made in the competing business, or for damages to be paid to the plaintiff as compensation for the loss sustained by the Partnership and the plaintiff as a result of the competition. 

15. On the evidence adduced, the Partnership is a family business, operating a shop at ground floor, 236 Yu Chau Street, Shamshuipo, Kowloon (“Shop”). The 1^st defendant has two-thirds interest in the Partnership, and the plaintiff one-third.  The 1^st defendant is the elder brother, and has been in control of the operation and management of the Partnership business since the father died in 2001.  Even on the 1^st defendant’s evidence, he is the person in contact with the main suppliers of the Partnership.  He keeps the accounts and records of the Partnership business, and operates the Partnership bank account.  Until she left the Partnership business in October 2012, the 2nd defendant had been assisting the 1st defendant at the Shop since 1998.  In fact, until disputes arose between the partners in 2013, other siblings of the plaintiff and the 1^st defendant, and the plaintiff’s wife, had all been helping out and working at the Shop, at different times, until the 1^st defendant refused to allow the plaintiff’s wife and the sixth sister to come to the Shop to help with the work there.  This was on 19 March 2013, shortly after the defendants commenced business on 9 March 2013.  The plaintiff says that this was to disrupt business and operations at the Shop.  In April 2013, the 1^st defendant stopped workers at the Shop from manufacturing a popular product, the vegetarian duck, which the 2^nd defendant used to produce for the Shop, and which has been produced and sold at the 3^rd defendant’s shop since March 2013.  The plaintiff also claims that he discovered on 22 April 2013 that the 1^st defendant removed from the Shop the notebook which contained the contact information of the suppliers and bulk purchasers of the Partnership.

16. The 1^st defendant disputes the factual allegations made by the plaintiff, that it was for the purpose of disrupting the Partnership business that he had prohibited the plaintiff’s wife and his own sister from working at the Shop, or stopped production of the vegetarian duck, referring to what he claims to be his legitimate reasons for doing so.  He also claims that the financial records of the Partnership had at all material times been kept at the Shop, and that it had been open to the plaintiff to inspect them, if he so wished.  He did not produce the accounting records to the plaintiff immediately upon demand made by the plaintiff’s solicitors, only because he required time to compile all the records requested for over the years. 

17. All these will no doubt provide fertile ground for cross-examination at trial.

18. However, the assertions made by the 1^st defendant, that he has no interest at all in the 3^rd defendant which is his wife’s own business, have been contradicted by the transcript of the Meeting which was produced in evidence after the defendants’ affirmations were filed in opposition to the plaintiff’s application for injunction.  The 1^st defendant made statements at the Meeting which indicate that the competing business is his, and that he had invested money in the competing business.  I agree with the plaintiff’s counsel that the defendants’ assertions cannot be believed, and that their credibility is suspect at this stage. 

19. Counsel for the plaintiff urged upon the court the significance of the fact that the Partnership business and the Centenary business are small-scale neighborhood businesses, mainly dealing with cash sales.  It cannot be realistically assumed that there would be detailed records of all sales of the perishable food products, or of the supplies of the raw ingredients from the suppliers.  It was argued on behalf of the plaintiff that it would be extremely easy for the defendants to hide their sales in order to reduce the appearance of the profits they actually make. 

20. It has not been seriously disputed that the defendants have been procuring supplies from the same suppliers of the Partnership business, and that the 1^st defendant is the person who has been dealing with these suppliers for the Partnership.  He no doubt enjoys a good relationship with the suppliers, as he claimed at the Meeting that he can easily influence these suppliers. 

21. The plaintiff claims that he has not been given free access to the books and accounting records of the Partnership.  The 1^st defendant’s reply, that these were all kept at the Shop, cannot in my view be a complete answer to the plaintiff’s complaint, as evidenced by the fact that although the 2^nd defendant claims that she had never made the production of the vegetarian duck a secret process, and that it was open to all the workers, the sister of the plaintiff and of the 1^st defendant claims that when she found the bottle of powder used to manufacture the vegetarian duck at the Shop, the 2^nd defendant had immediately taken the bottle away from her. 

22. As the partner in charge of the management of the Shop and  its finances, and who has control of the Partnership bank account as well as the books and records of the Partnership, there is strength in the plaintiff’s argument that, given the 1^st defendant’s interests in the competing Centenary business of the 3^rd defendant, it would be open to and easy for the 1^st defendant to withhold full information as to the Partnership’s profits, and to damage the Partnership business if he were to exert his influence on the suppliers.

23. The plaintiff has referred to his discovery of an application made in February 2013 for registration of the name of the Partnership as a trade mark. The application was made in the name of a BVI company, and filed by the solicitors who act for the defendants in these proceedings.  When the plaintiff asked the 1^st defendant if he or the other defendants had made the application (since none of the other family members had done so), the 1^st defendant only said that he did not know.  I cannot regard this as evidence that the trade mark application had been filed by the defendants.  However, I do regard this incident as evidence that the 1^st defendant cannot be expected to discharge his duty of honesty and utmost good faith towards the plaintiff and the Partnership, when he failed to give his co-operation even in the most basic matter of protecting the trade name and valuable asset of the Partnership.  The 1^st defendant could easily have given his partner a forthright and direct answer, whether he or his wife or “her” company had, or had not, made the application for registration of the “Shu Kee” name as a trade mark, but he did not or would not do so. 

24. On the evidence which I have seen, I consider that the plaintiff has demonstrated a strong case, with good prospects of success, that the 1^st defendant is in breach of his fiduciary duties owed to the plaintiff, by carrying on or having interests in a competing business.  A defendant who has been shown to have acted in breach of duties of uberrimae fidei to his partner, and brother in this case, can hardly be expected to be able to operate either the Partnership business, or the competing Centenary business, in honesty and utmost good faith, in the maintenance of full and accurate records of the sales, expenses and supplies of the products - which is essential in any account for profits or assessment of the damages payable to the plaintiff.  The plaintiff will be seriously handicapped by his inability to verify the accuracy of the statement of expenses and profits for either the Partnership (which is controlled by the 1^st defendant) or the competing business controlled by the defendants.  An assessment of damages on the basis of incomplete and inaccurate books cannot produce an award which can adequately compensate the plaintiff for his loss.

25. Further, If the defendants should be permitted to continue their competing business until assessment of damages after trial, it is likely that the Partnership would have lost a share of the market for the products to the competing Centenary business of the 3^rd defendant, and such loss would not be adequately compensated in damages, particularly in view of the matters referred to in paragraphs 18 to 24 above. 

Will the defendant be adequately compensated under the plaintiff’s undertaking as to damages?

26. The plaintiff has a one-third share in the Partnership which, as the defendants accept, is very profitable.  He should be in a financial position to pay any damages that may be awarded to the defendants, should the defendants succeed at trial.

Will the defendants be in a financial position to pay damages?

27. The 1^st defendant has a two-third share in the Partnership, and notwithstanding my doubts as to the 1^st defendant’s complete honesty in the further control of the Partnership business and records, he should be in a financial position to pay any damages that may be awarded to the plaintiff. 

Will the defendants suffer irreparable damage in the interim?

28. It is true that the granting of an interim injunction would have significant effect on the defendants.  The practical effect of the injunction would be that the defendants would not be able to sell the majority of their existing range of bean products.  They have taken a lease for their new shop, and they claim that it may have to be closed down as a result of the injunction, which would cause irreparable damage to their goodwill and reputation.  I take this into consideration, but bear in mind the fact that they may sell other products in the new shop, including other bean products not offered for sale by the Partnership.  I also bear in mind that they only commenced business in early March 2013, and have yet to build up any substantial goodwill.

The balance of convenience

29. In the course of the hearing, the defendants have offered various undertakings in relation to the maintenance of records of their sales and supplies, as a result of the queries made by the court, but these have been rejected by the plaintiff on the basis that he cannot trust the defendants in view of their lack of credibility.

30. Bearing in mind the strong merits of the plaintiff’s claims, the balance of convenience would be in favor of the grant of an injunction, and otherwise to preserve the status quo prior to the defendants’ acts of breaches.  As Ma J (as he then was) pointed out in Music Advance Ltd v Incorporated Owners of Argyle Centre Phase I [2010] 2 HKLRD 1041, the ultimate question is what course to adopt which involves the least injustice in the case of the grant or refusal of interlocutory relief, and the more “assured” the court is on the merits of the applicant’s case, the less will be the risk of injustice.

Conclusion

31. Having considered all the relevant and exceptional circumstances in this case, I grant the injunctions sought in paragraphs 1 and 2 of the plaintiff’s summons issued on 26 April 2013 (“Summons”), until trial or further order. 

32. I further order that there be a speedy trial, and direct the parties to agree on directions for the filing of further pleadings, witness statements and discovery for a speedy trial.  If agreement cannot be reached, the parties should forthwith apply to the court for directions.

33. I make an order nisi for the costs of the Summons to be in the cause, with certificate for counsel.