MA WAI CHIU v. NG KIN FAI RICHARD AND OTHERS

HCA 61/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 61 OF 2017

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J U D G M E N T

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1.  The plaintiff, who is known as Ricky Ma, is bringing a derivative claim on his own behalf and on behalf of the shareholders of the 6^th defendant, Fashion Element (HK) Ltd (“FEL”), other than the 1^st defendant, who is known as Dick Ng.  FEL manufactures garments, and the allegation is that Mr Ng and the 2^nd defendant, Mandy Chu, who is his wife and worked for FEL, diverted much of FEL’s business to two companies, the 3^rd and 4^th defendants, Primo Sourcing Group Ltd (“PSG”) and Yin Mei Holdings Ltd (“YMH”), which are wholly owned and controlled by the 5^th defendant, Lam Shu Pan. Mr Ma’s case is that this was what his counsel, Mr Christopher Chain, described as “the systematic stripping of [FEL’s] business by the defendants acting in concert”.  Mr Ma has issued a summons seeking interlocutory injunctions against the first five defendants. Today is the first return date for the hearing of the summons.  Mr Ng is not represented. The other four defendants are. 

2.  Mr Ma’s legal team acknowledges that the summons has to be adjourned for full argument.  He seeks directions relating to the filing of evidence.  Those directions are not opposed.  The contentious issue for today’s purposes relates to the injunctive relief which Mr Ma seeks until the summons can be heard and fully argued.  The relief he seeks has three components: (i) an injunction restraining the defendants from communicating with any of FEL’s customers — in essence, an injunction restraining them from soliciting business from those customers; (ii) an injunction restraining the defendants from dealing with those sums which it is alleged that their activities resulted in being diverted from FEL (“the receivables”); and (iii) an injunction requiring the defendants to disclose in writing any information about the current whereabouts of the receivables, about the business dealings between the defendants and FEL’s customers and about any assets in their possession which are valued at $50,000.00 or more.

3.  For the purposes of today’s hearing, Mr Victor Dawes SC for PSG, YMH and Mr Lam accepts that there is a serious issue to be tried on the main thrust of Mr Ma’s case, namely, that with the help of Mr Ng and Ms Chu, orders from FEL’s customers were systematically diverted to PSG and YMH.  No concession is made about Mr Lam’s part in any of that.  But in the light of Mr Lam’s effective ownership of PSG and YMH as well as other evidence in the case, there is in my opinion an issue to be tried in respect of Mr Lam’s participation in the diversion of FEL’s orders.  Mr Dawes did not really argue otherwise. 

4.  It is accepted by all the defendants that this is a case for some injunctive relief, at least up to the time when the application can be heard and fully argued.  Not only are there clearly issues to be tried, but although there may be questions as to whether the balance of convenience favours the grant of appropriate injunctions and whether damages are an adequate remedy, it is not suggested otherwise today. The issue today relates only to the form of such order which I should make.

5.  The first of the injunctions sought by Mr Ma is no longer contentious, at any rate not for present purposes.  PSG, YMH and Mr Lam are all prepared to give an undertaking in terms which satisfy Mr Ma. That undertaking is that they will not, whether directly or indirectly, by themselves, their servants or agents or otherwise howsoever, contact, correspond, canvas, solicit business from, accept business from, or otherwise communicate with any customer of FEL, such customer being defined elsewhere in the order to be made, save for the purposes of (a) receiving any of the funds described elsewhere in the order, and (b) performing the purchase orders referred to in para 16 of the affirmation which Mr Lam made yesterday.  Indeed, Mr Ng and Ms Chu are prepared to go further — unsurprisingly, since Ms Chu claims, and for all I know Mr Ng does as well, that she ceased to have any connection with either FEL or PSG or YMH last year.  Mr Ng and Ms Chu are prepared to give an undertaking in the terms originally sought by Mr Ma, no doubt because, to use a colloquialism, it is no skin off their noses to give such an undertaking.

6.  The second injunction sought by Mr Ma is much more contentious.  Mr Ma argues that the receivables in respect of orders which were diverted to PSG and YMH come to about US$2.356m.  PSG, YMH and Mr Lam say that this sum is far too high for two reasons.  The first is that it includes the value, not just of invoices which have been issued, but also of those invoices expected to be issued but which have not been issued yet.  They contend that that brings the sum down to about US$1.96m.

7.  The second reason why PSG, YMH and Mr Lam say that it is wrong to treat the receivables in respect of orders which have been diverted to PSG and YMH as amounting to US$2.356m is because it is wrong to take the value of the orders for the purposes of calculating the diverted receivables.  Instead, the diverted receivables should be calculated by reference to the profits which FEL would have made on the orders to which those invoices related.  PSG, YMH and Mr Lam contend that on Mr Ma’s own evidence the highest profit margin achieved by FEL was 3%.  They are therefore prepared to undertake to pay into court within seven days the sum of US$58,800.00, which is 3% of US$1.96m.  For their part, Mr Ng and Ms Chu are again prepared to give an undertaking in the terms sought by Mr Ma.

8.  The answer given by Mr Chain to these arguments is that they would have been well‑founded if Mr Ma’s claim had simply been a proprietary claim aimed at recovering the profits earned in breach of fiduciary duties — in other words, a claim of the kind referred to in para 22 of Mr Chain’s skeleton argument and in the endorsement to the writ.  But it is not.  Mr Chain proposes to amend the endorsement to the writ and to reproduce in the statement of claim an argument based on a line of authorities which he contends are to the effect that the business opportunities available to a trading company amount to trust property belonging to the trading company, so that if those business opportunities are diverted to another company, they are to be treated as held on trust by that company for the original trading company, and that the original trading company can bring proceedings to vindicate those property rights.  In this case, those business opportunities were translated into tangible trust assets, namely the receivables in their entirety. 

9.  Mr Chain accepts that these assets will have been enhanced, and that the doctrine of equitable allowance may permit those who have diverted the receivables to be compensated for what they have done to enhance the value of those assets.  But he points out that the giving of any equitable allowance is discretionary, not a matter of right, that it is for the party responsible for diverting those business opportunities to establish their entitlement to such an allowance, and that in that context the fact that there is a serious question to be tried as to whether the defendants could be said to have been responsible for the systematic destruction of FEL’s business is highly relevant.  In those circumstances, Mr Chain contends that there is at the very least a serious question to be tried on whether the law allows Mr Ma to recover the recoverables in their entirety, as opposed to just the profits which the diverted orders generated.

10.  These are a difficult and, dare I say it, controversial set of propositions, but that should not deter me from acting upon them if I thought that they raised a serious question to be tried.  Mr Chain relied on a series of cases and other materials to support his analysis.  He relied on what Lawrence Collins J (as he then was) said in CMS Dolphin Ltd v Simonet [2002] BCC 600 at [96] to support the proposition that a business opportunity which is exploited equates to the disposal of trust property in respect of which fiduciary duties are owed.  He relied on what Lord Millett said in Foskett v McKeown [2001] 1 AC 102 at p 167 to support the proposition that a beneficiary of a trust has a continuing beneficial interest, not merely in the trust property, but in its traceable proceeds as well.  He relied on what Lord Denning said in Greenwood v Bennett [1973] 1 QB 195 at p 201 to support the proposition that in a proprietary claim such as the present one, you are entitled to the return of your property (in that case a motor vehicle) even if its value has been enhanced (in that case by the bona fide purchaser carrying out works of repair on it), that enhancement in its value being catered for by compensating (in that case the purchaser) by the doctrine of equitable allowance.  Finally, Mr Chain relied upon some extra‑judicial comments by Lord Millett to the effect that there are times when it is appropriate for an innocent plaintiff to get a windfall even if as a result the dishonest defendant loses out.

11.  I have not been persuaded that these arguments raise a serious issue to be tried.  What has a business opportunity which has been wrongly exploited by your competitors resulted in you having been denied?  The answer is that you have not been able to make the profits on those orders which have been diverted from you which you would otherwise have made.  I just do not see how the propositions which Mr Chain derived from the authorities and materials on which he relied could have the consequence of entitling Mr Ma to a sum many times greater than what those profits would have been.  Without analysing where the flaw in Mr Chain’s process of reasoning is, it must be flawed in some way to produce a result which is so far from reality, even in a case such as this where the commercial morality of the defendants is said to be as low as Mr Ma claims. 

12.  It follows that I am not prepared to grant Mr Ma the second injunction which he claims, but I will accept the undertaking offered by PSG, YMH and Mr Lam to pay into court within seven days the sum of US$58,800.00.

13.  The third injunction sought by Mr Ma is less contentious now that I have decided the second injunction sought. No disclosure is now sought against Mr Ng and Ms Chu in view of such disclosure as PSG, YMH and Mr Lam are prepared to give.  They are prepared to disclose the existing contracts between PSG and YMH and any of the customers of FEL, as well as all the receipts and receivables arising from these contracts, and they are prepared to file evidence by affidavit or affirmation confirming that the only contracts which have been entered between PSG and YMH and any of FEL’s customers are those which have already been disclosed or revealed to Mr Ma or his solicitors.

14.  Mr Chain accepted that the disclosure which Mr Ma had originally sought was “ambitious” and could properly be regarded as “overkill”.  That concession applies particularly to the requirement to disclose any assets in the defendants’ possession valued at $50,000.00 or more.  Such an order is, on the face of it, no longer necessary in the light of the payment into court which PSG, YMH and Mr Lam are prepared to make.  But in any event, disclosure of this kind may well be appropriate when an order seeking the freezing of all of a defendant’s assets up to a certain amount is sought.  The plaintiff will want to know what assets the defendant has in order to police any freezing order he obtains.  But this is not that sort of case.  There is no freezing order sought in respect of all the defendants’ assets up to a certain amount.  The freezing order which is sought is limited to the receivables which have been paid to PSG and YMH.  All in all, the disclosure which Mr Ma is entitled to at this particular stage of the proceedings must be limited to that disclosure which PSG, YMH and Mr Lam are prepared to give. 

15.  That deals with the contentious issues which arise on Mr Ma’s summons, and I am confident that I can leave it to the parties to draw up an order which reflects the terms of this judgment.

(Submissions on costs)

16.  I think that the appropriate order for costs is that the costs of today be reserved to the judge who hears the application on the return date, with liberty to apply in the event of there not being a return date and the parties not being able to agree the costs which I have just reserved.