HCA 2237/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2237 OF 2008

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J U D G M E N T

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INTRODUCTION

1.  The Plaintiffs are suing for the return of accounting documents belonging to the 1st Plaintiff over which the Defendant asserts a lien and the Defendant also counterclaims for an allegedly outstanding amount of $58,440. 

2.  The background to the dispute can be shortly stated.  The 2nd and 3rd Plaintiffs and the Defendant were business associates and conducted business through the 1st Plaintiff which is a Hong Kong registered company, “the company” as I will from now on refer to the 1st Plaintiff, was a supplier of a chemical coating product which was applied to production moulds and cutters used to cut metal.  This would harden the surfaces to which it was applied and in this way prolong their working use.

3.  The shareholdings in the company, which had 10,000 issued shares of one dollar each were held as follows:  5,500 (55%) by Techmart Platit Ltd (“Techmart Platit”), 2,500 (25%) by the 2nd Plaintiff and 2,000 (20%) by the 3rd Plaintiff.  Techmart Platit was a company owned by Techmart Industrial Limited, a Hong Kong company controlled by the Defendant as to 60% and Platit AG, a Swiss corporation, as to the remaining 40%.

4.  The company’s directors were the 2nd and 3rd Plaintiffs and the Defendant.  The Defendant and a BVI company were the directors of Techmart Platit. 

5.  The company owned and still owns a factory in Shenzhen through a PRC company called Lida Shenzhen.  By the latter part of 2007 it had become clear that the Defendant’s business interests and those of the 2nd and 3rd Plaintiffs were going separately.  The Defendant and his Swiss associates had set up a business which was in competition with the company. The Defendant’s conflict of interest was becoming irreconcilable with that of the company and the other two Plaintiffs.  It was agreed that the 2nd and 3rd Plaintiffs would buy-out the Defendant’s interest in the company.

6.  After some negotiation an agreement, recorded in writing, was concluded.  It is dated 5 April 2008.  The Agreement (in translation) is at Bundle C/37-1 to 37-3.  It is sufficient to set out here its essential terms:-

“(1) Techmart Platit shall transfer its shares in the 1st Plaintiff to the 2nd and 3rd Plaintiffs.

(2) The 2nd and 3rd Plaintiffs would pay Techmart Platit:

(a) HK$1,550,000.00; and

(b) 55% of the net asset value (defined as consisting of cash deposit, account receivables and unpaid debts) of the 1st Plaintiff.

(3) The date for calculating the asset shall be 31^st March 2008.

(4)     The Defendant shall return all the Accounting Documents to the 1st Plaintiff.”

7.  On the same day, the 5th April, the 2nd Plaintiff on behalf of himself and the 3rd Plaintiff paid Techmart Platit $1.55 million by cheque.  On the 21st April, Techmart Platit was paid a further $631,930, this being 55% of $1,148,964.10 which was the net asset value of the company defined as cash deposits, accounts receivable and unpaid debts.  This was the amount shown on the company’s Consolidated Balance Sheet as at 31 March 2008 and calculated at the exchange rate of HK$1:RMB1.

8.  These two payments having been made to Techmart Platit, the 2nd and 3rd Plaintiffs had complied with their part of the Agreement or, so they thought.  What now remained outstanding was for the Defendant to deliver to the Plaintiffs the 1st Plaintiff’s accounting documents.

9.  The reason why the Defendant refused to do so is central to the case.  He says that he was justified in not delivering the accounting documents because the 2nd and 3rd Plaintiffs had short-changed him in their calculation of the company’s net asset value by taking the Hong Kong dollar and the RMB at par when the market value of the RMB was 1.10 to the Hong Kong dollar with the result that there was an unaccounted for shortfall of $58,440.  In fact at the time, the Defendant said that the shortfall was $65,736 which he now accepts was based on a miscalculation which has now been adjusted down in his pleadings to the correct amount.

10.  The Plaintiffs’ case is that since 2007, the company’s accounts had taken the two currencies at par.  The history of this was that there had been a fluctuation in the rate of exchange between the Hong Kong dollar and the RMB over the previous few years and that as a matter of convenience the company had, with the 2nd and 3rd Plaintiffs’ and the Defendant’s agreement, treated the currencies at par to each other rather than having to calculate each and every RMB transaction and apply it at the current rate to the Hong Kong dollar.  So far as this practice is concerned the Defendant agrees that this is what they had adopted as a matter of convenience and this is how the transactions were recorded by the company’s accountant, Miss Mandy Leung, who has given evidence about this and how this practice was also reflected in the company’s accounts.

11.  Mr Gary Lam, on the Plaintiffs’ behalf, has submitted that this practice represents a course of dealing between the parties.  It has been pointed out by the Plaintiffs that at a Board meeting of the company on the 6^th October 2007, at which the 2nd and 3rd Plaintiffs and the Defendant were present, a unanimous resolution was passed that the company should repay HK$1.6 million of the Shareholders Loans to the shareholders in the proportion of their respective shareholdings.  For this purpose, an exchange rate of 1:1 was adopted.  The resolution is to be found at bundle C/31-32.

Discussion of the Evidence

12.  Whilst the claim by the Plaintiff relates to the non-return of the accounting documents and the counterclaim is second in time, as it were, on the pleadings, it is more helpful to first deal with the issue of the rate of exchange which is the subject to the counterclaim.  If I hold in favour of the Plaintiffs’ case that the net asset value was to come in based on a par value for the Hong Kong dollar and the RMB, that would in effect dispose of the Defendant’s counterclaim, leaving over only a lately pleaded amended-defence about the accounting documents not being under the control of the Defendant but in the possession of Techmart Platit over which he did not have sufficient control, that company also having another shareholder and director who had a say over the affairs of Techmart Platit.

13.  There is no doubt that as a matter of calculation if one takes the actual rate of exchange on 31 March 2008 between the Hong Kong dollar and the RMB, the Defendant has lost out on the RMB to the extent of his counterclaim.  The matter that I need to decide is whether the parties are to be held to have agreed that their practice of applying the 1:1 rate of conversion in their accounting and operation of the company was also to apply to their buy-out Agreement.

14.  Mr Lam has referred to their past internal transaction by which Shareholders Loans were calculated at 1:1 which, in my view, is a strong indicator that they were content to deal with this issue on this basis.  Unsurprisingly, all the accounting was done on this basis and the evidence of Miss Mandy Leung provides confirmation of this practice.  She has produced the accounts which stand in proof of this practice.  Additionally, when she prepared the account as a result of which the figure of $631,930 was calculated as being 55% of the net asset value of the company, she explained the calculation to the Defendant which he, on her evidence which I accept, agreed without demur and encashed the cheque for this amount.

15.  It is significant that the Defendant’s first objection to the 1:1 calculation was raised in mid-May following exchanges of emails between the 2nd and 3rd Plaintiffs and the Defendant about the computer password for the company and when the 2nd and 3rd plaintiffs started to ask for the return of the accounting documents kept at the Kwun Tong office of the company which was also the office of the Defendant’s companies Techmart Platit and Techmart Industrial Limited.  The Defendant says that he first realised that he had been underpaid around 19 May, which was over a month after the agreement had been signed, by which time the Plaintiffs were pressing him for the return of the accounting documents because they required them for the preparation of the company’s tax returns.

16.  I am satisfied, and find as a fact, that at the time that they entered into their Agreement for the buy-out of the Defendant that all the parties understood that their, by now well-established practice of treating the Hong Kong dollar and the RMB at par, was to be used for the calculation of the company’s net asset value.  Mandy Leung, who had been keeping the accounts, prepared the valuation on this basis and I am satisfied that she explained this to the Defendant who at the time accepted the figures as they were presented to him.  I have no doubt that had he thought the actual rate of exchange was to apply to the calculation of the net asset value he would have raised the point at the time rather than cash the cheque for $631,930.  This is how the parties had agreed to treat RMB transactions and I am certain that had they thought that the actual rate was to be used on this occasion this would have been recorded or at the very least attention would have been drawn to it at the time of the Agreement.  Accordingly, I am satisfied that 1:1 was the agreed basis and that the amount paid out to the Defendant was correct and agreed.

17.  This issue therefore falls to be decided in the Plaintiffs’ favour.

18.  As to the accounting documents, the evidence is that Miss Leung packed up the documents in boxes and left them at the Kwun Tong office.  Shortly after that she left the employment of the 1st Plaintiff.  There is no doubt that the Defendant had the clearest obligation under the Agreement to hand over these documents to the Plaintiffs.

19.  The Defendant can no longer maintain any justification based on a lien where I have found that he was paid all that he was entitled to based on the agreed par exchange rate between the Hong Kong dollar and the RMB.  In any event, even if I had found in his favour on this issue, it seems to me that he could not have exercised a lien on these documents because they belong to the company and not to the 2nd and/or 3rd Plaintiff.  The Agreement was between these three individuals, to which the company was not a party.  The company has never owed the Defendant anything, it is merely the subject matter of the Agreement rather than a party to it.  Any plea based on lien is simply not available to the Defendant and this part of the defence must therefore fail.

20.  The other pleas based on possession and control of the documents by the Defendant are, if anything, discreditable.  Quite plainly, he had the necessary possession and control of and over these documents.  The Kwun Tong office premises are his.  This is where he operates from when in Hong Kong.  In his absence, his wife administers things.  There was no justification for holding onto the documents.  He did so to try and apply pressure on the 2nd and 3rd Plaintiffs to get more money.  This is the long and short of it.  He had no right to do so.

Judgment

21.  As a result of these findings, the Plaintiffs must have judgment on the claim and the counterclaim must also stand dismissed upon which there must therefore be judgment to the Plaintiff.

22.  As a direct result of the Defendant’s wrongly holding on to the accounting documents the evidence is that the Plaintiffs had to pay a fine to the Inland Revenue Department of $1,200 because they were unable to prepare the 1st Plaintiff’s tax return on time.  Consequently, there must be judgment to the Plaintiffs for this amount.

23.  Secondly, I direct that within 7 days, the Defendant do return to the Plaintiffs the accounting documents listed out in the attachment to Miss Mandy Leung’s witness statement.  In the event that the Defendant is unable to locate all of the documents, he should make an affirmation within 7 days stating which documents cannot be located despite his best endeavours and the reasons why they cannot be located.  (As Mr Lam has pointed out this affirmation is important to enable the 1st Plaintiff to explain to the Inland Revenue why it would not be able to produce all of its accounting documents for the past 7 years).  Thirdly, the Defendant is to indemnify the Plaintiff for any further loss and damage that may arise as a result of the Defendant’s failure to return all the accounting documents to the Plaintiffs. In this regard, the court has power to make a declaration in such terms following the case of Trans Trust SPRL v Danubian Trading Co. Ltd [1952] 2 QB 297 @ 303 in the Court of Appeal in England as applied in Hong Kong in Watfield Technology Ltd v Kenworth Engineering Ltd & Anr, HCCT 1/2008, 22 January 2010 unreported at para. 94.

Costs

24.  There will be an order nisi that the Defendant is to pay the Plaintiffs’ costs of the claim and of the counterclaim to be taxed on a party-and-party basis.