XCHRX LAM CHUN MOU v. YUNG CHONG KEUNG

HCA16477/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.16477 OF 1999

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(Consolidated pursuant to the Order of
Hon Mr Justice Yeung dated 22nd October 1999)

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J U D G M E N T

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The proceedings

1. Mr Yung Chong Keung ("Mr Yung") and Mr Lam Chun Mou ("Mr Lam") are partners in a firm ("the partnership") called Kam Tap Noodle Factory ("Kam Tap"). There is no dispute that the partnership is a partnership at will. On 9th October 1999, Mr Lam's solicitors served a Notice of Dissolution ("the Notice") on Mr Yung, dissolving the partnership at the expiration of seven days from 9th October 1999.

2. Mr Yung, on an ex parte application, had obtained in High Court Action No.16477 of 1999 the following orders :

(1) Mr Lam be restrained from dissolving the partnership until further order.

(2) Mr Lam be restrained from communicating or publishing or causing to communicate or publish the Notice to any third party until further order.

(3) Mr Lam be restrained from diverting or causing to divert business of Kam Tap to Kam Fat or any other party.

Mr Yung is now seeking a continuation of the orders he had obtained. He also applies for an order that Mr Lam is to deliver up all the accounts of Kam Tap.

3. Mr Lam, on the other hand, also commenced another High Court action, namely HCA 16615 of 1999 against Mr Yung. Mr Lam is seeking an injunction to restrain Mr Yung from (1) holding out or representing to any third party that Mr Lam had retired from the partnership and (2) carrying on the partnership business except for the purpose of winding up its affairs.

The facts

4. Very briefly, according to Mr Yung the facts are these. Mr Yung and Mr Lam had been partners since 1989. Mr Lam was already a partner when Mr Yung joined. The partnership has its own factory in a building. In the beginning of 1998, Mr Lam informed Mr Yung that he had purchased a unit on the 6th floor of the same building and he asked Mr Yung if Kam Tap would purchase the premises. This was refused by Mr Yung.

5. Two months later, Mr Lam suggested that they should divide the clients of Kam Tap between them and Mr Yung could retain Kam Tap and at the same time Mr Lam would sell his half share in the new property to Mr Yung. This was again refused by Mr Yung.

6. On 1st February 1999, Mr Lam suggested that he would pay Mr Yung $1.75 million to buy Mr Yung's share in the partnership. This was refused by Mr Yung. Mr Yung gave a counter offer that he would pay Mr Lam the same amount to buy his shares. This was refused by Mr Lam.

7. In September 1999, Mr Lam's wife began to operate a noodle factory by the name of Kam Fat Noodle Factory ("Kam Fat"). Mr Yung discovered that the customers of Kam Tap started to purchase noodles from Kam Fat. Mr Yung said that Mr Lam had solicited these clients to buy from his wife's factory.

8. On 17th September 1999, the parties signed an agreement ("the Agreement") in which Mr Lam agreed that he would not appropriate Kam Tap's clients before the dissolution of the partnership and if he appropriates the clients, he would have to compensate Mr Yung an amount of $100,000 for every client that he appropriates. It was further agreed that the partnership would be dissolved on or before 27th September 1999.

9. On 27th September 1999, there were further negotiations by the parties but no conclusion was reached. On 9th October 1999, Mr Lam served the Notice on Mr Yung. Mr Yung alleged that Mr Lam had had a fraudulent plan to dissolve the partnership since his wife started her own factory. The Notice was a vehicle by Mr Lam to force Mr Yung out of the business so that Mr Lam could pick up most of Kam Tap's clients and bring them to Kam Fat.

Application to discharge injunction

10. Mr Lam applies to discharge the injunctions obtained by Mr Yung on the ground of material non-disclosure. Mr Lam said that he had asked a Mr Yeung to act as a mediator between the parties. Mr Lam was offering to buy Mr Yung's share at $1.75 million. Apart from the Agreement signed by Mr Lam, Mr Yeung also prepared another document in Chinese in which the parties agreed that the assets of the partnership was to be valued at HK$3.5 million and that the parties were preparing to dissolve the partnership. This sum was to include the assets of the partnership including its goodwill. Clause 3 of this document provides that if Mr Yung was to own Kam Tap, then Mr Lam could not appropriate the existing clients of Kam Tap. This document was not disclosed by Mr Yung in his application.

11. In the meeting on 27th September 1999, Mr Lam had brought along an agreement drafted by his lawyer regarding his purchase of Mr Yung's interest in Kam Tap. Mr Yeung, who was present at the meeting, again prepared another agreement in Chinese which was not signed by the parties. This document was also not disclosed at the ex parte application.

12. After Mr Lam served the Notice, Mr Yung's lawyer K.Y. Woo & Co. ("Woo"), by letter dated 11th October 1999, wrote to Mr Lam's solicitors ("Lam & Partners") stating that :

" Our client is surprised to receive your letter to him dated 9th October 1999 which is entirely different from what our client agreed with your client, Mr Lam Chun Mou (林春茂). Our instructions are that it is agreed by the parties that our client should continue to carry on business as a sole proprietor for the above noodle factory and pay your client a sum of HK$1,750,000.00."

13. Lam & Partners replied on 12th October 1999 denying that there was any such agreement as alleged by Woo, and stating that, on the contrary, Mr Yung had agreed to sell his shares to Mr Lam at $1.75 million.

14. On 16th October 1999, Woo wrote to Lam & Partners stating that :

"1. our client does not have any objection that your client be retired from the partnership;

2. the partnership shall continue its normal operation under our client's supervision; and

3. as from today onward, all the company outgoings shall be solely borne by our client until the matter is settled."

The correspondence were not disclosed in the application.

Material non-disclosure

15. In my view, there was material non-disclosure in this case. The contents of the two Chinese documents would not have an impact on the dispute of the parties. They afterall only deal with the evaluation of the assets of the partnership. But Mr Yung's case is that Mr Lam's Notice is a vehicle of fraud. This being the case, then clearly all the documents that had been the subject of discussion between the parties regarding the dissolution ought to be disclosed.

16. However, it is not necessary to rely on the non-disclosure of these two documents to support Mr Lam's case to discharge the orders. What is more significant is the non-disclosure of the correspondence that were exchanged after the Notice had been served. On the one hand, Mr Yung was asking for an injunction to prevent Mr Lam from dissolving the partnership. On the other hand, it was alleged by his solicitors that there was already an agreement between the two partners that Mr Yung should continue to carry on the partnership as a sole proprietor of Kam Tap and that Mr Yung had no objection to Mr Lam retiring from the partnership. Mr Yung now accepts that Mr Lam had not agreed that he would retire from the partnership. This matter clearly ought to be drawn to the attention of the Court so that it might fully appraise the true nature of Mr Yung's case before it granted the injunction in his favour.

17. Mr Yung had actually sent out a Chinese translation of Woo's letter of 16th October 1999 to the customers of Kam Tap. The effect of the injunction, as Mr Li, Counsel for Mr Lam, submitted, is that Mr Yung becomes the sole proprietor of Kam Tap enjoying the use of the partnership assets to the exclusion of Mr Lam.

Innocent explanation?

18. Mr Yung explained that after 9th October 1999, Mr Lam had informed Kam Tap's customers, workers and drivers of the dissolution of the partnership. On 15th October 1999, Mr Lam informed two of Kam Tap's workers that Kam Tap would cease business on the following day. Mr Yung said that "in the moment of agony and in fear of the jeopardy done to Kam Tap's business and operation", he instructed Woo to issue the two letters to Mr Lam "as an immediate and temporary measure to prevent Mr Lam from plotting his well planned sabotage to Kam Tap".

19. In my view this explanation is not plausible because Woo's first letter was dated 11th October 1999 which was before Mr Lam told the workers on the 15th October 1999 that the business would cease on the following day.

20. Mr Chung, Counsel for Mr Yung, relies on Lloyds Bowmaker Ltd v. Britannia Arrow Holdings plc. [1988] 3 All ER 178 in which it was held that if the injunction is discharged because of material non-disclosure the court has a discretion to grant a second injunction when all the facts are placed before it and a second injunction may well be granted if the non-disclosure was innocent and an injunction would properly have been granted on the disclosed facts. In my view the non-disclosure of the correspondence cannot be treated as innocent in nature. No explanation was offered as to why the correspondence were not disclosed in the first place. I will set aside the orders obtained by Mr Yung.

Fraud and Notice of Dissolution

21. Mr Chung relies on the view of Lord Lindley in his work on partnership, Lindley and Banks on Partnership, 17th Ed. para.23-14 :-

"...[It] may be stated as a general proposition, that courts will not, if they can avoid it, allow a partner to derive advantage from his own misconduct by compelling his co-partner to submit either to continued wrong, or to a dissolution; and that rather than permit an improper advantage to be taken of a rule designed to operate for the benefit of all parties, the court will interfere... where formerly it would have declined to do so. At the same time courts will not take the management of a going concern into their own hands, and, if they cannot usefully interfere in any other manner, they will not interfere at all unless for the purpose of winding up the partnership."

22. In Walters and Others v. Bingham [1988] 1 FTLR 260, Sir Browne-Wilkinson MR held that :

" The general principle is undoubted: fraud unravels all. Although I have not been referred to any case in which that principle has been applied so as to vitiate a notice of dissolution of the partnership, in my judgment it must apply...."

That case is concerned with the partners of a firm of solicitors. The firm was investigating the conduct of one of its partners when he served a notice of dissolution on the firm. The firm alleged that the partner served the notice of dissolution with a view to impeding investigation of his transactions and inflicting damage on the partnership. The defence stated it would not contend that the notices were served with no such view. There was accordingly an admission that the notices were served mala fide with the intention inter alia of inhibiting investigation of breaches of trust to which Mr Bingham (i.e. the partner under investigation) was knowingly a party. It was held that :

"...on the admissions made by Mr Bingham, he served the notices of dissolution with intent to conceal his own fraud and such intent was itself fraudulent. As a result the notices of dissolution, even if otherwise effective, are of no effect."

No serious question to be tried on fraud

23. The partnership in that case was one of a fixed term. In my view whether the opinion of the Master of the Rolls was expressed by way of obiter dictum or not, clearly the principle enunciated must be a valid one. However, in the present case, it is clear that Mr Yung had failed to show that the Notice is an instrument of fraud. In my view, there really is no serious question to be tried on this issue. Mr Yung was aware that Mr Lam had bought premises of his own. He was aware that Mr Lam's wife had started a noodle factory. When he came to the knowledge that customers of Kam Tap had been diverted to the new factory, he went so far as to ask Mr Lam to sign an agreement in which Mr Lam had to pay a sum of $100,000 for each customer that had been taken away. There were negotiations then about who should take over the interest of the other partner. After the negotiation broke down, the Notice was served by Mr Lam. On these facts, I just cannot see how it can be said that the Notice is not valid by reason of fraud.

24. Mr Lam disputed that he had taken away the customers of Kam Tap. He said that Mr Yung's case is built on suspicion. Of the 120 to 130 customers of Kam Tap, Mr Yung only alleged 19 customers had been taken away. Mr Lam said that he had ascertained from these customers that they chose not to use Kam Tap because of the quality of the product.

25. In my view it is not necessary to resolve the issue whether Mr Lam had in fact taken away the customers of Kam Tap at this stage of the proceedings. If he indeed had done so, arguably this is not a case where irreparable damage would be done to the partnership. The partnership is a noodle factory, there was no question of trade secrets involved. Mr Yung insisted that he could rely on the compensation of $100,000 per customer that had been agreed between the parties as a basis of calculating the loss. He was also able to quantify some of the loss of business since the new factory commenced. This is a case where two partners had fallen out from each other and one of them had exercised his right to dissolve the partnership by serving the Notice. In my view, there is no serious question to be tried on this issue.

Specific performance of a partnership agreement

26. This is a partnership which consists of two partners. It is a small operation and it obviously requires the co-operation of the two partners. They have now fallen out from each other and to grant an injunction restraining Mr Lam from dissolving the partnership will tantamount to ordering specific performance of the terms of the partnership agreement. It has long been an established rule that the Court would not order the specific performance of an agreement for a partnership : para.23-43 Lindley & Banks.

27. Mr Yung's Statement of Claim seeks an injunction to restrain Mr Lam from dissolving the partnership of Kam Tap without specifying any time limit. In the summons, Mr Yung is asking for an injunction to retrain Mr Lam from dissolving the partnership until further order. If the order is granted, and if the litigation is allowed to take its usual pace, a substantial period of time would have elapsed before the matter can finally be resolved. At the mean time, there will be two partners who would not be able to work together and are yet forced to stay together by virtue of the order. As Lord Lindley said in his work :

"...To compel an unwilling person to become a partner with another would not be conducive to the welfare of the latter, any more than to compel a man to marry a woman he did not like would be for the benefit of the lady."

28. In the circumstances, I would not make an order restraining Mr Lam from dissolving the partnership.

Other order

29. As Mr Yung is not entitled to restrain Mr Lam from dissolving the partnership, his application to restrain Mr Lam from disclosing the Notice to other persons also falls by the way.

Diverting customers

30. As to Mr Yung's application to restrain Mr Lam from diverting the business of Kam Tap to Kam Fat, as I have already observed, Mr Lam is disputing that he had diverted the customers. However, Mr Lam, through Counsel, is prepared to give an undertaking not to approach Kam Tap's customers for three months after 20th October 1999 (i.e. the date of the service of the injunction) so as "to neutralize Mr Yung's allegation that he had since September 1999 solicited Kam Tap's clients". This undertaking was given on the condition that the partnership was dissolved according to the Notice.

31. The question whether the partnership had in fact been dissolved by the Notice is not an issue that I can determine today. Although Mr Yung's case on the Notice is based on the issue of fraud, I do not find any admission by Mr Yung that the Notice is otherwise a valid one and had terminated the partnership.

32. Although in my view the loss of customers of the partnership can be quantified, I am minded to grant an injunction to restrain Mr Lam from dealing with the customers of the partnership so as to preserve the assets of the partnership until the determination on the issue of dissolution. In view of the undertaking given by Mr Lam, it is, however, not necessary for me to make such an order. If Mr Lam insists that the undertaking is given on the condition that I should grant his application for injunction, then I would order that Mr Lam be restrained from dealing with the clients of Kam Tap until trial.

Delivery of accounts

33. Mr Yung asks Mr Lam to deliver the accounts of the partnership to him. There is no factual basis for such an order. According to Mr Yung, his wife had been looking after the accounts of the partnership and he had been able to work out the approximate loss of business in the past few months. He is not entitled to this relief.

Mr Lam's cross-claims

34. As to Mr Lam's cross-claims, he is clearly entitled to an injunction to restrain Mr Yung from representing to others that he, i.e. Mr Lam had retired from Kam Tap. Mr Yung accepts that there was never any agreement regarding Mr Lam's retirement.

35. Mr Lam is also seeking an injunction to restrain Mr Yung from carrying on the partnership business except for the purpose of winding-up its affairs. As I have indicated earlier, whether the partnership had in fact been dissolved or not is a matter that has to be resolved. I am not prepared at this stage to grant the injunction asked by Mr Lam. Too drastic a consequence will follow if the assets of the partnership are required to be realized at this stage when the ultimate issue has not been resolved.

Order for speedy trial

36. Instead, I will order a speedy trial for these two actions. The Statement of Claim had already been served and filed by Mr Yung. Mr Lam is required to file the Defence and Counterclaim within seven days. The parties are required to serve their lists of documents within seven days of the service of the Reply. Inspection is to take place within seven days after discovery. The case is then to be set down by either party within seven days of the inspection. The estimated length of this hearing is three days.

Orders

37. The orders obtained by Mr Yung are discharged. Upon Mr Lam's undertaking, I will make no order on Mr Yung's application. I give Mr Lam liberty to apply to deal with the issue of his undertaking.

38. On Mr Lam's application, I will order that Mr Yung be restrained until trial from representing to third parties that Mr Lam had retired from Kam Tap.

Costs

39. Mr Lam is to have the costs nisi of his application to discharge the injunctions. He is also to have costs nisi of Mr Yung's application. As for his own application, the order nisi is that Mr Lam is to have his costs in the cause.