CHIU CHI TONG v. LAU CHONG SAI AND ANOTHER

HCA 765/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 765 OF 2002

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J U D G M E N T

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Introduction

1.  The plaintiff commenced this action on 25 February 2002.  He seeks the dissolution of the partnership between him and the 1^st defendant (“D1”).  Other related relief such as accounts and inquiries are also sought.  There is also a claim for an injunction order, damages and other relief against both defendants.

Undisputed Background Facts

2.  The following background facts are undisputed.

3.  The plaintiff has a brother called Chiu Chi Nun (“the plaintiff’s brother”).  D1 and the 2^nd defendant (“D2”) are husband and wife respectively.  D1 also has a brother called Lau Chong Wah (“D1’s brother”).

4.  The partnership business in question in this action was known as “Hing Yip Hong” (興業行).  It was registered in Hong Kong in the names of the plaintiff and D1.  Its business has been the wholesale of Chinese herbs.

5.  Both defendants assisted the daily operation of “Hing Yip Hong”.  D2 was one of the shop assistants there.

6.  D1 paid HK$700,000 into “Hing Yip Hong” by way of capital injection in about February 2000.  “Hing Yip Hong” commenced business since about March 2000.

7.  There was another partnership business known as “Hing Fat Hong” (興發行) located in Zhaoqing City (肇慶市), China.  Its business has been the processing, packaging and trading of Chinese herbs.

8.  Apart from “Hing Yip Hong” and “Hing Fat Hong”, there was also a business known as “Lee Fat Native Products Processing Factory” (利發土特產加工廠) or “Lee Fat Hong” (利發行) in Zhaoqing City, China.  It was also a wholesaler of Chinese herbs.

9.  On about 15 February 2002, the defendants withdrew HK$1.93 million from the savings account of “Hing Yip Hong”.  That sum was transferred into a bank account in D2’s name.  D2 sought to withdraw that sum on 20 February 2002.

10.  “Hing Yip Hong” closed its business on 11 February 2002 for the upcoming Chinese New Year.  The defendants left on that day and did not return to work afterwards.

The Plaintiff’s Case

11.  The plaintiff alleges he and D1 were the partners of “Hing Yip Hong”.  In February 2000, the assets of “Hing Yip Hong” were agreed to be worth HK$932,685.  However, D1 could only afford to pay HK$700,000 as capital.  The profit and loss were to be shared equally.  The plaintiff, however, was entitled to draw HK$232,685 from the gross profit first.

12.  The accounting record signed by the plaintiff’s brother which purports to show D1 had paid HK$700,000 into “Hing Yip Hong” was in fact only a document to show intended capital investment to be paid by D1’s brother for a proposed business.  The proposed joint venture never materialised and no payment was in fact made.

13.  Neither “Hing Fat Hong” nor “Lee Fat Hong” was related to “Hing Yip Hong”.  The plaintiff’s brother used to own “Lee Fat Hong”.  In early 2000, he and D1’s brother agreed to become partners in the manufacture of Chinese wine.  “Lee Fat Hong” was used for that purpose.

14.  D1’s brother in fact never paid any sum.  However, on 8 April 2000, the plaintiff’s brother signed an accounting record which shows D1’s brother had paid in total RMB2,008,900.  On the same day, he also signed an accounting record which shows he paid RMB1,184,000.  He did so without giving any thought to the matter as he was on good terms with D1’s brother at the time.

15.  The said sum of HK$1.93 million was part of the property of “Hing Yip Hong” and was part of the partnership property within the meaning of s. 22, Partnership Ordinance (Cap. 38).  It was part of the credit balance of the partnership bank account as at close of business on 11 February 2002.

16.  D1 was the partner responsible for the keeping of the partnership’s account.  He made use of pre-signed blank bank withdrawal slips (intended for payments to suppliers) to obtain the said sum.

17.  Both defendants breached their duties which they owed to “Hing Yip Hong” by wrongfully removing the said sum and converting it to their own use.  They are accordingly liable to return the said sum to “Hing Yip Hong”.

The Defendants’ Case

18.  “Hing Fat Hong” was a partnership between D1, D1’s brother and the plaintiff’s brother.  “Hing Yip Hong” was nothing more than a Hong Kong branch of “Hing Fat Hong”.  The two businesses were in fact one and the same partnership.

19.  “Lee Fat Hong” was in effect taken over by “Hing Fat Hong”.  Its assets were injected into “Hing Fat Hong” and it ceased to operate.

20.  D1 and D1’s brother held 2/3 share of the said partnership whereas the plaintiff’s brother held the remaining 1/3.  The plaintiff has no share in either business.

21.  D1 paid HK$700,000 as capital of the said partnership and D1’s brother injected RMB1.22 million into it.  The plaintiff’s brother was treated as having injected RMB1.184 million into the said partnership.  Thus, the total capital was about RMB3.2 million.

22.  In September 2001, it was orally agreed between D1, D1’s brother and the plaintiff’s brother that the said partnership be dissolved.  D1 and D1’s brother were entitled to the return of their earlier capital contribution by the end of the lunar year.  The plaintiff’s brother would carry on the said business on his own.  This agreement will be called “the alleged Sep 2001 agreement”.

23.  Further, in early February 2002, it was orally agreed between D1, D1’s brother and the plaintiff’s brother that D1 and D1’s brother were to be paid HK$1.93 million by way of return of capital payment.  The said partnership was to be dissolved upon such payment.  This agreement will be called “the alleged Feb 2002 agreement”.

24.  On about 11 February 2002, the plaintiff signed a withdrawal slip authorising the payment of HK$1.93 million pursuant to the alleged Feb 2002 agreement and handed it to D1.

25.  In the premises, the defendants were entitled to withdraw and retain the said sum of HK$1.93 million.

The Issues

26.  By virtue of the above matters, the issues herein are:-

(a)	what was the parties’ agreement regarding their partnership business.  This includes the precise ambit of the partnership and the identity of the partners therein;
(b)	did the parties enter into the alleged Sep 2001 agreement;
(c)	did the parties enter into the alleged Feb 2002 agreement;
(d)	whether the withdrawal of HK$1.93 million/was authorized by the plaintiff (or the plaintiff’s brother).

27.  There is no contemporaneous document expressly setting out:-

(1)	the partnership agreement (let alone its terms);
(2)	the respective capital share to be contributed to by the partners;
(3)	the alleged Sep 2001 agreement;
(4)	the alleged Feb 2002 agreement.

Hence, the issues will have to be resolved by an assessment of the credibility of the witnesses.

Credibility of Witnesses

28.  There are two objective tests for assessing a witness’s credibility regarding a matter to which he has testified:-

(a)	whether that part of his testimony is inherently plausible or implausible;
(b)	whether that part of his testimony is, in a material way, contradicted by other evidence which is undisputed or indisputable (an example often given of such evidence is contemporaneous documents).

Further, where it is shown that a witness has been discredited over one or more matters to which he has testified (using the above tests), this fact is relevant to the assessment of his overall credibility.  Likewise, regard may be had to a witness’s motive for deliberately not giving truthful testimony.  For example, telling the truth may prejudice his interest, or a just determination of the litigation may affect his interest.

29.  The following witnesses testified at trial:-

(1) the plaintiff;

(2) the plaintiff’s brother;

(3) Ng Man Kwan, a former shop assistant of “Hing Yip Hong” (plaintiff’s witness);

(4) D1;

(5) D1’s brother;

(6) D2.

30.  For the avoidance of doubt, I have assessed credibility bearing in mind the totality of the evidence adduced at trial.

31.  This is not a case where any satisfactory conclusion can be reached regarding the witnesses’ credibility or reliability by an observation of their demeanour when they testified.

(a)     Plaintiff’s Witnesses

32.  The defence relies on the following matters to discredit the two plaintiff witnesses, namely, the plaintiff and the plaintiff’s brother.

33.  “Hing Yip Hong” and “Hing Fat Hong” were formed at about the same time, namely, around March 2000.  The plaintiff’s brother cannot explain why he has to form “Hing Fat Hong” after “Hing Yip Hong” commenced business.

34.  The following contemporaneous documents cast doubt on the plaintiff’s case and support the defence case:-

(a)	accounting documents signed by the plaintiff’s brother and D1’s brother (except item (2) below, which was signed by D1):-
	(1)	the ledger entry for 27 February 2000 (signed on 8 April 2000) records D1’s brother paid RMB2,008,900 (which included the sum of HK$700,000).  This is consistent with the defence case regarding the payment of that amount of capital into “Hing Yip Hong”;
	(2)	the net asset valuation statement of “Hing Yip Hong” signed on 10 February 2000.  The assets were valued at a total worth of HK$932,685.60;
	(3)	the ledger entry for an unclear date in February 2000 (signed on 8 April 2000) records the plaintiff’s brother paid HK$932,685.  This sum corresponds to the assets of “Hing Yip Hong” (see sub-para. (2) above) which, according to the defence, was treated as his capital contribution;
	(4)	the ledgers showing remittances from “Hing Yip Hong” to “Hing Fat Hong” in February, March and April 2000;
	(5)	the ledgers showing withdrawals by the plaintiff’s brother and D1’s brother in 2000;
(b)	a document headed “肇慶市鼎湖區總工會: 關於批覆基層工會領導成員職務的通知” (notice of approval of the election of entry level leader’s duties) shows D1’s brother to be the chairman of the trade union of “興發土特產加工場” (dated 10 August 2000).  The plaintiff’s brother was elected as its vice-chairman.

(As regards items (a)(1) and (a)(3) above, the defence case is that they were part of the account records of the partnership (comprising both “Hing Yip Hong” and “Hing Fat Hong”).  The plaintiff’s brother, on the other hand, testified they were documents related to the intended joint venture which never materialised.)

35.  The defence also draws my attention to the lack of satisfactory contemporaneous documents recording the so-called “trading” relationship between “Hing Yip Hong” and “Hing Fat Hong”.  The only relevant documents are the alleged warehouse notes of “Lee Fat Hong” which the defence submits are questionable documents.

36.  The defence asks me to reject the 2 above-said plaintiff witnesses’ claim that some of the documents were for the wine manufacture business venture between the plaintiff’s brother and D1’s brother (unrelated to the business of “Hing Yip Hong” or “Hing Fat Hong”).  The defence also asks me to reject the claim of the plaintiff’s brother that he signed the said documents without giving them any thought.

37.  The plaintiff fairly (and correctly) accepts that he bears the burden of proving that “Hing Yip Hong” was a partnership between him and D1.  However, he contends the burden is a light one and has been sufficiently discharged by the particulars appearing in the business registration documents.  The relevant parts of s. 19(2), Business Registration Ordinance (Cap. 310) read:-

“A copy of any certificate or extract of any information certified by the Commissioner to be a true copy or extract thereof shall be, in all legal proceedings civil …, prima facie evidence as to the facts stated therein … ” (emphasis supplied).

Hence, s. 19(2), Cap. 310 in effect shifts to the defendants the evidential burden of proving that the particulars in the business registration documents are incorrect.

38.  The plaintiff asks me to accept the testimony of his witnesses and reject that of the defence witnesses.  Further to the business registration documents, the plaintiff also relies on other contemporaneous documents including the following:-

(a)	the signature of D1 on the audited accounts of “Hing Yip Hong” (in particular, the Statement of Account for the year ended 31 March 2001) above the place for the partners’ signatures;
(b)	as D1 should know, the said audited accounts were to be seen by the accountants and later presented to the Inland Revenue Department.  Thus, D1 held out to third parties he was a partner;
(c)	similarly, D1 signed on IRD Form 52 (return of profits tax) dated 16 July 2001 holding himself out as a partner of “Hing Yip Hong”;
(d)	even in his statement to the police (dated 21 February 2002), D1 still claims he together with the plaintiff commenced “Hing Yip Hong” in partnership (question and answer (1)).  D2 also said so in her police statement dated 21 February 2002 (question and answer (6));
(e)	D1’s brother said in his police statement (dated 14 July 2003) that the plaintiff and the plaintiff’s brother on the one part and he and D1 on the other part had formed “Hing Yip Hong” and “Hing Fat Hong”.  He has not stated clearly if they were two partnership businesses, or two businesses belonging to one partnership;
(f)	the net asset valuation statement of “Hing Yip Hong” was signed by the plaintiff and D1 (not D1’s brother) on 10 February 2000;
(g)	as regards the injection of capital in the sum of HK$700,000, an entry in the ledger of “Hing Yip Hong” states that HK$699,000 was paid by D1 (not D1’s brother) on 17 February 2000.

39.  The plaintiff also argues that the accounting records signed on 8 April 2000 (para. 34 (a)(1) and (a)(3) above) are inadmissible because they came into existence after the formation of “Hing Yip Hong” and are in the nature of hearsay evidence.

40.  I agree with the defence and disagree with the plaintiff.  The accounting documents referred to in para. 34(a)(1) to (3) are particularly important.  They came into existence close to the time of formation of the partnership business(es) in issue.  Their authenticity is undisputed and the contents are self-explanatory.  The plaintiff has in effect failed to explain why they were drawn up and signed in the way they now appear.  The explanation of plaintiff’s brother regarding them is incredible and is rejected.

41.  On the other hand, for the reasons set out below, the documents relied upon by the plaintiff (see para. 38 above) should be given little weight.  Many people in the business world think that documents such as audited accounts or tax returns and the like do not necessarily have to contain information as to the internal arrangement among the owners of the business; a typical example being nominee directors.  Trust arrangements likewise often involve the concealment of the identity of the true owner.  Putting a nominee’s name into the business registration documents is not unheard of.  Hence, while not something to be approved of, these are not inherently implausible incidents.  After all, audited accounts are intended to be accurate for accounting purposes and tax documents accurate for tax purposes.

42.  The documents relied upon by the plaintiff (see para. 38 above) have to be considered together with the documents relied upon by the defence (see para. 34 above).  They should also be looked at in the light of the factual dispute relating to the true nature of the partnership. With these matters in mind, I find that the inaccuracies in the audited accounts and tax documents do not advance the plaintiff’s case.

43.  The police statements of the defendants should also carry little weight.  The emphasis at the time must have been on the criminal aspect.  Their main concern must have been to try to exculpate themselves from the allegation of theft (or other offence(s) of dishonesty).  The reason they gave for withdrawing the money was in short that D1 was entitle to do so.  It is understandable that they over-simplified the background facts which were not of utmost importance to the police investigation.

44.  Other than the above matters, I find the plaintiff to be unable to answer many of the questions put to him in cross-examination.  This is particularly so in relation to many of the accounting documents.  He gave the impression that he knew far less about them than the plaintiff’s brother.  He often requested defence counsel to put the questions to the plaintiff’s brother.  I find this to be strange and an indication that the plaintiff’s brother may be one of the partners of “Hing Yip Hong”.

45.  To sum up, I do not find the plaintiff or the plaintiff’s brother to be credible witnesses insofar as they assert that “Hing Yip Hong” was a partnership between the plaintiff and D1 only.

46.  However, I find them to be truthful and reliable when they deny that there was an agreement whereby the defendants could withdraw HK$1.93 million from the bank account of “Hing Yip Hong”.

47.  I also find Ng Man Kwan to be truthful and reliable.  When he testified, he already left the employment of “Hing Yip Hong”.  The defence has not accused him of being untruthful in the written final submission.

48.  Ng testified he never heard of “Hing Fat Hong” or “Lee Fat Hong” when he was working at “Hing Yip Hong”.  He also testified, on about 11 February 2002 (when “Hing Yip Hong” closed for the upcoming Chinese New Year), the defendants did not tell anyone in the shop they would not return after the Chinese New Year.  He got the impression that they, like many others, were going back to the mainland for the Chinese New Year holiday.

49.  As regards the plaintiff’s argument that the accounting records compiled or signed after March 2000 are inadmissible because they are hearsay evidence (see para. 39 above), the short answer is that hearsay evidence is now admissible pursuant to s. 47(1), Evidence Ordinance (Cap. 8) which provides:-

“In civil proceedings evidence shall not be excluded on the ground that it is hearsay unless-
	(a)	a party against whom the evidence is to be adduced objects to the admission of the evidence; and
	(b)	the court is satisfied, having regard to the circumstances of the case, that the exclusion of the evidence is not prejudicial to the interests of justice”.

50.  I am not satisfied that the exclusion of the said documents is not prejudicial to the interest of justice.  In fact, I am satisfied that their exclusion is likely to prejudice the interest of justice.  This is because, as stated above, these documents were compiled close to the time of formation of the partnership business(es).  Their contents are clear and self-explanatory and closely related to one of the main issues herein.

(b)     Defence Witnesses

51.  Matters also relevant to the credibility of D1 and D1’s brother have been set out in para. 33 to 36 and 38 to 43 above and will not be repeated.

52.  Insofar as these witnesses testified that “Hing Yip Hong” was not a partnership whose partners were limited to the plaintiff and D1, I find that they are truthful and reliable.

53.  However, I disbelieve these witnesses’ testimony that there was an oral agreement whereby “Hing Yip Hong” was to be dissolved and the defendants were entitled under that agreement to withdraw HK$1.93 million from the bank account of “Hing Yip Hong”.  The reasons for this conclusion include:-

(a)	their testimony is that the oral agreement was reached in about September 2001 (D1’s witness statement, para. 14 and 15; D1’s brother’s witness statement, para. 14 and 15).  The agreement was allegedly that the capital investment would be repaid when “Hing Yip Hong” has sufficient cash flow.  This is different from the pleaded case which is the capital would be repaid by the end of the lunar year (para. 2.10, Defence);
(b)	D1’s witness statement alleges that Ng Man Kwan left “Hing Yip Hong” before the defendants did (para. 19 thereof).  Ng, however, testified he left later than them;
(c)	the importance of sub-para. (b) above is Ng testified the defendants never indicated they were leaving “Hing Yip Hong” for good after the upcoming Chinese New Year.  This is inconsistent with the normal behaviour of someone who is leaving his place of employment permanently;
(d)	D1 said in his police statement (dated 21 February 2002) that the agreement to dissolve “Hing Yip Hong” was reached “before Chinese New Year” (question and answer (4) thereof).  This is different from the defence case (at sub-para. (a) above) which is the agreement was reached in about September 2001;
(e)	in her police statement, D2 claimed she only knew about that sum after she returned from the mainland on 15 February 2002.  Considering she was D1’s wife and she also worked at “Hing Yip Hong”, it is unbelievable she would not be told by D1 about the alleged dissolution agreement shortly after September 2001 (in any event, well before the Chinese New Year).  This is especially so when D1 claimed he and D2 were leaving “Hing Yip Hong” for good after the Chinese New Year holiday;
(f)	D1 testified he deposited the sum of HK$1.93 million into D2’s bank account because he was busy.  He never explained why he was so busy on the day when the deposit was made and why that caused him to deposit the sum into D2’s bank account;
(g)	the defence cannot explain why the plaintiff should decide to report the matter to the police on 19 February 2002 when, according to the defence, the withdrawal of HK$1.93 million was with his consent given on 11 February 2002.

54.  For the reasons given above under this sub-heading, I also make the same finding in relation to the testimony of D2.

55.  In so concluding, I have borne in mind the defendants’ argument in the written final submissions to the effect that it is unlikely the defendants would unlawfully withdraw the money.  This argument is based on D2 being the registered owner of a flat in Fa Yuen Street and the defendants’ voluntary return to Hong Kong.

Findings of Fact

56.  In relation to s. 19(2), Cap. 310 (see para. 37 above), I find that the defence evidence has rebutted the business registration records.  Consequently, I find that the plaintiff has failed to satisfy me he was one of the partners of “Hing Yip Hong”.  The plaintiff also fails to satisfy me “Hing Yip Hong” was a partnership business completely independent of “Hing Fat Hong”.

57.  I also find that the alleged Sep 2001 agreement and the alleged Feb 2002 agreement do not exist and were made up by the defence witnesses.  The withdrawal of HK$1.93 million was unauthorised by the plaintiff (or the plaintiff’s brother).

58.  I understand from the parties it is likely a new legal action will be commenced.  It is also likely the issues set out in para. 26(a) above will be raised in the new action.

59.  In the trial of this action, probably because the plaintiff concentrated on proving that he was one of the two partners of “Hing Yip Hong” and the defence concentrated on refuting that matter, it appears that insufficient attention has been given to the issue set out in para. 26(a) above.  No criticism is intended by this statement.  It is just that this is the reason why I decide not to make any finding on that issue.  To avoid any doubt or misunderstanding (if a new action is in fact commenced), no finding has been made in this judgment regarding that issue.

Conclusion

60.  By an order dated 18 May 2002, the disputed sum of HK$1.93 million was to be paid into court by D2.  She did so on 28 May 2002.  By an order dated 31 March 2004, that sum was deposited into an interest-bearing account.  The parties agreed on 28 July 2004 that they would seek the court’s further direction regarding the disposal of that sum after judgment is given herein.

Costs Order Nisi

61.  Both parties have been found to have given not entirely truthful testimony.  For this reason, it may be appropriate to depart from the usual rule that costs should follow the event: Hong Kong Civil Procedure 2004, para. 62/2/7 citing Baylis Baxter Ltd. v. Sabath [1958] 1 WLR 529; Anglo-Cyprian Trade Agencies Ltd. v. Paphos Wine Industries Ltd. [1951] 1 All ER 873; Jones v. McKie and Mersey Docks and Harbour Board [1964] 1 WLR 960.  See also Ho Shu Kwong Wilson V. Chiang Chun Yuan CACV 168/2002 (5 August 2002).  There will accordingly be a costs order nisi pursuant to Ord 42 r 5B(6) that there be no order as to the costs of this action.