WONG HIN MAN v. CMG ASIA LTD.

HCSD 2/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HCSD NO. 2 OF 2002

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D E C I S I O N

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The application

1. This is an application to set aside a statutory demand dated 12 April 2001 served on the applicant on 31 December 2001.

2. The applicant was formerly engaged by the respondent as a district manager and insurance agent. He signed a District Manager Agreement with the respondent dated 5 January 1999, an Agency Agreement dated 8 January 1999 and a Guaranteed Income Agreement dated 11 January 1999. His engagement took effect from 1 December 1998. It was terminated in December 2000. Upon the termination of his engagement, the applicant became liable to pay: (1) the outstanding sum of an upfront loan in the sum of HK$52,600.00; and (2) the outstanding sum of finance made to him in July 2000 and August 2000 of HK$40,000.00, less his entitlement to the mandatory provident fund of HK$5,283.19, being HK$34,716.81. These two sums with interest calculated up to the date of the statutory demand came up to HK$89,605.80. This debt is admitted by the applicant.

3. The applicant applies to set aside the statutory demand under r. 48(5)(a) of the Bankruptcy Rules, namely, that he "appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt.".

4. The applicant contends that he has a counterclaim and equitable set-off for damages against the respondent and that a conservative estimate of the amount of his loss and damage allegedly suffered is about HK$340,000.00, although no action has been brought by the applicant against the respondent as yet. His counterclaim is said to arise in this way.

Basis of counterclaim

5. Firstly, it is alleged that there is a trade usage in the insurance industry by which an insurance company is prohibited to solicit the down-line agent of a manager to switch to another team headed by a different manager in the company. This trade usage is a term implied by law in the contract between the applicant and the respondent. It is further alleged that there was breach of this implied term in that a down-line agent Ms Lilian Chan and nine agents working under her, who were recruited by a unit manager under the applicant's supervision in 1999, were solicited by another district manager of the respondent, Mr Jimmy Sun, to join the respondent under Mr Sun's supervision instead of under the applicant's supervision. The respondent had approved of this arrangement and allowed Mr Sun to submit another set of application form for these agents, notwithstanding that the applicant had earlier on submitted application forms for them when he recruited them. The applicant claims loss in the commission he would have earned from these down-line agents' premium production from June 1999 to November 2000, when the applicant's engagement was terminated, in the sum of HK$250,000.00 for breach of the implied term.

6. Secondly, it is alleged that when the applicant was recruited to become a district manager of the respondent, Mr Andre Hui, on behalf of the respondent (Mr Hui had since passed away) had represented to the applicant that he would hold the title of district manager with all the benefits derived from that title for 24 months after his appointment. In breach of the representation, he was demoted to the position of a branch manager in 2000 and his guaranteed income payment was reduced. The applicant claims loss in the allowance and commission that he would have earned as district manager if he had not been wrongfully demoted in the sum of HK$90,000.00 to HK$100,000.00.

The implied term

7. I turn to consider firstly, the allegation based on breach of the implied term. The applicant has no documents in support of his allegations of the implied term and breach thereof. He had made three affirmations and got two insurance agents, Mr Tsui Ching Kuen and Mr Ho Kwok Kuen, who had worked for the respondent before, to depose to the alleged trade usage which is to be implied by law as a term in the applicant's contract with the respondent. The applicant alleges in his affirmation that his unit manager had recruited Ms Lilian Chan and the nine agents under her and it was he who had submitted the application forms for these ten agents with their resume and that he had arranged for these agents to attend the training course provided by the respondent.

8. The respondent denies there was any such trade usage and asserts that it was unreasonable that the down-line agents recruited by a manager should be regarded as his "assets" so that they could not be solicited by another manager in the company to switch over to another team. A manager's duty is to recruit and supervise agents for the respondent. His commission can only come from the production of down-line agents recruited by him and working under his supervision. He is responsible to the respondent for the balance owing to the respondent by the down-line agents under his direct supervision on the termination of engagement of such agents. Further, the manager is required to fulfil minimum production requirements. His entitlement to guaranteed income payment may be reduced or suspended if his AFYP (i.e. annual first year premium) production should fail to meet the AFYP target. The AFYP production of a manager is calculated on the basis of the premium of the policies as a result of his solicitation as well as the policies obtained through the solicitation of his 1st tier agents (i.e. those who report directly to him), his 2nd and 3rd tier agents.

9. I am unable to say at this stage that the alleged trade usage is plainly unreasonable. Whether this trade usage can be proved with satisfactory evidence remains to be seen. I am mindful of the requirement that for a trade usage to be proved, it must be established that the usage is notorious, certain and reasonable and that it must not offend against the intention of any legislation.

10. It has been drawn to my attention that there are differences in the wording between Mr Tsui's affirmation and the applicant's affirmation on the trade usage. It does not appear to me that the evidence on affidavit of the applicant and Mr Tsui should be rejected at this stage on the ground that it would be improbable that their evidence would meet the criteria of proving the existence of a trade usage. In my view, this issue should be resolved at a trial.

11. If there were such a trade usage and that the trade usage should be an implied term of the contract, the respondent said that there could be no breach of this term as Ms Lilian Chan and her agents were not recruited by the applicant. The respondent produced a memorandum dated 13 May 1999 from Ms Chan to Mr Alan McGregor, the director of agency sales of the respondent, in which Miss Chan stated that she was approached by a Mr Gary Hui, a unit manager working under the applicant, to join the respondent in March 1999. She was dissatisfied with the presentation made to her by Mr Hui regarding the compensation package and the production requirement and the questions she raised were not answered. Hence, she did not make any decision to join the respondent because of the unclear presentation and she did not persuade her down-line agents (they were then with another insurance company) to join. Notwithstanding that, Mr Hui "forced" Ms Chan to give him the names of the recruits for enrolment in the training course of the respondent because the deadline for enrolment was approaching. Mr Hui also gave Ms Chan the application forms to complete. Ms Chan stated she "hurriedly" returned "9 incomplete applications to [Mr Hui] with a few supporting documents" and she "assumed [her] BM (i.e. branch manager) title was confirmed." Several days before the training course, Ms Chan had a meeting with Mr Hui in which she requested for details on various aspects of her terms of appointment and because Mr Hui was still unable to give her a clear answer, she told him there and then that she and the agents under her would not join the respondent or attend the training course. A week later Ms Chan was introduced to Mr Jimmy Sun, another district manager of the respondent, and she decided to join the respondent after she was given a clear presentation of the package and production requirement. It was only after she had decided to join the respondent under Mr Sun's supervision that the applicant approached her to ask her to change her decision and join the respondent under his supervision. Ms Chan declined to change her decision and her application form to join the respondent was subsequently submitted by Mr Sun.

12. The respondent also produced a memorandum dated 21 May 1999 from Mr McGregor to the applicant in which he stated that he had looked at "all the information provided by [the applicant] and others" but looking at the sequence of the events as set out in his memorandum, Mr McGregor had no alternative but to allow Ms Chan and her agents to remain with Mr Sun. The events according to Mr McGregor were as follows: (1) Ms Chan and her agents never attended the training course; (2) they were approached by Mr Sun after they had decided not to join under the applicant's supervision; (3) they were introduced to Mr Sun and he did not target them; and (4) the offers made by Mr Sun were not substantially different from the earlier offers. Mr McGregor ended by saying that the respondent would publish some "business rules" to prevent this kind of incident happening again.

13. There are issues of facts in dispute. Ms Chan was no doubt approached by the unit manager of the applicant to join, but was she recruited by the applicant in that the applicant had submitted the application forms of Ms Chan and her nine agents to the respondent and enrolled them in the training course of the respondent? I do not think Mr McGregor's memorandum contradicts the applicant's case. It is not known at this stage what information was provided by the applicant that Mr McGregor had considered as stated in his memorandum. The applicant claims he had submitted such application forms and that he should have the opportunity to ascertain in the process of discovery in litigation if the respondent did have such documents. This had been denied by the respondent. It is asserted by the respondent that the only application forms in their records are the application forms submitted by Mr Sun for Ms Chan and her agents. I have at this stage no affirmation from Ms Chan, Mr McGregor or Mr Hui. I am unable to say that the allegation of the applicant that he had recruited Ms Chan is so incredible that his proposed claim for breach of implied term should not go to trial.

14. As for the alleged loss of commission attributable to these down-line agents' premium production, I am not prepared to say that the applicant's quantification in respect of net loss in the sum of HK$150,000.00 is clearly excessive or demonstrably wrong. This amount alone would have exceeded the respondent's debt, notwithstanding that I may have considerable reservations about another head of claim being the loss of commission of HK$100,000.00 due to "loss of morale" on the part of the applicant and his down-line agents. I should also mention that the applicant's quantification of the loss of commission attributable to the premium production of the down-line agents is alleged to be based on a business plan of Ms Chan. He has not produced the business plan in his affirmation but even if the business plan is not available, I would expect there to be records of premium production of Ms Chan and her team kept by the respondent, so the alleged loss of commission attributable to the production of Ms Chan and her team members is a matter capable of proof.

15. On this ground, I would exercise my discretion to set aside the statutory demand. I am not prepared to say on the available material that the counterclaim based on breach of implied term is entirely without substance.

The demotion to branch manager

16. I turn to consider the second ground for the proposed counterclaim. This relates to the alleged wrongful demotion of the applicant to a branch manager. It is alleged by the applicant that when he was recruited by Mr Andre Hui, Mr Hui showed him an Agency Manual which sets out, inter alia, the causes for demotion and Mr Hui had promised him that he would only be demoted if his performance was poor after a two-year observation or probation period.

17. The respondent's answer to this allegation may be summarised as follows. Firstly, it is denied that Mr Hui had made the representation to the applicant as alleged. Mr Hui, who had passed away, had never informed the respondent that he had made any such representation to the applicant. Secondly, Mr Hui had no authority to make any such representation. Thirdly, the respondent had never agreed with any agent that his title or position would be maintained for a specific period. Fourthly, the District Manager Agreement and the Agency Agreement all contained an "entire agreement clause" in that they superseded any prior agreement or understanding. Fifthly, the applicant was demoted because of his poor performance in that the applicant had failed to achieve the AFYP target for his first contract year and for the first 6 months of his second contract year, by which time the respondent had reduced his guaranteed income payment, as the respondent was entitled to do pursuant to the Guaranteed Income Agreement. The respondent had submitted monthly reports to the applicant on his AFYP production from which it was apparent that he had failed to meet the minimum production requirements. The applicant had never challenged the calculation in the monthly reports.

18. The respondent had also produced a number of memoranda. There was a memorandum dated 3 February 2000 from Mr McGregor to the applicant informing him that he was to be "re-appointed" as branch manager and that his guaranteed income would be reviewed. There was a memorandum dated 22 June 2000 from Mr McGregor to the applicant confirming that the "special arrangement" which was discussed and concluded in their meeting on 21 June 2000 when it was agreed that the applicant's guaranteed income payment be revised down to HK$28,800.00 and subject to a future adjustment and that his defined measurement in determining his guaranteed income payment in future in terms of AFYP would be set at HK$144,000.00. Next, there was a memorandum dated 24 July 2000 from Mr McGregor to the applicant stating that the applicant's guaranteed income payment would stop because of his failure to meet the defined measurement in the June memorandum and lastly, there was a memorandum dated 10 August 2000 signed by the applicant in which he accepted the repayment schedule for the upfront loan and the finance for July and August 2000. There was no reply in writing of the applicant to any of these memoranda. The applicant had never asserted in writing until he applied to set aside the statutory demand that a representation was made to him that he could not be demoted within two years. The applicant had continued as the respondent's agent in his new title of branch manager for another nine months until the respondent terminated his appointment by a letter dated 29 November 2000, or as according to the applicant, until he tendered his letter of resignation dated 1 December 2000.

19. The applicant also denies that he had failed to achieve the AFYP target and he disagrees with the respondent's calculation that he had failed to achieve that target. I am not sure of the relevance of that contention. The applicant's case is that he had an assurance that he would not be demoted within the two-year period even though his performance might have been unsatisfactory. In my view, if the application to set aside the statutory demand had been based on the proposed counterclaim for damages for wrongful demotion alone, I would not have granted the application. I am not persuaded that the applicant has a bona fide and genuine cross claim here.

Orders

20. For the above reasons, I would set aside the statutory demand as the applicant appears to have a cross demand or counterclaim which equals or exceeds the debt in the statutory demand.

Costs

21. As for costs, the applicant has put forward two bases as his proposed counterclaim to apply to set aside the statutory demand. The applicant has succeeded on the basis of breach of implied term but not on the basis of wrongful demotion. Much evidence has been filed in this application on the wrongful demotion issue. In the exercise of my discretion, it would appear to me to be appropriate to award only half of the costs incurred to the applicant. I have indicated to the parties that I would like to award costs on a gross sum basis, to avoid the costs and expense of taxation. The applicant has provided to me a global estimate of the costs incurred for the entire proceedings being HK$70,500.00 with a breakdown. I would reduce it to HK$60,000.00 as costs reasonably incurred on a party and party basis. As the applicant is to be awarded only 50% of his costs in these proceedings, the amount awarded here is HK$30,000.00.