DING LI HUA AND ANOTHER v. NG SO KAU

HCA 20823/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 20823 OF 1998

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BETWEEN

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D E C I S I O N

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Introduction

1.  This is a partnership dispute.

2.  By way of Summons dated 21 March 2013 (“the Summons”), the Plaintiffs apply for:

(1) an order that the eighth and tenth affirmations of the Defendant, and the exhibits thereto, be struck out on the ground that the same is scandalous and irrelevant and an abuse of the process of the Court;

(2) an order that the Defendant do pay into Court a sum of HK$4,394,188 within 28 days of the date of the order.

B. Background facts

3.  The Plaintiffs and the Defendant were partners of a partnership business known as “Cheung Wah Piece Goods Company” (祥華疋頭公司) (“the Partnership”). 

4.  By an Order dated 27 September 2001, Master M Yuen declared that the Partnership had been dissolved on 7 December 1998. 

5.  By an Order dated 6 January 2010, Chu J (as she then was) directed the parties to exchange a list of accountant firms “proposed to prepare the audited accounts of the partnership”, so that they could endeavour to agree on the firm to “undertake the preparation of the audited accounts of the partnership”.  

6.  On 25 January 2010, Chu J further directed, inter alia, as follows:

“The accountant to be appointed (‘the Accountant’) shall be instructed to study and examine the records, books and accounts of the partnership and to prepare a financial statement of the partnership”.

7.  The parties having failed to agree on the firm to be appointed, on 3 March 2010 Chu J directed that KL CPA Limited (“the Accountant”) be jointly appointed by the parties to undertake the work as indicated by the Court on 25 January 2010.

8.  On 1 June 2010, Chu J directed that the deadline for the parties to provide the Accountant with the “invoices, records, books and account and other relevant papers of the partnership” was to be 15 June 2010, and, thereafter, the Accountant

“shall proceed to prepare the financial statement of the partnership on the basis of the materials and information that have made available to him by the deadline”.

9.  On 15 June 2010, the Defendant, through his solicitors, sent to the Accountant

“invoices, records, books and account and other relevant papers of the partnership as per the schedule annexed hereto pursuant to the directions made by The Honourable Madam Justice Chu on 1^st June, 2010 for your further action”.

10.  The Accountant duly prepared a document called “Financial Statements for the period 1 January 1996 to 31 August 1998” of the Partnership (“the Financial Statements”).  In the Financial Statements, it is assumed that:

“All trade payables were paid except for a trade creditor, 深圳市闊天貿易有限公司 of HK$1,449,964 and the supplier, 金丰布行owned by [the Defendant], all sales were collected except for the customers, 金丰布行 and 廣州祥华owned/controlled by [the Defendant] or his related party, and all expenses had been settled”.

11.  It is further assumed in the Financial Statements that 廣州祥华 (“GZCW”), an entity set up in Guangzhou in the Mainland in about April 1997, was controlled by a related party of the Defendant.

12.  On the basis of inter alia the assumptions referred to in §§10 and 11 above, the Accountant states in the Financial Statements that the Defendant was indebted to the Partnership as at 31 August 1998 for HK$4,126,949 or HK$4,824,676 or HK$4,394,188.  There are three different sums because of three different scenarios under which the Accountant worked.  In calculating each of these sums, the Accountant proceeded on the basis that GZCW owed to the Partnership a sum of HK$8,772,712 (being sales of HK$9,104,712 less HK$332,000 received), and that the Defendant was liable to the Partnership for this sum of HK$8,772,712.

13.  On 5 November 2012, L Chan J directed the parties to appear before him to advise the Court on how to proceed with this action in the light of the common view of the parties that the Partnership had been dissolved.  In particular, the parties were:

“asked to advise the court on the interim arrangement, if need be, for the custody of the monies and assets belonging to the dissolved partnership …”.

14.  On 12 November 2012, after hearing the parties, L Chan J ordered that:

“1. The Defendant do explain by affidavit or affirmation to be filed and served within 60 days the reasons why he should not pay into Court any or any part of one of the three sums of HK$4,126,949, HK$4,824,676 or HK$4,934,188 …

5. The hearing for ordering payment into court by the former partners of the partnership be adjourned to a day to be fixed to be outside the next 120 days with an estimate of 1 day”.

15.  On 11 January 2013, the Defendant filed his eighth affirmation as directed by L Chan J on 12 November 2012. A number of transactions, and documents purportedly in support of the Defendant’s case on those transactions, are referred to and exhibited.  In particular, the Defendant says that the true state of affairs between GZCW and the Partnership, by reference to some books and records and business documents of GZCW, is that GZCW owes to the Partnership a sum of HK$1,222,894.65 only and not HK$8,772,712 as stated in the Financial Statements.  The Defendant says that by reason of those transactions, he does not owe the Partnership any money.  It will be necessary to refer to this issue of the state of affairs between the Partnership and GZCW below.

16.  On 8 February 2013, Mr Poon, an assistant solicitor in the firm acting for the Plaintiffs, filed an affirmation in opposition.  In the affirmation, Mr Poon does not deal with any of the transactions or documents referred to by the Defendant in his eighth affirmation.  Rather, after setting out what the Plaintiffs suggest happened in the preparation of the Financial Statements, and saying that the Defendant had had ample opportunities to submit the documents exhibited to his eighth affirmation when the Accountant drafted and finalised the Financial Statements and did not raise any objections and comments to the Accountant when the latter gave the Financial Statements to the parties in December 2011, it is already time-barred for the Defendant to adduce the said documents.  It is said that it was unfair and unjust, an abuse of the process of the Court and the fair disposal of the matter would be prejudiced, embarrassed and delayed, if the Defendant is allowed to adduce the said documents so as to further comment on, or request the re-calculations of, the Financial Statements. 

17.  On 8 March 2013, the Defendant filed his tenth affirmation explaining, inter alia, why by mistake he did not disclose to the Accountant the documents of GZCW he had produced under his eighth affirmation.

18.  On 21 March 2013, the Plaintiffs issued the Summons.

19.  At the hearing on 5 June 2013, I was informed by counsel that no dates had been fixed for the trial of this action which would, inter alia, decide on the true state of the financial affairs between the partners regarding the Partnership.  Further, I was informed that the Plaintiffs would be seeking to amend the Statement of Claim to take into account the Financial Statements.

C. The real issue before the Court

20.  In my judgment, the real issue before me is whether I should order payment in of HK$4,394,188, as applied for by the Plaintiffs by way of the Summons. The question of the striking out of the eighth and the tenth affirmations of the Defendant is only, as I shall explain below, a side issue.

21.  As stated at §23-92 of Lindley & Banks on Partnership (19^th ed, 2010):

“A partner will not be ordered to pay in any sum in respect of a debt owed to the firm, where the amount is not admitted and cannot be readily ascertained. Where, however, the amount of the debt is ascertained and the partner concerned does not insist that an overall balance is due to him from the firm, he may be ordered to make a payment in”.

22.  Lindley & Banks referred to, inter alia, Wanklyn v Wilson (1887) 35 Ch D 180, where, after referring to a number of authorities including the judgment of Jessel MR in London Syndicate v Lord (1878) 8 Ch D 84, Stirling J said at 185-186:

“Upon these authorities it seems to me that the Court is now at liberty, when it has before it the parties to an account, to look at the account and the facts of the case, and, to use the words of the late Master of the Rolls, ‘in the fair exercise of its judicial discretion,’ to order a sum of money to be paid into Court when it has been sufficiently ascertained that such a sum will be due on the taking of the account. Adopting that principle, I have to look at the facts of this case, and in the fair exercise of my judicial discretion I have to consider whether I can arrive at any conclusion as to what sum will be due to the Plaintiff in the taking of the account which is the object of the action…” (emphasis added).

23.  In London Syndicate v Lord at 88-89, Jessel MR gave guidance as what is meant by “sufficiently ascertained”, ie a “sufficient probability” that the account will result in at least a certain sum being found due from a defendant.  The question is whether the Court is satisfied that

“there is a probability amounting to reasonable certainty that not less than a certain amount will be found due from the Defendants, [so that the Court] may in its discretion direct the amount to be brought into Court” (emphasis added).

24.  Thus, the question is whether the, or a minimum, amount owed by the Defendant (if any) to the Partnership can be sufficiently ascertained by me now with reasonable certainty so that a payment in of that amount can (and should) be ordered.[1]  Unless I am so satisfied, taking into account any evidence properly adduced by the Defendant, no order for payment in should be made.  It is not for me at this stage to make any finding as to what is the true amount owed by the Defendant to the Partnership.

25.  The eighth affirmation of the Defendant was filed pursuant to the order of L Chan J in an attempt to adduce evidence to show why payment in should not be ordered against the Defendant, and the real purpose of the Plaintiffs in seeking to strike out that affirmation is to defeat this attempt by the Defendant so that, if that affirmation is struck out, there is arguably no basis for me to refuse to order payment in by the Defendant. 

26.  The grounds for striking out relied upon by the Plaintiffs, as stated in their skeleton submissions and confirmed by their counsel Mr Wong, are that the matters referred to in the eighth affirmation of the Defendant are irrelevant, and that it is an abuse of the process of the Court for the Defendant now to seek to adduce further documents and thereby seeking to re-open the question of the state of the accounts which had been dealt with by the Accountant based on documents which had been adduced to him as directed by Chu J. 

27.  However, as explained by Barma J (as he then was) in Chan Woon Fui v Chan Wing Suen (HCCW 350/2004; 11 July 2005) at §4, even if one or more of the grounds for striking out is/are established, I still have a discretion not to strike out the affirmation or the offending parts, on the basis that I can simply exclude the offending materials from my mind when deciding the issues which arise for decision.  Thus, the crucial point is whether the objections of the Plaintiffs to the eighth and tenth affirmations of the Defendant have any substance.

D. Abuse of process of the Court

28.  I shall deal with the question of the alleged abuse of process first.

29.  It is important to bear in mind the purpose and status of the Financial Statements prepared by the Accountant.  They are in the nature of a report of a single joint expert prepared for the assistance of the Court at the trial of this action, when the Court is to decide, inter alia, on the final accounts of the Partnership and the rights and liabilities of the Plaintiffs and the Defendant inter se.  By its very nature, a joint expert report such as the Financial Statements are not binding on the Court (see, for example, Armstrong v First York Ltd [2005] 1 WLR 2751) or the parties as such.  The directions of Chu J did not say so, and by making the orders on 12 November 2012 allowing the Defendant to show why he should not be ordered to make payment in, obviously L Chan J did not think so either. Further, as Mr Wong accepts, correctly in my view, the parties are not bound by the Financial Statements as such at the trial, and the Defendant is not barred from adducing the same evidence (which he is now adducing by way of his eighth affirmation) at the trial so as to contest the question of how much he owes the Partnership (if at all). 

30.  On this basis, I fail to see how it can be said that it is an abuse of the process of the Court for the Defendant now to seek to adduce evidence of further transactions which he says affects the question of his indebtedness to the Partnership, when he can do so at the trial. 

31.  The Plaintiffs argue that the parties, having had a chance to comment on the Financial Statements before they were finalised, should not be allowed to “re-open” the same by seeking to adduce evidence of further transactions.  There has to be an end, it is argued, to this process.

32.  I do not accept this argument:

(1) I do not think that the Defendant is seeking to “re-open” the Financial Statements as such, because there is no suggestion that, on the basis of the documents before the Accountant, and with the assumptions that he made, the Financial Statements are incorrect.  By filing the eighth affirmation pursuant to the order of L Chan J, the Defendant is simply seeking to resist an order for payment in. 

(2) In any event, even if the Defendant can be said to be (at least indirectly) challenging or seeking to “re-open” the Financial Statements now, I do not see how this can be an abuse of process when he can do so at the trial.  In considering whether to make an order for payment in, I have to see whether I can say with reasonable certainty that a minimum amount will be found to be owing by the Defendant at the trial, and it is simply wrong to say that it is an abuse of process for the Defendant to seeking to adduce before me the very evidence which he will rely on at the trial regarding his liability to the Partnership.

(3) Thus, once it is accepted that the Financial Statements are not binding on the Court and the parties as such, and that the Defendant is not barred from adducing evidence of the transactions at the trial so as to show, for the purpose of a final order, what is the true state of indebtedness (if any) between the Defendant and the Partnership, it cannot be right to say that the Defendant is somehow debarred from adducing, or that it is an abuse of process for him to adduce, the same evidence, at an interlocutory stage, simply for the purpose for showing that there is no reasonable certainty as to the amount owed by the Defendant (if any).  If he is so barred at the interlocutory stage, the Defendant will have to pay in a sum now before his liability is finally determined at the trial and which supposed liability he is free to challenge (despite the Financial Statements) and which supposed liability may well be reduced or extinguished by the very same evidence which the Plaintiffs suggest I now exclude.  This is most unfair to the Defendant unless I am satisfied that, taking into account all the evidence before me, there is a reasonable certainty that the Defendant owes at least a certain sum to the Partnership (an issue which I deal with in the next section).  The crucial issue is whether such reasonable certainty is shown, which is the threshold the Plaintiffs must satisfy for them to be granted an order for payment in, and it cannot be an abuse of process for the Defendant to adduce evidence to resist this, without seeking to challenge (or revise or re-open) the Financial Statements as such.

(4) I bear in mind what Lord Herschell LC said in Neville v Matthewman [1894] 3 Ch 345 at 353:

“… if, upon the whole of the facts before the Court, it is obvious that the defendant does in good faith dispute the title of the plaintiff, and that there is a serious question to be tried, it would be monstrous prematurely to order him to pay money into Court when the result of the trial may be to shew that there is nothing due from him at all. No doubt if a defendant has made a clear, unequivocal admission that he has a sum of money in his hands, he cannot afterwards get rid of it by merely saying that he disputes the plaintiff’s claim; there must be a real bona fide dispute.”

(5) The eighth affirmation of the Defendant was filed pursuant to the order of L Chan J to explain why the Defendant should not be ordered to pay in any of the sums as stated to be owing by him in the Financial Statements.  The evidence to be filed must be intended to include any matter which calls into question the real amount owed by the Defendant (if any).  The Plaintiffs argue that the evidence must be limited to matters on the basis that the Defendant had delivered all relevant documents to the Accountant, but I do not see any basis for reading in this restriction to the order of L Chan J.  Plainly, to adduce evidence on matters with the leave of the Court can no way be described as an abuse of the process of the Court.

33.  As for the tenth affirmation, it is an affirmation filed in response to the criticism made by the Plaintiffs on the eighth affirmation of the Defendant through the affirmation of Mr Poon.  In no way its filing can be described as an abuse of the process of the Court.

34.  I further do not see how these proceedings will be delayed (to any substantial extent, if at all) by what the Defendant is doing here, as there are no trial dates yet, and the Plaintiffs themselves are intending to amend the Statement of Claim. 

E. Relevance and merits

35.  The Plaintiffs also argue that the eighth affirmation should be struck out as irrelevant.  Mr Wong took me to the evidence and made submissions as to why the documents produced by the Defendant do not support his case regarding the relevant transactions or the sums in question.  In my judgment, and with respect, it is incorrect to describe the evidence in question as “irrelevant”.  They are evidence which, if accepted, would affect the existence and amount of the indebtedness owed by the Defendant to the Partnership, and on this basis they must surely be relevant.  Mr Wong criticises the evidence and argues that it does not show what the Defendant alleges, and thus the real attack of Mr Wong is rather on the quality of the evidence, to which I now turn.

36.  As stated above (at §12), in calculating the sums owed by the Defendant to the Partnership, the Accountant proceeded on the basis that GZCW owed to the Partnership a sum of HK$8,772,712 (being sales of HK$9,104,712 less HK$332,000 received), and that the Defendant was liable to the Partnership for this sum of HK$8,772,712.  The assumption is that GZCW was owned and controlled by the Defendant or his related party.

37.  The Defendant disputes the assumption that he owned and controlled GZCW.  He says that GZCW was a subsidiary of Partnership (which owned 90% of it, the other 10% being owned by the Defendant’s younger sister) and he should not be responsible for any debts GZCW owed to the Partnership. 

38.  Further, the Defendant says, the total amount of goods sold by the Partnership to GZCW was in the amount of HK$6,204,479.61, and GZCW had made payments to suppliers on behalf of the Partnership for a total of HK$4,981,584.96. Thus, GZCW only owes the Partnership HK$1,222,894.65 (instead of HK$8,772,712 as stated in the Financial Statements).  If so, and even if the Defendant is responsible for this debt owed by GZCW, on this point alone the overall net position is that the Defendant does not owe the Partnership any sum.

39.  In support of his case, the Defendant exhibits the relevant pages of the sales record book and the cash book of GZCW to his eighth affirmation.[2] He says that both books were contemporaneous records prepared by him.

40.  Mr Wong very fairly accepts that he cannot, at least at this stage, challenge the authenticity of the sales record book and the cash book adduced by the Defendant.  His case is that if the transactions recorded in those books did take place, there would have been other documents (such as invoices and financial records of the Partnership) which reflect these transactions, and any such transactions supported by documents would have been taken into account by the Accountant when he came up with the figures of HK$9,104,712 and HK$332,000.  Transactions not so supported should not be accepted. 

41.  In so far as the sales are concerned, it must be borne in mind that in the Financial Statements the Accountant states that the sales to GZCW was HK$9,104,712 in total (up to 31 August 1998), whereas the Defendant’s case is that sales to GZCW between 16 April 1997 (when GZCW was formed) and 13 January 1999 was only HK$6,204,479.61, ie there was in fact less sales than the Accountant thought. 

42.  There is, however, no evidence before me as to the basis and materials on which the Accountant came up with the figure of HK$9,104,712, or the particulars of each sale transaction which together made up that total, and how do they compare with the particulars shown in the sales record book now produced by the Defendant.  To seek to reconcile the two figures, or to decide which one is the correct figure, one needs to compare the particulars of each transaction making up the respective figures, and to consider the evidence (if any) regarding the sales which appear on one list but not the other.  This must be a matter for the trial (with evidence from the Accountant if necessary including evidence on the basis on which he came to the figure of HK$9,104,712) unless I can now be satisfied, on a summary basis on affidavit evidence alone, that there is a reasonable certainty that the sales figure relied upon by the Accountant is correct notwithstanding the evidence adduced by the Defendant.  I do not see how I can do so.

43.  The absence of evidence before me now regarding how, and with what materials, the Accountant came up with the sales to GZCW cannot be blamed on the Defendant.  And even if there is such evidence before me it is not appropriate for me to conduct a mini-trial to resolve this issue. It must be a matter to be canvassed fully at the trial.  On the other hand, as countless cases on summary judgment tell us, contemporaneous documents are of real significance in testing the credibility of a party’s case as alleged on affidavit. The authenticity of the sales record book is not challenged before me for the purpose of this application and I do not see any reason or basis for me not to accept its authenticity.  Given the existence of the apparently complete and contemporaneous record of sales between the Partnership and GZCW which the Defendant affirmed was prepared by him, despite the present lack of other documents supporting the existence of the transactions recorded in the sales record book before me, I cannot come to the view that there is a reasonable certainty that the sales from the Partnership to GZCW were in the total sum of HK$9,104,712 and not HK$6,204,479.61.  To do so would mean that I will be rejecting the Defendant’s evidence (in particular a contemporaneous and authentic sales record book) summarily at this stage, and in my judgment I cannot do so. 

44.  I also note that the Plaintiffs have filed no evidence to answer the Defendant’s case on this point, although the burden is, in my judgment, on the Plaintiffs to show the required reasonable certainty of the amount supposedly owed by the Defendant, since it is their application for a payment in.

45.  As for the alleged payment by GZCW to suppliers on behalf of the Partnership totalling HK$4,981,584.96, the Plaintiffs again criticise the lack of any documents or accounting entries or bank statements in support.  Further, the Plaintiffs argue that if these payments were in fact made, there would have been some record of them in the books of the Partnership, and the Accountant would have taken them into account in his calculations.

46.  However, these submissions beg the question of whether such payments were recorded in any documents or records of the Partnership because, on the Defendant’s case, the cash book of GZCW shows the amount of cash taken away by the 1^st Plaintiff, and a Mr Tsui Kin Ming, to pay off the suppliers.  If so, it is probable that the accounting documents or bank statements of the Partnership would not have records of these transactions.  Rather, as in the case of the sales to GZCW:

(1)     what I have is a cash book which the Defendant has affirmed to be contemporaneous record of the cash taken away and prepared by him, when there is no challenge, or reason for me not to accept, the authenticity thereof, for the purpose of this application;

(2)     there is no evidence before me of how the Accountant came up with the figure of HK$332,000, in particular whether that figure has taken into account any of the payments recorded in the cash book of GZCW.  Again, this lack of evidence cannot be blamed on the Defendant;

(3)     there is no evidence from the Plaintiffs (in particular the 1^st Plaintiff, who allegedly has taken away some of the cash), who have the burden here, to dispute the Defendant’s case on this point. 

I therefore am not satisfied that there is a reasonable certainty that the total amount that GZCW had paid the Partnership (by whatever means, including paying off creditors of the Partnership directly) was only HK$332,000 and not HK$4,981,584.96.

47.  If the Defendant’s figures are accepted, then the amount owed by GZCW is only HK$1,222,894.65 and not HK$8,772,712, with the result that, if other figures in the Financial Statements are not disturbed, the Defendant does not owe the Partnership anything (even if he is responsible for the HK$1,222,894.65 owed by GZCW).  Rather, the Partnership owes him money.

48.  With the evidence before me now, in particular the contemporaneous and (for the purpose of this application) authentic sales record book and cash book, I cannot say with reasonable certainty that the Defendant will be found to be liable to the Partnership for any particular amount.

F. Disposal

49.  My conclusion above on the alleged sales to, and alleged payments by, GZCW is sufficient to dispose of the Summons in favour of the Defendant.  While the Defendant has also sought to resist an order for payment in by raising issues regarding other alleged payments and transactions, as well as the issue of whether he should be responsible for any debts owed by GZCW to the Partnership, it is not necessary or desirable for me to deal with them given that they will all be live issues between the parties at the trial. If I may refer to the position regarding applications for summary judgment as an analogy in this respect, once I conclude that there is no reasonable certainty as to how much (if any sum at all) is owed by the Defendant to the Partnership, all that I should do is to say shortly why I think so.  It is neither necessary nor desirable for me to express any view, on affidavit evidence, as to the other points raised.  See Man Earn Ltd v Wing Ting Fong [1996] 1 HKC 225 at 229D-F per Godfrey JA and at 230D per Litton VP (as he then was), and Far East Consortium Ltd v Full Wealthy International Ltd (HCA 2080/2005; 2 June 2006) at §35 per Sakhrani J.

50.  For reasons stated above, no basis has been made out for the eighth or the tenth affirmations of the Defendant to be struck out.

51.  The Plaintiffs’ application by way of the Summons dated 21 March 2013 is dismissed with an order nisi that the costs of the application be paid by the Plaintiffs to the Defendant, to be taxed if not agreed.

52.  Lastly, I thank counsel for their assistance.