LAW KWOK KEI v. VICKY SIU WING KEE AND OTHERS

HCA 1825/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1825 OF 2005

_______________

_______________

________________________

J U D G M E N T

________________________

1. This action originally started as a derivative action by Law Kwok Kei, the plaintiff (“Law Junior”) against various alleged wrongdoers, namely Vicky Siu, the 1^st defendant (“Vicky”), Intelli Company Limited, the 2^nd defendant (“Intelli”) and Siu Chi Keung (“Siu Senior”), the 3^rd defendant, (collectively “the defendants”).

2. The company on whose behalf the derivative action was brought is HK Fullson Company Limited (“Fullson”), the 4^th defendant.  Law Junior and Siu Senior were at all material times registered shareholders of Fullson (each being a registered shareholder of ⅓ of the company’s shareholding). Vicky is the daughter of Siu Senior and was an employee of Fullson in 2005.  Intelli is and was at all material times a Hong Kong company.  Siu Senior was at one time a shareholder of Intelli but he transferred all his shares to Vicky in February 2005.  The other shareholders of Intelli are Vicky and Siu Man Chun Benny, son of Siu Senior.

3. The allegations against the alleged wrongdoers (which will be explained further below) are twofold:

(1)  Diversion of business from Fullson to Intelli.

(2)  Wrongful occupation and use of a factory called Lik Sing (“Lik Sing Factory”) owned by Fullson on the Mainland.

4. Fullson was wound up by the High Court on 15 August 2006.  By a deed of assignment dated 22 January 2009 the liquidators of Fullson (with court sanction) assigned Fullson’s causes of action to Law Junior.  Law Junior therefore now pursues the claim as assignee of Fullson. 

The allegations, issues and background facts

5. According to Law Junior:

(1)  Fullson was at all material times engaged in manufacturing and trading of plastic products.  One of its lines of products was the Intelli brand. 

(2)  In breach of fiduciary duties as a director, Siu Senior diverted business to Fullson to Intelli.  Vicky and Intelli had dishonestly assisted Siu Senior in his breach of fiduciary duties.

(3)  Fullson owned the Lik Sing Factory on the Mainland.  At all material times it was managed by Siu Senior.  After the winding up of Fullson, the Lik Sing Factory continued to be operated by Intelli, Vicky and Siu Senior.  By making use of the Lik Sing Factory for their benefit and by diverting Fullson’s business, Intelli, Vicky and Siu Senior are liable to account for the profits they had made as a result of such use. 

6. According to the defendants:

(1)  In about March 2004 Law Junior suggested to Siu Senior that Fullson should be wound up, or Law Junior should buy out Siu Senior, or Siu Senior should buy out Law Junior. Valuation of Fullson’s assets was done but Law Junior was not satisfied and he thereafter engaged in a series of disruptive conduct.  In order to preserve the business and customers of Fullson, Siu Senior caused Intelli to be incorporated which would do business with Fullson’s customers as Fullson’s agent.  The “disruptive conduct” relied on by them are:

(a) refusing to attend directors’ meetings;

(b) refusing to sign audited accounts;

(c) refusing to sign a Director’s Certificate when it was proposed that a mortgage by Siu Senior and his wife of their joint property should be substituted for a HK$2,000,000 deposit pledged by Law Senior with the bank; and

(d) refusing to attend Extraordinary General Meeting and Annual General Meeting of Fullson.

  Initially Sin Senior thought that by being a shareholder of Intelli it could receive better treatment in its loan applications to the bank but upon being told by the bank that it would not make any difference, he transferred his shares in Intelli to Vicky.

(2)  Law Junior was guilty of unclean hands and should not be granted any equitable remedies.

(3)  Vicky through an affirmation in HCCW 374/2005 had already given an account of the business that had been diverted.

(4)  Intelli had periodically accounted for profits to Fullson.

7. By way of response, Law Junior contends as follows:

(1)  If (as Fullson contends) Intelli was an agent of Fullson in conducting its business then it is under a liability to account for its profits. 

(2)  Since Law Junior is suing as an assignee asserting the rights of Fullson, the doctrine of clean hands does not apply to him.

(3)  As a matter of fact the operation of Fullson had not been disrupted by the acts complained of.

(4)  There had not been full account and payment of the profits by Intelli.

8. The issues in this case are therefore as follows:

(1)  Whether in fact the business of Fullson had been disrupted by the acts of Law Junior.

(2)  Whether Intelli is liable to account to Fullson for its profits irrespective of any alleged acts of disruption.

(3)  Whether the doctrine of clean hands apply to Law Junior as assignee.

(4)  Whether Vicky had already rendered a proper account of the profits of Intelli and effected payment.

9. Before I discuss these issues, it may be convenient for me to set out some elementary and uncontroversial principles of law.

10. A director owes fiduciary duties to the company of which he is a director.  If a director puts himself in a position where his self interest conflicts with the duties he owes to the company (typical examples would be to carry on a business in the same line or area as the company, or to take customers from the company), he is under a liability to account for the profits he has made by reason thereof.  Such liability is strict and does not depend on the presence of any ill-will or dishonesty.  Nor does it depend on proof of loss.  The law reports and textbooks are full of examples where a fiduciary has been held liable to account even though there is no finding that he has been dishonest or intended to do harm to the company.  The liability to account exists even though the profit was one which the principal/company could not have made for itself.  The fiduciary could only keep his profits if he has obtained his principal’s informed consent after making full disclosure.

11. A director is also liable as a trustee for any misapplication of the company’s property in which he participated and which he knew or ought to have known to be a misapplication. 

12. Conceptually, where a fiduciary has obtained an unauthorized profit for himself, equity will insist on treating him as having obtained it for his beneficiary. 

13. A third party who dishonestly assists a fiduciary to act in breach of his fiduciary duties is liable to compensate the principal for any loss that he had suffered, or account for any profit that he (the third party) has made as a result.  For this purpose the assister need not take a view on the propriety of his own conduct; it suffices if his conduct (together with his motives and knowledge of facts) would be regarded as dishonest by the standards of an ordinary honest person (Snell’s Equity, 32^nd edn,§30‑078). In other words he cannot set his own standards.  It is highly questionable whether he would be accountable for any profits made by the defaulting fiduciary because (see Snell §30‑801) to hold him accountable for profits made by the defaulting fiduciary would subvert the proper basis of his accountability by imposing a penalty. 

Breach of fiduciary duty

14. As a director, Siu Senior was a fiduciary of Fullson.  It is plain that Intelli was in the same line of business as Fullson.  There is evidence (which I accept, and I so find) that Vicky had attempted to divert to Intelli a customer (who was actually a private detective agency in disguise) who wanted to do business with Fullson.  The details are contained in Law Junior’s witness statement at paragraph 2 and a report by Black and White Investigation Agency (“Black and White”) dated 7 April 2005 (which I accept).

15. In short, Back and White pretended to be a customer who wanted to place orders with Fullson and emailed Vicky.  In her communications with this pretended customer, Vicky purported to represent Fullson.  When the customer requested details of bank account for the purpose of making payment, Vicky provided a pro forma invoice bearing the name Intelli instead of Fullson, and gave the account details of an account of Intelli instead of Fullson.  The address of Intelli provided on the pro forma invoice (which is also its registered address) was the same as that of Fullson.  Intelli was the brand name of Fullson’s products. I should add that even though this incident related to a “trap order”, there has been no attempt by any of the defendants to suggest that this was just an isolated incident. 

16. It has not been pleaded or suggested in evidence that Siu Senior had at any time made any disclosure of his interest in Intelli to Fullson’s board of directors or shareholders in general meeting or obtained their informed consent.  The use of Fullson’s address as Intelli’s registered address was also without such consent. 

17. Prima facie, therefore, Siu Senior is liable to account for his profits (I shall deal with the accessory liability of Vicky and Intelli later) made arising out of Intelli doing business with Fullson’s customers from the date of incorporation (12 January 2005) up to date of winding up (15 August 2006).

18. I would add that in the course of her oral evidence Vicky was asked how, if a customer were to approach her for to place an order, she would decide whether to take the order in the name of Fullson or Intelli.  She gave an answer which I could only described as an “improvised filibustering”.  She referred to customer agreements and entrustment of moulds, while avoiding the simple question.  However, for the purpose of an order for accounting it is not necessary for me to make concrete findings as to how many customers of Fullson remained with Fullson after Intelli was set up, and how many had “migrated” to Intelli.  These are things which would (and should) come out in the accounting exercise. 

19. This is as good a place as any for me to comment on issues of credibility.  Apart from witnesses from the investigators Black and White agency (who went to visit the Lik Sing Factory on the Mainland and whose evidence I accept), the two antagonists who gave evidence were Law Junior and Vicky.  There is no “head on collision” of oral testimony between these two but on the whole, Law Junior gave evidence in a straightforward manner and I accept his testimony except for one part where he gave an unsatisfactory ex post facto explanation as to what he would have done had he received a letter (which I shall deal with later).  His explanation was contratry to the terms of the contemporaneous documents.  Vicky, on the other hand, was unsatisfactory.  She was no doubt highly intelligent.  At times she would give the impression that she was aggrieved by Law Junior’s failure or refusal to sit down and talk with them.  But such ostensible grievance does not provide any justification for what Siu Senior and she had done, and I think she was fully aware of this, given the evasive and long winded way in which she had dodged certain simple questions put to her which, for someone of her intelligence, she ought to have been able to give immediately.  Her rambling discursion in dealing with these answers was indicative of her awareness that she had no legitimate explanation for what had been done.  I do not accept the explanation or justification put forward by her except where I specifically indicate otherwise. 

20. I should also add that Siu Senior’s liability to account arises independently of Intelli’s concession in paragraph 5 of its Amended Defence that it would account to Fullson for all the profits it had made from Fullson’s business after deducting administrative expenses and other costs.  This concession does not cover the liability that would arise in law because it was acceptance of Intelli’s liability to account but is not an acceptance of the fiduciary’s liability to account (ie Siu Senior’s).  Also it seems to reserve to itself the right to deduct administrative expenses and other costs, whereas in law the allowance of expenses and costs is a matter for the court at the accounting stage. 

21. Given the prima facie liability to account, one now turns to see whether any defences can be made out. 

Alleged acts of disruption

22. I shall deal with the alleged acts of disruption in turn.

23. The undisputed evidence is that at the material time, Law Senior and his wife maintained a HK$2,000,000 deposit at CITIC Ka Wah Bank as security for banking facilities granted to Fullson.  Law Senior requested that the security be withdrawn.  By way of substitute security, it was proposed that a property at Illumination Terrace owned by Siu Senior and his wife be mortgaged to the bank.  To that end, by a letter dated 9 October 2004 Miss Shirley Wong (a staff member of Fullson) asked “Mr Law” to contact her with a view to making arrangements to sign a document at a solicitors’ office.  However, Law Junior did not contact Shirley Wong to make the arrangements and the document was not signed at the end of the day.  The HK$2,000,000 was not released and eventually HK$1,690,000 was set off against Fullson’s indebtedness to the bank.

24. The document which was supposed to have been signed at the solicitors office has been described in the pleadings and witness statements as a “Director’s Certificate”.  However, on top of that, there was also a shareholders’ resolution of Fullson.  Both documents required the signature of Law Junior. The effect of these documents is, put simply, that while Siu Senior and his wife would be mortgaging their property to secure bank financing, they would join in as borrowers under the banking facilities as well, and that Fullson agreed to be jointly and severally liable for advances made by the bank to Siu Senior and his wife. 

25. The evidence of Law Junior was that he did not encourage his father to propose to withdraw his deposit as security, and that he was not aware of the letter sent by Shirley Wong.  He referred to hearsay evidence from Law Senior (who gave a witness statement but who did not testify) that the letter was received by Law Senior but he kept it and did not inform Law Junior. In any event, Law Junior’s evidence was that even if he had been explained of the arrangements at the time he would not have agreed to sign.  In his witness statement he referred to the fact that Vicky had already acquired signing rights of Fullson and, together with Siu Senior, they already had control of the company’s finance.  Further, in the witness box, he said that he had since been advised that under the documents he had to shoulder Fullson’s debts. 

26. On the question of whether Law Junior had encouraged his father to propose withdraw the security or had been told about the letter by his father, I cannot place much weight on the hearsay evidence of Law Senior because he did not testify.  The inherent probabilities do not point either way and there is nothing particularly remarkable about Law Junior’s demeanour that can aid me.  Also, the reason now given by Law Junior as to why he would not have agreed to sign the documents were not borne out on a proper reading of the documents.  He said that he had since been advised that under the documents he had to be responsible for Fullson’s debts and that Vicky and Siu Senior were in charge of Fullson’s finances already (seemingly suggesting that he did not want to personally commit himself the liability of Fullson which was beyond his control).  Actually the documents said nothing of this sort, and did not require him personally to shoulder the debts of Fullson.  What the documents did was to constitute Fullson a guarantor of whatever debts that Siu Senior or his wife might owe to the bank.  I can readily understand why someone would refuse to sign anything to commit Fullson to such a covenant.  But Law Junior did not give this as a reason.

27. If I have to make a factual finding on this, I would find that Law Junior had failed to show that he had not received the letter.  At the end of the day, however, I do not think it matters whether Law Junior had received the letter or whether his ex post facto attempt to justify his non‑signing is a good one or not.  The fact remains that because the relevant documents were not signed, the HK$2,000,000 had not been withdrawn as security.  Things remained as they were.  Fullson enjoyed the use of Law Senior’s HK$2,000,000 as security for its loans and (as I said above) part of that was utilised by the bank to set off debts owed by Fullson.  Therefore despite the refusal or failure to sign, Fullson did not suffer financially.  Vicky accepted this in cross examination.  She mentioned about a plan to transfer the loan of Fullson to Intelli, and then to pay off Fullson’s debt and then release the HK$2,000,000 security.  There was no mention of this in Vicky’s witness statement.  If this plan had really existed one would have expected her to tell Law Senior but on her own admission she had not mentioned this plan to Law Junior or Law Senior.  I do not accept Vicky’s evidence about this “plan” and I also reject Vicky’s suggestion that Law Junior’s failure or refusal to sign the documents was in any way disruptive of Fullson’s business. 

28. I now turn to the complaints about failure to sign audited accounts.  Law Junior accepted in evidence that he did refuse to sign the audited accounts of Fullson for the year ended 31 March 2004.  He explained that he refused to sign because he was unable to obtain a copy of Fullson’s previous audited accounts from Fullson’s auditors or Siu Senior.  I accept that explanation. But more importantly, Fullson’s audited accounts for the year ended 31 March 2004 were eventually signed on 24 January 2005.  The “Report of Directors” page was signed by Law Junior and the end of the accounts was signed by Law Junior and Lee Tak Lun, both as directors.  There is no evidence that the refusal to sign at an earlier stage has caused any harm to Fullson and Law Junior’s refusal to sign could not have been a causative reason (and I find that it is not) as to why Intelli had to be formed to take customers from Fullson. 

29. I should digress slightly here and explain how Lee Tak Lun came to become a director of Fullson and be able to sign the accounts in January 2005.

30. When Fullson was incorporated in 2000, the subscribers were Law Junior (as to 200,000 shares), Siu Senior (as to 200,000 shares), Lee Tak Yuen (as to 100,000 shares) and Lee Tak Lun (as to 100,000 shares).  They were also directors.  The two Lees were business associates of the Laws and the Sius.  They were co‑shareholders with Siu Senior, Law Senior in a previous company called Fullson Industrial Limited although for the purpose of this judgment I do not need to go into the detailed evidence as to the nature of the dealings among them.  Some time before 31 July 2001 (being the date of a Notification filed in the Companies Registry) the Lees resigned as directors of Fullson.  They remained, however, as registered shareholders.  The amended Reply stated that they held their shares as trustees for Law Junior and Siu Senior but Law Junior’s witness statement did not address this point, and his oral evidence on the nature of the relationship between the Lees and Fullson after their resignation was not very clear.  Be that as it may, the evidence clearly shows that on 6 December 2004 the Lees together with Siu Senior issued a notice of an Extraordinary General Meeting to be held on 23 December 2004 for the purpose of appointing additional directors of Fullson.  At the EGM held on 23 December 2004 (in which Law Junior was absent) the Lees were appointed as directors of Fullson.  The appointment was notified to the Companies Registry on 28 December 2004. 

31. Therefore after the appointment of the two Lees as additional directors of Fullson, the Sius (meaning Vicky and Siu Senior) could already secure the requisite directors’ signature to approve the audited accounts of Fullson even if Law Junior continued to refuse to sign the audited accounts.  Fullson was only incorporated in 12 January 2005 which was after the Lees had been appointed back as directors.  Law Junior’s refusal to sign audited accounts therefore could not have been a reason in setting up and operating Intelli.  As things turned out, Law Junior actually eventually signed the audited accounts anyway.  I reject Vicky’s evidence that Law Junior’s refusal to sign audited accounts had led to business disruption and that this had caused her to incorporate Intelli or to take customers from Fullson.

32. I now turn to the allegation that Law Junior had caused disruption by refusing to attend Extraordinary General Meeting (“EGM”) and Annual General Meeting (“AGM”) of Fullson.  The EGM in question was the one held on 23 December 2004 to appoint additional directors.  The AGM in question was held on 19 January 2005.  The short point about these meetings is that they were both quorate and had been validly held.  Law Junior’s absence from the EGM and AGM therefore had not disrupted the business of Fullson and could not have been relied upon by the Sius at the material time as a reason for commencing Intelli’s business.

33. Lastly I turn to the last allegation namely failure to attend directors’ meetings.  This can be shortly dealt with.  Despite Vicky’s bare assertion that Law Junior had failed to show to at directors’ meetings, there was no proof (whether by way of documentary proof such as notice of directors meeting and minutes showing his absence; or oral evidence containing particulars of when a meeting was called and that Law Junior had failed to show up).  I find that the defendants had failed to prove the allegation that Law Junior had failed to attend directors meetings and that this had led to business disruption. 

34. To conclude on this topic, I reject the defendants’ case (which I find to be disingenuous) that Intelli was set up as an agent for Fullson because of the unco‑operative attitude and obstruction caused by Law Junior. 

35. However, even assuming for the sake of argument that Law Junior’s acts had caused business disruption, this still would not detract from any liability to account on the part of Siu Senior.  As a shareholder Law Junior is not obliged to attend shareholders’ meetings.  But even assuming that refusal or failure to attend meetings amounted to some form of wrongdoing or breach, that does not in law justify the conduct adopted by Siu Senior.  The law does not recognize some form of tit‑for‑tat defence by another director to breach his fiduciary duties.  Siu Senior remains liable to account. 

36. I also reject the clean hands argument.  Even assuming that Law Junior is tainted by unclean hands, the cause of action is one vested in Fullson and Law Junior is only suing as assignee.  He was asserting Fullson’s rights.  There is no suggestion that Fullson is tainted by unclean hands. 

37. Lastly I come to the question of whether Vicky, by her affirmation dated 3 August 2005 in HCCW374/2005, has already rendered an account of the income and expenses of Intelli. 

38. I have perused that affirmation which consists of seven pages, 15 paragraphs and a number of exhibits made up largely of bank statements (of Intelli), financial statements (of Fullson) and copy cheques.

39. In my judgment the materials disclosed in this affirmation and the exhibits fell far short of what was required by way of a proper account of profits and despite the affirmation I still exercise my discretion in favour of ordering an account of profits against Siu Senior, for the following reasons.

40. First, the affirmation only covered the period up to May 2005.  It was completely silent on the period after May 2005.  There is no suggestion that Intelli has ceased business after May 2005.  Indeed when Law Junior’s solicitors wrote on 27 September 2005 to ask for bank statements of Intelli for the months June to September 2005 the reply was that the documents sought were irrelevant to the proceedings and would not be disclosed.

41. Second, the affirmation was not provided by Siu Senior, the accounting party.

42. Third, even the disclosure and explanation in Vicky’s affirmation was not adequate.  For example, only bank documents were disclosed, and there was no disclosure of the underlying contractual documents (eg order forms from customers, etc) and there was no attempt to link up, for example, individual contracts with primary documents (cheques, vouchers, bank statements, etc) showing costs, expenses and revenue (with a view to arriving at the profit position).  Individual items in the bank statement were only selectively explained (eg some deposits in the statement dated 31 May 2005 were not explained).  This is not the way to go about performing a proper accounting exercise. 

43. It is not for me to provide advice to Siu Senior as to how an account of profits is to be conducted.  I am not his legal advisor.  He has chosen to act in person at trial.  It is his entitlement (though at an earlier stage he was represented).  It is up to him (whether by engaging lawyers or otherwise) to acquaint himself of the proper way of providing an account of profits.  But I would say that an account of profits is not just about providing bank accounts, or internal management accounts or audited accounts and leaving it to the plaintiff or to the Court to “decipher” them.  It means more than that. 

44. I now turn to the saga about Lik Sing Factory. 

45. Lik Sing Factory was (on the admission of the defendants in their Amended Defence at paragraph 12) owned by Fullson.  Siu Senior was the legal representative. All these are undisputed on the pleadings.

46. On 17 May 2005 Law Junior issued a Petition in HCCW374/2005 for an order under section 168A of the Companies Ordinance (Cap 32) that Siu Senior be ordered to purchase his interest in Fullson, alternatively that Fullson be wound up.  The petition was initially resisted (and application for a validation order was made at one stage) but by an affirmation made on 2 August 2005 Siu Senior indicated that because of the presentation of the petition, its bank froze Fullson’s account on 30 June 2005, that the business of Fullson had been paralysed, that it has become dormant and it was impossible to keep Fullson as a going concern, and he therefore had no objection to the making of a winding up order.

47. On 15 August 2006, by consent Fullson was wound up by an order made by Chu J (as she then was).

48. The evidence at trial about Lik Sing Factory is very unsatisfactory.  On the pleadings (as I mentioned above) it was admitted that Fullson owned Lik Sing Factory.  The defendants also pleaded in their Amended Defence (paragraph 12) that after the winding up of Fullson, since the liquidator did not take over Lik Sing Factory they had to keep Lik Sing Factory as a going concern so as to avoid paying termination compensation to the workers.  Therefore even on their own case, a liability to account would arise as from the time of liquidation because they were utilizing an asset (and running a factory) that belonged to Fullson. 

49. However, during oral evidence, when asked whether Fullson owned Lik Sing Factory, Vicky gave a guarded answer “If Fullson thought it owned Lik Sing Factory, then yes”.  In her written closing submissions she denied (at paragraph (2)) the she, Intelli or Siu Senior had occupied or appropriated (佔用) Lik Sing Factory and called upon this court to clearly point out who owned Lik Sing Factory.

50. In fairness, in a report by Deloitte (the liquidator) dated 21 January 2010 actually stated that based on the information available to them, Fullson did not own any equity interest in Lik Sing Factory though it did own some machinery there worth about HK$3,000,000.  The report mentioned a number of Hong Kong entities in the name of “Lik Sing” as being the foreign party of the investment for Lik Sing Factory or being the party who signed documents with Lik Sing Factory employees. 

51. The problem with this state of affairs is that as a matter of pleadings, the defendants had admitted that Fullson owned Lik Sing Factory.  That was at a stage when they were still legally represented and I can only proceed on the basis that it was an informed decision (made in the face of all the evidence and materials available to them).  No application was made to withdraw the admission.  For understandable reasons, in the face of the admission on the pleadings no attempt was made by Law Junior to probe Vicky’s evidence further. I can only proceed on the basis that Fullson owned Lik Sing Factory.

52. In the witness box, Vicky gave a long and elaborate explanation as to the fate of the Lik Sing Factory.  Put briefly, in 2007 there was a labour dispute where the workers complained that they had been underpaid for years.  The village representative (a company called “Nam Tau Company”) paid off the workers but claimed the machinery for itself in order to sell them to set off against money that it had paid out.  This dispute about salary was broadly alluded to in Deloitte’s report that I mentioned above.  But on top of this, Vicky said that another sum was due and owing to Nam Tau Company.  It was a sum that had to be paid to Nam Tau Company by way of 公繳 and which was made up of rent, taxes and customs.  There was supposed to be a six month credit period but Nam Tau Company had called for speedy payment.  There were also ongoing new liability for monthly salaries (on top of the old “underpaid” portion) being incurred.  The upshot was that in around September 2012 the Nam Tau Company took away all the machines in the Lik Sing Factory and the factory no longer operated after that (though Siu Senior was still the legal representative).  This has not been pleaded.

53. In my judgment, all these matters about how much was due and owing to the Nam Tau Company, how the sums became due and owing, what parts of the machinery were (if at all) seized, when they were seized, how much was sold and how much was left, what debt(s) were still outstanding, etc should all be matters to be properly explained and accounted for at the stage of accounting.  According to Vicky, there were some documents to prove the taking away of the machines by Nam Tau.  Indeed I would have thought that since Siu Senior was the legal representative he should have a lot of documents to enable him to conduct an accounting as to the affairs of Lik Sing Factory.  It is not my role here to attempt to make any findings as to the matters above in the absence of proper pleadings, and discovery about them. 

54. There is one outstanding point on the pleadings that I should deal with at this juncture.  In paragraph 12 of the Amended Defence it was averred that after Fullson had been wound up, since the liquidators  had not taken up Lik Sing Factory, the defendants had to keep Lik Sing Factory as a going concern so as not to have to pay termination compensation to the workers.  Insofar as this is intended to suggest that there existed a reasonable or good excuse for the defendants to take over the Lik Sing Factory, I reject it as a defence, for the following reasons:

(1)  As I have said above, as a matter of law, lack of mala fides is not a defence to a claim for breach of fiduciary duties. 

(2)  Further, as I have said, it was admitted on the pleadings that Fullson owned Lik Sing Factory.  I am therefore in grave doubt whether it is open to the defendants to rely on a ground of defence which presupposes that Fullson did not own Lik Sing,

(3)  Even if, for the sake of argument, Deloittes had refused to take up the affairs of Lik Sing because of a belief that Lik Sing was not owned by Fullson, there was no reason why Vicky, Siu Senior and Intelli should take up the positive burden of running the Lik Sing Factory themselves.  I do not accept the explanation that the defendants were, in effect, forced to carry on the business of Lik Sing Factory without much choice.  There is no admissible expert evidence before me that under Mainland law a legal representative is to be personally responsible for debts or outstanding wages or severance pay of the company or entity of which he is a legal representative.  In the absence of such liability, the defendants could simply have not taken up the business of Lik Sing Factory and let the burden of wages/severance payment fall on the shoulders of whatever entity that under Mainland law should be responsible for the payments.  But even assuming that under Mainland law the legal representative was under a legal liability to pay severance payment, I find it inherently incredible for a legal representative (in the position of Siu Senior) to carry on a business just for the purpose of avoiding severance payment.  He could very well end up paying his own good money after bad.  There was no guarantee or assurance that the business that he carried on would be able to survive or be profitable in order to generate enough funds to pay wages.

(4)  The story was not backed up by any contemporaneous documentation.  One would have expected that, in the somewhat bizarre scenario posited by the defendants (namely that the owner of Lik Sing could not be identified and Siu Senior, as the legal representative, was lumbered with the potentially unwelcome liability to pay the workers), Siu Senior would and should have corresponded with approached various related parties to attempt to work out a solution, or to ascertain the extent of exposure, or to seek some kind of recourse (eg correspondence with Nam Tau, with the liquidators, or with the entity 香港力成制品廠有限公司 named by Deloittes in their report) or to seek Mainland legal advice as to what they should do.  There was not an iota of such evidence. 

(5)  Lastly (and perhaps fatally) since this defence is about why Siu Senior had chosen to carry on the business of Lik Sing Factory, evidence of such explanation should come from Siu Senior himself.  Siu Senior did not testify at all and therefore I have no evidence before me from the key protagonist. 

(6)  I therefore reject the defence that the defendants were somehow forced to take up the business of the Lik Sing Factory because otherwise Siu Senior would be lumbered with liability to pay severance payment. 

Order against Siu Senior

55. Having rejected his defences, I find that Siu has acted in breach of fiduciary duties by operating (and having a shareholding in) Intelli which is in the same line of business as Fullson, and by operating the business of Lik Sing. 

56. I order that Siu Senior should account for all profits that he has made from Intelli by dealing with former customers of Fullson from 12 January 2005 to 15 August 2006 and pay to Law Junior all such profits as are found due and owing on such accounts.  I also order that he should account for all profits made from Lik Sing Factory from 15 August 2006 to September 2012 whether or not arising out of dealings with Fullson’s former customers and to pay to Law Junior all such profits as are found due and owing on such accounts.

Liability of Vicky and Intelli

57. I now turn to the liability of Vicky and Intelli.

58. The claim against them was not pleaded or run as one of breach of fiduciary duties.  Rather, it was one of accessory liability by way of dishonest assistance in breach of fiduciary duties by Siu Senior. I have already found Siu Senior to be in breach. 

59. I shall first deal with Vicky.

60. There can be no dispute that she had engaged in acts of assisting Siu Senior to breach his fiduciary duties.  She was in charge of taking orders for Fullson and Intelli.  She was the person who diverted the order placed by Black and White. She was a director of Intelli, and she was initially a shareholder of Intelli.

61. As to the requisite dishonesty, I bear in mind the fact that disbelieving a witness’s explanation cannot be converted in a positive finding of dishonesty.  However, in the present case, rejection of Vicky’s evidence means that there is no “innocent explanation” of the conduct of the defendants.  Lest there be any misunderstanding, I am in no way placing any burden of proof on the defendants. The burden to prove dishonesty is on Law Junior.  However (as I shall explain below) the acts of assistance are such that they give rise to a strong inference of dishonesty in the absence of contrary (and proper) explanation. The rejection of Vicky’s evidence then clears the way for me to make a finding of dishonesty against her.

62. The factors leading to an inference of dishonesty are:

(1)  Vicky was a university graduate and a sophisticated businesswoman. 

(2)  As a matter of ordinary common sense and ethics, to engage in a parallel business in the same line as one’s principal is improper.  It is an act of disloyalty and betrayal. 

(3)  To compound the above, the circumstances of the “trap order” shows that Vicky had positively diverted business away from Fullson.  This was particularly egregious because she had been corresponding with the customer on behalf of Fullson all along and only when the customer asked for payment details did she provide the details of Intelli instead of Fullson.  Such diversion is strong evidence of dishonesty. 

63. In her evidence Vicky suggested that many people were involved in the setting up and operation of Intelli, such as Shirley Wong (staff member of Fullson), the two Lees, Paula (an accounts clerk of Fullson) and Simon Lee from Fullson’s auditors.  This could arguably be said to be evidence that the defendants had been open about the set up of Intelli.  Of these people, only Shirley Wong was foreshadowed in Vicky’s witness statement.  The others were mentioned by Vicky for the first time in the witness box.  No attempt was made by Vicky to draw my attention to any contemporaneous documents indicating their involvement.  It is an extremely unsatisfactory state of affairs to face such last minute new assertions without proper notice and disclosure. 

64. I would not want to decide this matter purely on the basis of making a finding as to whether or not these persons had the involvement or knowledge as alleged.  I proceed on the basis that even if (for the sake of argument) these individuals had varying degrees of knowledge about the existence of Intelli and involvement in its affairs, it does not go any way towards counteracting the inference of dishonesty.  If Vicky and Siu Senior had wanted to be open about it, it would have been easy for them to inform Law Junior but it is common ground that Law Junior has not been told by Vicky or Siu Senior about the existence of Intelli or its activities.  Further, it is inherent in any dishonest scheme that some third party staff or intermediaries would have to be involved in doing professional or administrative or clerical tasks.  The fact of involvement of such third parties cannot, by itself, be relied on as any evidence of “openness” in the absence of evidence of their relationship with Law Junior and of whether any of these individuals had any special affinity towards Law Junior such that they could be expected to “tip off” Law Junior about the existence of Intelli. 

65. Specifically, Shirley and Paula were merely staff members and Alex was an outside professional; the Lees seem to be closer to the Sius, see eg their willingness to be appointed additional directors of Fullson at the request of the Sius, as well as the fact that the Lees had, together with Siu Senior, retained the same firm of solicitors who, by a letter dated 9 September 2005, refuted certain allegations made by Law Junior.  Further, there is no evidence that Law Junior would attend Fullson’s office with any degree of regularity. 

66. Vicky also said that Intelli had been paying funds to Fullson through the arrangement of Shirley Wong who was a staff member common to both.  However, the evidence of such payment is piecemeal and, in terms of documentary evidence, seems to be confined to the two transactions mentioned in Vicky’s affirmation at paragraph 10(c) and (d).  However, the fact of such payments still would not suffice to counteract the inference of dishonesty.  I repeat the point that the operation of Intelli (and such payments) had been concealed from Law Junior.  I also repeat the point that Shirley Wong was only a staff member and I do not have evidence as to her “affiliation” (or lack of it) towards Law Junior.  And apart from the two payments in paragraph 10(c) and (d) of Vicky’s witness statement there is no other evidence of Intelli paying money to Fullson. 

67. Indeed any suggestion of “openness” (and hence lack of dishonesty or intention to conceal) on the part of the defendants is also counteracted by the fact that when Law Junior’s solicitors asked for Intelli’s bank statements for the period after May 2005 it was met with refusal.  I have referred to this refusal above already.  If there had indeed been any intention to be “open” about Intelli and its financial relationship with Fullson, the request ought to have been acceded to.  She was cross examined on her affirmation and this solicitors’ letter and her evidence was evasive and is anything but open. First, when asked why she had not accounted for anything after May 2005 (her affirmation was in August 2005), she answered (in a rambling way) that she did not know when she should account up to.  Then when the solicitors’ letter was put to her, by a filibustering answer Vicky maintained that the documents sought were irrelevant.  This was inconsistent with any intention to be open.  When I asked her why then she had chosen in her affirmation to disclose materials up to May 2005, she responded by saying that that did not make sense either.  All this is contrary to any suggestion of openness on her part.  Needless to say (and this is relevant to an earlier point) this is also contrary to her suggestion that Intelli accepted that it was the agent of Fullson and was prepared to account for everything to Fullson. 

68. Many other items of evidence and submissions had been placed before me.  I have not set them out exhaustively here.  Suffice it to say that I have considered all the evidence and submissions and where I had not referred to or dealt with any particular one, it is because either I regard it to be irrelevant, or in the overall scheme of things they are not significant enough to influence my decision one way or the other.

69. For the reasons set out above, I find Vicky liable for dishonestly assisting Siu Senior in his breach of fiduciary duties, and she is ordered to render an account of the profits that she made as a result of such assistance, and to pay the Law Junior the amount of such profits as are found due.

70. As to Intelli, Vicky was a director.  While there is no rule of law that the state of mind of a director is automatically attributed to his or her company, on well‑established rules of attribution (see eg El Ajou v Dollar Land [1994] BCC 143 and Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500), Vicky was the director responsible for the relevant area of activities of Intelli (taking of orders) and her state of mind is to be attributed to Intelli.  Intelli is therefore equally liable to account on the same basis as Vicky. 

71. I therefore give judgment in favour of Law Junior against Vicky, Intelli and Siu Senjor for them to render accounts of profits in terms set out in paragraphs 56, 69 and 70 above.

72. I also give an order of costs, on a nisi basis, that Law Junior should have his costs of this action including all costs reserved, to be taxed if not agreed.

73. The parties are to have liberty to apply for further directions in relation to the taking of the accounts before any judge of the Court of First Instance.