DS CHEUNG & CO (A FIRM) v. FONG LEUNG KAI

HCA 2988/2016
& HCA 3062/2016

[2022] HKCFI 1048

HCA 2988/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2988 OF 2016

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HCA 3062/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3062 OF 2016

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________________________

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J U D G M E N T

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INTRODUCTION

1.  This is the trial of two actions in which the two protagonists are Mr Doi Shu Cheung (“DS”)  and Mr David Fong (“David”).  They are both practising solicitors in Hong Kong.

2.  DS established the law firm, DS Cheung & Co (“the firm”), in 1995 and has at all times been its sole proprietor.  DSC (Corporate Services)  Limited (“the service company”)  is a company owned by him and provides service to the firm.

3.  David joined the firm in September 1995, shortly after he qualified as a solicitor.  He became a salaried partner in December 2001.  He was with the firm until 30 June 2016. He founded his own firm, David Fong & Co, on 1 July 2016.

4.  The firm and David Fong & Co initially operated in association with each other.  But that arrangement ceased shortly afterwards.  David’s area of practice is corporate finance.

5.  The present dispute revolves round the dealings between DS and David in relation to the firm from around January 2005 to June 2016.  In gist, the dispute is about who was the true owner of the firm during this period of 11½ years (“the period in question”). 

6.  DS says that he was. 

7.  David says that based on an oral agreement reached in January 2005 between him, another salaried partner, Shirley Chui (“Shirley”), and DS, David and Shirley became the owners of the firm “in economic terms” to the exclusion of DS.  From January 2005 to April 2013, he and Shirley were the owners.  After Shirley left the firm in April 2013, David became the firm’s sole owner.  I shall refer to the alleged agreement, which forms the foundation of David’s case, as “the alleged agreement” below.

8.  If DS’s case is upheld, there is a separate dispute as to whether prior to his departure, David was in breach of his contractual duties, duties of fidelity and/or fiduciary duties by undertaking preparatory acts to set up his own firm while he was still employed by the firm.

9.  The two actions were commenced by the firm and David respectively in November 2016, ie a few months after David’s departure, when the two of them could not agree on the amount of the final payment due to him by the firm. 

10.  In HCA 2988/2016, the firm is the plaintiff and David the defendant.  The firm seeks a declaration that it owes no further sums to David and an account of profits arising from his wrongful preparatory acts.  By an order made on 5 May 2020, should the court find that David is liable to an account of profits, the accounting exercise should be conducted separately, and certain issues as defined in the order, including the issue of causation, are to be tried in that exercise. 

11.  In HCA 3062/2016, David is the plaintiff and DS and the service company the 1^st and 2^nd defendants.  David claims various proprietary reliefs on the basis that he was the true owner of the firm during the period in question.  His claims against DS and the service company are for the sums of $19,938,378.84 and up to $12,100,000, respectively.  David also mounts an alternative claim in the event that the court finds DS to be the true owner at the time.  Under his alternative case, David claims a sum of $4,732,684 against DS. 

12.  DS and the service company dispute all the claims.  However, if liability is established, the parties have, in the course of the trial, reached agreement on the quantum of the various heads of claims, save for the claim in relation to what is referred to in the pleadings as “the CNT Properties”.

13.  In this judgment, as their interests are aligned, where I refer to DS’s case or his evidence, that can be taken to mean the case or evidence of DS, the firm and the service company as a whole, save where the context requires otherwise.

14.  In the evidence are contemporaneous financial and business records of the firm relating to the period in question. In some instances, the records go to back to 1995 (when the firm was founded)  or 2001 (when David became a salaried partner).  The financial records include, most notably, financial statements, ledgers of accounts and internal payment requisitions and cheques in relation to bonus payments.  The business records include business registration certificates, employees’ insurance certificates, tenancy agreements in respect of the office premises, tax returns filed with the Inland Revenue, indemnities signed by DS in favour of salaried partners and minutes of partners’ meetings. 

15.  I would state at the outset that save for a few documents concerning payments to David in 2015 and 2016, the information and figures contained in the contemporaneous records are not in much dispute between the parties.  Their authenticity and accuracy is not under challenge.  Rather, each side has put forward different explanations as to why the financial and business records of the firm appeared in the way they did. 

16.  As an illustration, DS points to the minutes of partners’ meetings to demonstrate that he was the person in charge of the firm, giving instructions and directions to the salaried partners in the meetings.  The minutes, he says, are straightforward records which fully support his case.  On the other hand, David says that the minutes were not drafted in a very stringent manner.  DS’s instructions, as recorded there, were rarely followed up or implemented.  The fact is that DS was a powerless figurehead and David attended the meetings chaired by DS out of respect.

17.  Therefore, the task of the court is in a large part to evaluate which factual narrative more logically explains, and fits more closely with, the contemporaneous documents.  In my view, the inherent plausibility of the rival explanations is a key indicator of their truth.   

18.  The firm’s financial year is from 1 December to 30 November.  When the financial records are referred to below, as an example, “the financial year 2010/2011”, or simply “2010/2011”, refers to the year from 1 December 2010 to 30 November 2011.

19.  At the trial, at my request, parties compiled a table setting out the financial information of the firm from 2001/2002 to 2015/2016 (1^st quarter).  The information, which is laid out by reference to each financial year, includes, eg, the collected billings of the firm, the collected billings of David’s team, the collected billings of Shirley’s team, the remuneration received by David, and that received by Shirley.  Again, save for a few items which are not presently material, the information is not in dispute.  The parties’ cases may therefore be conveniently tested against the objective financial information of the firm over the years.  I shall refer to the table as “the agreed table” below.

20.  At the trial, DS himself gave evidence and called no other witness.  As stated in his witness statement, DS took the view that the documentary evidence supporting his case and rejecting David’s is overwhelming and more than sufficient to resolve the dispute.  Furthermore, he did not want to call any present or former salaried partners of the firm as witnesses so as not to burden them with testifying as they all have busy practices to run.  Many of them have maintained good relationship with him. 

21.  By contrast, apart from himself, David called a total of nine witnesses to testify for him.  Among the nine, the more prominent witness is Denise Kwok (“Denise”).  She is a former accountant of the firm.  She worked there from July 2011 to June 2016, directly reporting to David, among others.  She now works at David’s firm.  Her evidence is a commentary on the accounting records and documents of the firm, in particular in relation to DS’s withdrawal of monies out of the firm and his personal expenses charged to the firm over the years.

22.  The eight other witnesses are former staff of the firm who worked in David’s team.  Six of them now work at David’s firm.  They are Hermes Shin, Lee Li Li, Herman Lee, Wilson Chong, Chan Yeuk Hang and Louise Lo.  Two others, Stephen Tsui and Clare Chan, are presently with other law firms.  Lee Li Li is a company secretary and Chan Yeuk Hang a paralegal.  The rest are solicitors.  They have each made a short witness statement, which content is substantially similar.  In gist, they say that based on their personal observations and experiences, and from their points of view, they believed that David played the role of “managing partner” at the firm.  Their cross-examination was very brief. 

23.  Lastly, what is notable in David’s long list of witnesses is the absence of Shirley.  According to him, she was one of the three parties to the alleged agreement.  If the agreement was indeed reached, Shirley would be able to testify to its existence, its terms and its execution.  David explained in his witness statement that Shirley had declined his request to make a witness statement as she did not want to get involved in the action.  David expressly reserved the right to subpoena Shirley at trial.  In the end, she was not called. 

24.  In the course of David’s opening submissions, the absence of Shirley as a witness was discussed.  Mr William Wong, SC, who appeared with Mr Tom Ng for David, accepted that the burden of proving the alleged agreement lies with David.  In his closing submissions, however, he contended that no adverse inference can be drawn against David for not calling Shirley because David has adduced sufficient evidence in support of his case.  In the circumstances, even if an adverse inference is to be drawn against David, it should similarly be drawn against DS, as in light of David’s evidence, the evidential burden has shifted to DS and it is for DS to show that the alleged agreement did not exist.  

25.  At the trial, DS was represented by Mr Christopher Chain and Ms Tiffany Chan.

DS’S CASE

26.  DS’s case is fairly straightforward.  He says that he has at all times been the sole owner of the firm, both in name and in substance. 

Summary

27.  He denies that the alleged agreement existed. 

28.  In early 2005, there was indeed discussion among him, David and Shirley on the succession of the firm. He made an offer to the two of them to take over the firm from him.  But the offer was turned down. 

29.  After that, David and Shirley remained to be salaried partners and employees of the firm.  They were paid salaries and bonuses.  Initially, the firm did not have any formal bonus scheme and all the employees, including David and Shirley, were paid discretionary bonuses.  In other words, DS in his sole discretion decided the bonus amounts. In the financial year 2010/2011, DS implemented a formal scheme, which is referred to as “the DS Profit Sharing Scheme” in the pleadings.  In gist, as far as David was concerned, under the scheme, David was entitled to a total remuneration of up to 50% of his team’s billings for the financial year, after deducting the team’s aggregate base salary. 

30.  That was the full extent of David’s contractual entitlements arising out of his employment with the firm up to the time he left in June 2016.  At all times, he was an employee of the firm.  He did not own any part of the firm or any of its assets.

31.  DS says that his case is fully supported by the contemporaneous business and financial records of the firm.

The background

32.  Before establishing the firm, DS was a partner of a city firm.  When he left that firm in 1995, he was head of its Banking and China practices in Hong Kong. 

33.  DS hired David as the firm’s first assistant solicitor in 1995.  This was David’s second career.  He had a first career as a qualified accountant. 

34.  The firm grew rapidly over the years.  By 2001, it employed 11 assistant solicitors. 

35.  Having supervised, mentored and worked with David for over 20 years, DS would describe him as a competent, diligent and ambitious person.  On the other hand, despite a generally confident demeanour, DS considers, purely as a matter of his own opinion, that David had a deep-lying insecurity.  This was perhaps due to the fact that he was older than his peers.  He was 35 years old when he gained his qualification as a solicitor.  DS also observed that David had a bad habit of bad-mouthing his colleagues whilst bragging about himself. 

36.  Returning to DS, because of his earnings from the time he worked at the city firm and several years of running the firm, coupled with some reasonably successful investment decisions, by the late 1990’s and early 2000’s, he had reached a very comfortable financial position.  He disclosed a bank statement of a BVI company owned by him showing that in August 2003, the company held bonds in the value of about US$10 million. 

37.  DS therefore decided to start gradually stepping back from frontline practice and to promote salaried partners to handle the client work.  He would instead focus on his family, mentoring the firm’s employees, and his other interests.  Due to his comfortable financial position, he was happy to step back and share the success of the firm with its staff and employees. 

38.  It was against this background that David was promoted as a salaried partner in December 2001. He was the firm’s first salaried partner.  An employment contract dated 8 November 2001 was signed, which stated his position to be “Salaried Partner – Corporate Finance”.  Apart from his monthly salary, he was also “entitled to participate in any employee participation bonus scheme, which may be operated by the firm from time to time”.

The firm was not profitable in the financial years 2001/2002 to 2003/2004

39.  It is common ground that the firm was in a poor financial condition and operated at a net loss in the three financial years of 2001/2002, 2002/2003 and 2003/2004.  The business suffered from challenging economic conditions, including the SARS outbreak in Hong Kong in 2003.  As at 30 November 2004, its net asset value stood at about $670,000. 

40.  Notwithstanding the losses, DS refused to dismiss any staff as he did not want anyone to leave without a job in those difficult times.  He injected funds into the firm.  The financial statements show that DS injected a total sum of about $7.2 million during the three financial years.  (In the following financial year 2004/2005, DS injected a further net sum of about $719,000.)  He actively led the firm’s frontline practice, delaying his plans to step back. 

41.  The year of 2004/2005 saw the firm return to profitability, earning a net profit of about $751,000. 

The succession discussion in 2005

42.  As the firm became profitable under his leadership, DS had a discussion with David and Shirley in 2005 on succession of the firm. 

43.  He proposed to them that they would take over the firm from him.  He would become a consultant with his own office and secretary. 

44.  David and Shirley did not accept his proposal.  Neither of them was ready to take on the financial risks and personal liability exposure involved in owning and running the firm. 

45.  Both of them expressed their loyalty to DS as the firm’s sole proprietor and “boss”.  As recalled by DS, Shirley said to him at the time:

“唔好，咁樣唔啱嘅，老細，間嘢係你嘅，我地一齊搞好佢啦”

46.  Ultimately, there was no agreement reached between the three of them regarding the taking over of the firm.  The common consensus was that they would all work towards building it for the good of all the staff. 

47.  DS denies that the alleged agreement was ever reached. 

DS is the sole owner of the firm at all times

48.  DS’s case is simply that he is at all times the sole owner of the firm, both in form and in substance.  The other partners were all salaried partners during the period in question.  They were divided into teams according to the practice areas of corporate, litigation and conveyancing.  David and Shirley were in charge of the “Corp 1” and “Corp 2” teams respectively.

49.  After leading the firm through the tough years of 2002 to 2004, following his earlier plan, DS gradually took a step back from frontline practice.  He began assuming a typical managing partner role.  He did not frequently perform billable work for clients.  Instead, he was responsible for the overall supervision of the firm and its salaried parties, including mentoring lawyers, maintaining client relationships, and presenting himself as the face of the firm.  

50.  In around 2005, he promoted David as the partner in charge of finance and accounting.  As its finance partner, David had access to all financial information of the firm.

51.  DS contends that his case is fully reflected in the general administrative arrangements, the internal management and operational arrangements and the finance and accounting arrangements of the firm.  He has been the sole person who takes up various obligations and responsibilities of the firm, including vis-à-vis the Law Society, the Inland Revenue, the landlord of the office premises, the salaried partners and employees of the firm.  This is part and parcel of his role as its sole owner.

The general administrative arrangements

52.  In the firm’s filings with the Law Society from 1995 to the present, the firm is identified as a sole proprietorship with DS as the sole equity partner.

53.  According to section 8 of the Legal Practitioner Ordinance, Cap 159 and the Accountant’s Report Rules, Cap 159A, a law firm has a duty to file an accountant’s report with the Law Society each year setting out certain prescribed information.  In the accountant’s reports filed by the firm during the period in question, DS was stated to be the “sole proprietor” and David and Shirley, among others, “non-equity partners”.

54.  From 1995 to the present, the business registration status of the firm has been either “sole proprietor” or “individual”.  This is shown in the business registration certificates of the firm.

55.  In the financial statements prepared by the accountant from the financial year 1995/1996 to the present, the balance sheets were signed by DS as sole proprietor.  The financial statements covering the period in question are disclosed in the evidence, with the exception that for 2004/2005 only a one-page income statement is disclosed.  In the financial statements, DS signed against the following statement:

“I certify that to the best of my knowledge and belief the above accounts are true and correct.”

56.  DS arranged for the service company to enter into tenancy agreements for renting office premises for the firm.  DS alone acted as the personal guarantor in respect of its obligations and arranged for letters of guarantee to be issued by his bank.  Extracts of tenancy agreements from 2004 to 2018 are produced in the evidence.  Personal guarantees signed by DS over the years are also produced.  Letters of guarantee and subsequent letters of extension issued by UBS AG in relation to the tenancy agreements are also in the evidence.

The internal management and operational arrangements

57.  As the sole proprietor of the firm, DS is the employer of the its employees and personally shoulders all the responsibilities as an employer.  This includes the taking out of employees’ compensation insurance for all the firm’s staff.  In the evidence are notices of insurance taken out in the name of the firm over the years.  In respect of the period in question, the notices were all signed by DS and his position was stated to be “Sole Proprietor”. 

58.  As part of his duties as employer, DS signed off on the employer’s tax returns.  In the evidence, there are the employer’s returns filed by the firm with the Inland Revenue Department in respect of David from the tax year 2001/2002 to 2016/2017.  In these returns, DS signed on behalf of the firm and his designation was stated to be “Sole Proprietor”.  The income received by David included these three items: “Salary/Wages”, “Commission/Fees” and “Bonus”.

59.  A guarantee and indemnity agreement was signed between DS and each of the salaried partners of the firm, including David.  In that agreement, DS provided a full indemnity to each salaried partner for all liabilities of the firm.  This arrangement made DS the sole person ultimately responsible and accountable for all the firm’s debts and liabilities.

60.  When David was promoted as a salaried partner, DS entered into the Guarantee and Indemnity Agreement with him dated 1 December 2001.  This is produced in the evidence.  In these actions, DS also disclosed a number of such agreements signed with different salaried partners during the period in question.  They include one dated 15 February 2005, which was very shortly after when David says the alleged agreement was reached. 

61.  I reproduce parts of the agreement below:

“RECITAL:

(A)  DSC [ie DS] practices law under the name D. S. Cheung & Co (“the Firm”)  at 1910-1913 Hutchison House, 10 Harcourt Road, Central, Hong Kong.

(B)  [name omitted] is to be admitted as a non-equity partner of the Firm with effect from 15 February 2005.

…

IT IS HEREBY AGREED AS FOLLOWS:

1. DEFINITIONS AND INTERPRETATION

1.1 In this Guarantee and Indemnity unless the context otherwise requires words importing and references to:

(A)  “equity partner” means DSC and/or any future partner who shares in the profits and losses of the Firm otherwise than the Firm’s Participation Scheme in the capacity of non-equity partner;

…

(C)  “secured moneys” means all amounts which at any time for any reason or circumstance in connection with any Guarantee and Indemnity or arrangement between the Firm and any other person or any transaction entered into or undertaken by the Firm or equity partners, and whether at law, in equity, under statute or otherwise (and whether or not of a type within the contemplation of the parties at the date of this Guarantee and Indemnity)  are payable, are owing but not currently payable, are contingently owing, or remain unpaid by the Firm or the equity partners on any account or liability whatsoever except amounts payable or owing to any person to the extent to which the same arise from a breach of the terms of appointment of [name omitted] or the law or any negligent act or omission of [name omitted] or any member of the staff of the Firm acting under his supervision and control.

…

3. GUARANTEE

DSC irrevocably and unconditionally guarantees payment of the secured moneys when they are due.

4. INDEMNITY

4.1 DSC, as a separate and additional liability, irrevocably and unconditionally indemnifies [name omitted] against any loss she may suffer by reason of being called upon to pay any liability of the Firm or any equity partner, provided that such loss has not been caused by any negligent act or omission on the part of [name omitted] or any member of the staff of the Firm acting under her supervision and control.

…

7. ADMISSION OF EQUITY PARTNER

  DSC undertakes to procure the execution of an identical guarantee and indemnity in favour of [name omitted] by every person who is admitted as an equity partner of the Firm.”

62.  It is notable that the definition of “equity partner” does not make any reference to either David or Shirley.  It is also not in dispute that neither of them signed any similar guarantee and indemnity agreement with any of the salaried partners of the firm during the period in question.

The finance and accounting arrangements

63.  Salaried partners are paid salaries and bonuses.  In addition, they are paid commissions for referring conveyancing cases to the firm. 

64.  As a matter of accounting treatment, on the firm’s ledger, each salaried partner would have:

(1)  a salary account – this would include bonus payments;

(2)  an employer’s contribution MPF account;

(3)  an employee’s contribution MPF account; and

(4)  a commission account recording commissions received for conveyancing referrals.

65.  In addition to the above, a current account could be opened between the firm and the salaried partner to record any other transfer of monies between them.  But in practice this was almost never necessary.  In fact, only David had a current account with the firm.  In the 15½ years when David was a salaried partner, however, there were only a total of four entries in his current account, which dated back to before the time of the alleged agreement.

66.  Each salaried partner also had a miscellaneous client account with the firm.  This is to handle miscellaneous payments and expenses in relation to his clients and professional practice, over which the salaried partner would have some discretion.

67.  The parts of the firm’s ledger concerning David are disclosed.  They show his salary account, MPF accounts, commission account, current account and miscellaneous client account.

68.  The above accounting arrangement applicable to salaried partners is to be contrasted with the accounting treatment which applies to DS.

69.  On the firm’s ledger, DS was not an employee.  He did not have any salary account or MPF account.  He did not draw any salary.  He had a commission account. But there have only been two entries during the period in question. 

70.  Rather, as the sole equity partner of the firm, he had three accounts with extensive entries recording multiple deposits and withdrawals of funds between him and the firm over the years:

(1)  an “equity” account;

(2)  an “equity-Cheung DS” account; and

(3)  a current account.

71.  Practically, there is no real distinction between the three accounts during the period in question.  There are frequent adjustments and reallocation of funds among the three accounts. DS frequently injected and withdrew funds from the firm.  (It is not in dispute that from 2013 onwards, the withdrawals became much reduced.  The reason for that is set out below.) 

72.  It was unnecessary to clearly distinguish between the use of the three accounts as DS is all along the sole equity partner.  In theory, if another equity partner was brought in, then the “equity” account would become the general equity account representing the shared equity between partners.  The “equity-Cheung DS” account would be DS’s specific equity account and used to record his injection of funding and allocation or withdrawal of his share of the firm’s profits.  Other miscellaneous expenses would be recorded in his current account only.

73.  Separately, DS had a miscellaneous client account with the firm.  As the boss of the firm, DS had the freedom to use that account much more expansively.  He took advantage of the firm’s clerical and accounting infrastructure and booked his personal expenses into his miscellaneous client account.  This included school fees for his children, cable television and internet fees, property management fees and utility payments.  This way, he would not have to maintain a separate set of books, subject to later adjustment and write-offs as appropriate. 

74.  DS also made use of the clerical and accounting infrastructure for some of his corporate vehicles which had client accounts with the firm. 

75.  In addition, as the owner and boss of the firm, he arranged for it to employ, among others, his parents as clerks of the firm.  Their income tax returns were filed by the firm as employer.

76.  The firm’s ledger showing DS’s accounts and the internal records showing that his personal expenses were charged and subsequently written off from the accounts are disclosed by him in these actions.  DS stresses that his extensive use of the clerical and accounting structure in relation to his personal expenses was done in an open manner.  There was a complete record trail in the firm’s records.  This fully reflects that he has been the sole owner of the firm.

77.  In cross-examination, DS was asked a series of questions about his practice of charging various personal expenses to the firm, as revealed in the ledger.  To these questions, he asserted his right against self-incrimination.

78.  The arrangement on the payment of bonuses to salaried partners also reflects that DS has been the true owner of the firm. 

79.  All bonus cheques, including those for David, Shirley and all salaried partners, were presented to DS for final approval and signed by DS.  There was one exception when in December 2013, David signed the bonus cheques on behalf of DS as DS was away on holiday.

80.  The evidence includes tables compiled for each of the financial years from 2006/2007 to 2008/2009 setting out the salaries and bonuses for all salaried partners, fee-earners, and administrative staff.  At the bottom of these tables, DS signed under the words “Approved by”.  Also disclosed by DS are documents in relation to the bonus payments for subsequent financial years.  They include payment requisitions, which are internal standard form documents prepared by the firm’s accounting staff and presented to DS for approving the bonus payment specified in the form.  DS also produces copies of some cheques signed by him in relation to the bonus payments.

81.  DS emphasises that his signing of the payment requisitions and the bonus cheques over the years fully support his case that he has all along been the true owner of the firm.  If David and Shirley had been the true owners, there would have been no reason why DS was still the person approving the bonus payments.

82.  DS further relies on the signing arrangements for the firm’s bank accounts in support of his case.  From 2000 to 2013, DS was the only bank signatory with unlimited single signing authority. It was only later on in 2013 when David and Hermann Leung, another salaried partner, were added as bank signatories with the power to sign singly.  That was for convenience and ease of administration only.  

83.  DS asks rhetorically – if David and Shirley had been the owners of the firm “in economic terms” to his exclusion after January 2005, why would DS have been allowed to continue operating the firm’s bank accounts with single signing authority, when the firm’s monies were no longer his?

The partners’ meetings

84.  Lastly, DS refers to the partners’ meetings held over the years in support of his case. 

85.  As part of his supervision of the firm, from about 2004/2005 and up to the present, he has called and chaired partners’ meetings between him and the salaried partners.  The purpose is to allow the salaried partners to report to him on the performance and work progress of their teams, and to seek advice and guidance from him.  DS would explain to the salaried partners the firm’s overall direction.  He would listen to the views of the salaried partners, but ultimate decisions were made at his sole discretion.

86.  The partners’ meetings were therefore all structured around his schedule.  A partners’ meeting would not be held without him.  He was present in person at every single meeting.  On the other hand, the salaried partners would attend subject to their availability. 

87.  Prior to 2011, no minutes were kept for the partners’ meetings save for a few exceptions.  In late July 2011, out of his desire for the firm to keep better written records, DS decided that the firm should implement a policy of keeping minutes.  Attending salaried partners would take turns to prepare minutes.  This practice continued for about 15 months until November 2012. 

88.  In these actions, DS produces minutes of the 41 meetings held during those 15 months.  These go to support that he was present in all of the meetings while David and Shirley were absent in some of them.  They also show that DS was never the one who took minutes. Instead, David and Shirley had prepared minutes for some of these meetings.  At almost each of the meetings, the salaried partners would deliver reports on their work progress.  DS did not have to do so.

89.  As an illustration, I quote below extracts of some of the minutes which were referred to in the cross-examination.

90.  The minutes of the partners’ meeting held on 8 August 2011 read:

“Report on Work

David, Nicholas, Hermann and Edwin reported on the work of their respective teams.

…

Firm’s Management

DS decided on the following allocation of management work:

Partners	Responsibility
David	Finance
Shirley	Marketing
Hermann	Human Resources
Edwin	File Management

-  If any area overlapped with others, consult each other.

-  For marketing, DS suggested gatherings among various clients/partners.”

91.  The minutes of the partners’ meeting held on 19 September 2011 included the following:

“2. FEES AND BUSINESS DEVELOPMENT

2.1  DS shared his views that IPO works would be getting more competitive.  DS suggested that it was time to deploy more time and attention to develop works on compliance and annual retainer with corporate clients, in particular those clients we acted for them in the IPO.”

92.  DS says that these minutes reflect on their face that he was the person in charge of the firm, chairing the meetings, giving instructions, and providing guidance to the salaried partners.

93.  In summary, DS contends that when one looks at the administration and operation of the firm, one would readily conclude that he has all along been the sole proprietor and sole equity partner of the firm, and hence its true owner.

The DS Profit Sharing Scheme

94.  Prior to 2010/2011, the firm did not have any formal bonus arrangement.  The bonuses were entirely discretionary.  As the sole equity partner, DS had the sole discretion to decide how much bonus to pay to each salaried partner each year.

95.  From 2010/2011 onwards, at David and Shirley’s recommendation, DS caused the firm to implement the DS Profit Sharing Scheme for salaried partners of the corporate teams and the litigation team. 

96.  Broadly speaking, the salaried partner in charge of each team would be entitled to a total remuneration of up to 50% of the team’s collected billings for the year.  That would be inclusive of the team’s aggregate base salary (subject to minor adjustments).  In other words, his bonus entitlement would be the difference between 50% of the team’s collected billing and its aggregate base salary.  It would be up to the salaried partner to decide whether to share his bonus with members in his team.

97.  Due to the different nature of practice, the conveyancing team was subject to its own bonus arrangement based on commission.  That arrangement did not form part of the DS Profit Sharing Scheme.

98.  DS refers to the amounts of the collected billings of, and the bonuses paid to, each team for the six financial years commencing from 2010/2011 and highlights that the figures are fully consistent with the DS Profit Sharing Scheme, with three isolated exceptions. 

(1)  The first exception relates to 2011/2012.  Because of the good performance of David’s team and Shirley’s team, the percentage of 55% was adopted for the two teams instead of 50%.  On top of that, a further one-off sum of $413,621 was given to each of David and Shirley.

(2)  The second exception concerns David’s team in respect of 2014/2015 and for the 1^st quarter of 2015/2016 where the percentage of 70% was adopted instead of 50%.  However, DS says that the higher percentage had not been authorised by him.  David had abused his position as the finance partner and wrongly instructed the accounting staff to allocate extra bonuses to him.  I shall come back to this issue later.

(3)  For 2015/2016, to recognise the loyalty of a litigation partner, the percentage of 60% was adopted instead of 50%.

99.  Set out below are the bonuses paid to David’s team, which DS says are in accordance with the DS Profit Sharing Scheme.  This is shown by the fact that the figures in column (C)  match with those in column (D), save where the exceptions concerning David apply. The figures themselves are not disputed.

Financial year	(A) 50% of David’s team’s collected billings ($)	(B)  Aggregate base salary of David’s team ($)	(C) Bonus entitlement ($) [ie (A)  - (B)]	(D) Bonus actually paid to David’s team ($)
2010/2011	7,124,351	3,538,159	3,586,192	3,600,000
2011/2012	4,915,037	3,742,445	1,172,592 (the 55% exception)	1,172,591
2012/2013	4,574,492	3,077,409	1,497,083	1,496,884
2013/2014	6,913,187	4,744,097	2,169,090	2,169,090
2014/2015	9,210,356	4,536,454	4,673,902 (the 70% exception)	8,358,042
2015/2016 (1st quarter)	2,621,356	1,305,774	1,315,582 (the 70% exception)	2,364,123

The financial year 2010/2011

100.  Apart from the implementation of the DS Profit Sharing Scheme, two other matters of note happened in respect of the financial year 2010/2011.

101.  First, it was discovered that Ms Priscilla Leung, then the firm’s accountant, had been embezzling monies of the firm.  The incident was reported to the police. She was eventually convicted.

102.  As a result of her wrongdoing, the firm suffered a loss of about $6.9 million.  That amount was fully booked into DS’s current account under the ledger entry “Being reallocation of accounts – stolen by Leung May Ching” in November 2011.  In other words, DS solely bore the burden of the loss.  DS contends that if David and Shirley had been the owner of the firm “in economic terms”, the loss should have been borne by them instead of him.

103.  The second matter of note is that there was a confrontation between DS on the one hand and David and Shirley on the other in December 2011.

104.  In these actions, David accuses DS of withdrawing $8 million from the firm on 5 December 2011.  DS admits that he had withdrawn the sum but he says he was fully entitled to do so, as he was its sole proprietor and sole equity partner. 

105.  In fact, he withdrew that sum with the intention of using the money to partially finance his personal purchase of a commercial property, which could be used as office premises for the firm.  At the time, DS was searching for an appropriate property.

106.  After learning of the withdrawal of $8 million, David and Shirley confronted DS and complained about it.  As mere salaried partners, they did not have any entitlement to the firm’s monies.  However, they were complaining as they had concerns over whether there would be sufficient cash left with the firm to pay bonuses to salaried partners. 

107.  The bonus amounts had just been determined for 2010/2011, which was the first year the DS Profit Sharing Scheme was implemented.  In other words, the salaried partners had an entitlement to the bonuses as calculated under the scheme.

108.  DS explained that his intention was to personally purchase and invest in a commercial property which could be used as office premises for the firm.  With the succession planning idea in mind, DS offered to David and Shirley the opportunity to jointly purchase the property.

109.  However, both of them rejected the offer.  They stated that they wished to focus on their legal practice and did not want to be involved in DS’s personal property investments. 

110.  They maintained their complaint as to whether there would be sufficient funds left with the firm to pay bonuses and threatened to leave the firm if funds were not re-injected by DS.  In response to the complaint, DS arranged for $13 million of his own funds to be injected into the firm on 6 January 2012.

The purchase of the CNT properties in 2012

111.  The relationship between DS and David became strained after DS’s purchase of six office units and two car park spaces of CNT Tower in Wanchai (“the CNT properties”)  via the service company in 2012.

112.  Some time in 2012, DS came across the CNT properties.  He proceeded to purchase it through the service company as one of his personal investments.  He considered them to be suitable office premises for the firm.  This was one of the reasons he was attracted to buy them in the first place.

113.  The purchase price was $56,800,000.  The initial deposit was $2,840,000 and was paid on 3 September 2012.  DS withdrew a sum of that amount from the firm to pay it.  Later, on 19 December 2012, DS arranged for the sum to be paid back to the firm.

114.  The service company completed the purchase on 17 December 2012. 

115.  The purchase price and the related expenses were wholly funded by DS.  He made use of his own funds and withdrew monies from the firm to fund the purchase.  DS says that he was entitled to make use of the firm’s resources in relation to his personal investments as he was its sole owner.  The service company also took out a mortgage to finance the purchase.  The monthly mortgage repayments were $147,057.60.  The CNT properties were sold at $67,100,000 in May 2016.  Before its sale, DS was solely responsible for making the mortgage repayments, and paying the management fees and rates.

116.  DS admits that David was very unhappy about his purchase of the CNT properties.  In cross-examination, it was put to him that David took the view that DS had made use of the firm’s money, including David’s collected billings, to purchase his own personal property. DS agreed to that but stressed that it was only David’s own way of thinking. Any grievance which David had over the purchase was unjustified as DS was entitled to draw funds from the firm at any time for any purpose.  Nevertheless, David had since been complaining about the purchase of the CNT properties.  I will return to an offer made by DS to address David’s grievance below. 

Shirley left the firm in April 2013

117.  Shirley left the firm in April 2013.  There is a dispute as to why she left.

118.  DS’s case is that she left not because she had any grievance over the CNT properties or the alleged agreement.  At that time, she mentioned to DS that she wanted to try owning her own firm at the milestone age of 50.  She and her team parted ways with DS in wholly amicable circumstances. 

119.  When Shirley left the firm, the accounts between her and the firm were settled based on the DS Profit Sharing Scheme.

120.  There were two subsequent occasions when the firm collected long overdue fees from clients of her team and the fees were paid back to Shirley and her junior salaried partner in accordance with the DS Profit Sharing Scheme.  The first occasion was in January 2015 when the firm allocated 50% of the fee collected, in the sum of $57,400, to Shirley’s team.  The second occasion was in July 2016 when the firm collected $450,000 and allocated half of it to Shirley’s team.  Copies of the cheques paid to the two former employees are produced in the evidence.   Neither Shirley nor the junior salaried partner have ever expressed any dissatisfaction about the allocations.  That is, DS says, further proof that the DS Profit Sharing Scheme was in place, and it applied to all salaried partners, including Shirley and David.

After Shirley left the firm, a number of changes took place

121.  While she was with the firm, Shirley had been the star among the salaried partners, with her team being the highest earning team.  Her total remuneration far exceeded David’s from 2009/2010 onwards.  After she left, David’s team became the highest earning team.

122.  It is not in dispute that a number of changes took place after Shirley’s departure.  However, the parties have put forward different reasons for why the changes happened.

123.  First, it was arranged for David and another salaried partner, Hermann Leung, to be added as the firm’s bank signatories with unlimited signing authority.  DS’s case is that it was David and Hermann Leung who proposed that to be done for ease of administration.

124.  Secondly, his drawings from the firm were much reduced when compared with before.  DS voluntarily imposed a temporary limit on his own withdrawals from the firm, set at 50% of his own collected billings.  In cross-examination, he explained that at that time David requested him not to draw money from the firm so as to keep it in a good and stable financial condition.  He thought it was a good idea and agreed to it. 

125.  Thirdly, DS stopped charging his personal expenses to the firm.  In cross-examination, he said that he did so at the request of David.  At that time, he agreed with David that the firm should do things “the right way” and his personal expenses should be separated from the firm. 

126.  It was put to him that he acceded to David’s request because David was the true owner of the firm and had the power to make the request.  DS denied that was the reason.  He stressed that David could make a request to him but David had no right to impose it on him.  DS further elaborated that when running a business, one would need to listen to and respect the views of the employees and he would not act like a dictator. 

David’s persistent unhappiness

127.  From late 2012 onwards, David increasingly expressed unhappiness and grievances with his position at the firm.  He considered that he was a major contributor of the firm but was remunerated inadequately. 

128.  David was unhappy about DS being able to withdraw monies from the firm at any time and as he wished.  He was jealous of DS being able to afford to purchase the CNT properties as a personal investment.  He frequently made remarks that as the CNT properties were purchased with the firm’s money, he should also have a share.

129.  In early 2016, DS made an offer to make a one-off payment of $5 million to David, conditional upon him continuing to work for the firm.  In cross-examination, he explained that at that time the properties had not yet been sold but since David was so unhappy about the purchase, DS was prepared to sell the CNT properties to address his grievance.  The offer was not taken.  It is not apparent from DS’s case what exchange he and David had over this matter.

130.  In the meantime, in early 2016, DS approached David and had a discussion about the promotion of two assistant solicitors to salaried partners.  There was disagreement between them.  Eventually in the course of the conversation, David demanded that DS give him the firm. He took the view that as the highest billing partner, he should be the boss and the one in charge.  DS made clear to David that he would be happy for David to succeed him on the same terms as previously discussed, namely that DS would step down to be a consultant with his own office and secretary. 

131.  David rejected this, stating that he did not want DS around and DS had to retire and leave the firm completely.  He then threatened that if DS did not give him the firm, he would establish a new firm and said that all the employees would go with him because everybody believed that he was the true boss of the firm and DS would not survive without them. 

132.  DS rejected David’s threats.

133.  DS was dismayed to hear what David had said.  DS’s health had been frail for many years.  And perhaps David knew nothing of DS’s true financial means.  David therefore perceived that he could exploit DS’s moment of weakness as he saw it.  He was willing to throw away over 20 years of their relationship just to further his ambitions and seize power for himself.

The Preparatory Acts

134.  DS then learned that David had taken active and substantial preparatory steps since 2015 to set up his own firm.  These steps are generically referred to as “the Preparatory Acts” in DS’s pleadings.

135.  In the re-amended statement of claim in HCA 2988/2016, the firm pleads that these steps included David and his team making the application to the Law Society for the setting up of David Fong & Co, and searching for new office premises during work hours and without the firm’s consent.  No other specific acts or steps of David are pleaded.  However, it is stated that the firm reserves its right to plead further details of David’s breach of duties.

136.  In the re-amended reply in HCA 2988/2016, in rebuttal to David’s plea that the firm is not entitled to an account of profits, the firm pleads that had David not breached his duties, the firm would have continued to serve the clients and deal with the businesses intercepted by David. 

137.  That is the extent of the firm’s pleaded case on its cause of action based on the Preparatory Acts.

138.  Included in the evidence are a series of emails exchanged among David, Denise and members of David’s team between April to May 2016 in relation to the Law Society application and the lease of the new office premises.  These emails were sent on the firm’s email system during office hours on weekdays. 

139.  In fact, it is undisputed that these steps were taken during office hours.  David’s reply is that the Preparatory Acts were done with the consent of DS. 

140.  This all came to a head in early May 2016, when David told DS that he would be leaving the firm to form his own firm and he would be taking 15 solicitors and administrative staff with him.  He demanded that the firm waive the notice period for the departing staff. 

141.  By that time, DS had discussed the matter with Hermann Leung.  They agreed that in the best interests of clients, the firm should ensure a smooth transition, and avoid engaging David and escalating the dispute.  DS therefore agreed to David’s demand to waive the notice period.  He also agreed with David for the firm and David’s new firm to operate in association in the short term.  David would hold the title of “Consultant” with the firm.

142.  In the course of these discussions, DS made clear to David that all rights of the firm in relation to David engaging in the Preparatory Acts were expressly reserved.

143.  David left the firm on 30 June 2016.  His new firm commenced operation on the following day.

144.  Just shortly before that, on 24 June 2016, the firm received a mass of letters from David’s clients, terminating their retainers with the firm.

145.  DS says that David took away with him nine IPO projects, six of which proceeded to successful listing.  Had David not breached his fiduciary duties, the firm would have continued to earn professional fees on these projects.

146.  In the circumstances, David was in breach of his contractual duties, duties of loyalty and/or fiduciary duties to the firm and is liable to account for the profits obtained as a result.

Discovery of unauthorised bonuses taken by David

147.  It is part of DS’s case that he came to discover that unauthorised bonuses were paid to David for 2014/2015 and the 1^st quarter of 2015/2016.  These are referred to as “the Unauthorised Allocation” in his pleadings.

148.  In early May 2016, after being informed by David that he would be leaving, DS scrutinised the draft financial statements for the previous financial year of 2014/2015 carefully. He noticed that the salaries figure was very high when compared to the professional fees charged during the year.  The salaries figure was about $23.13 million when the professional fees amounted to about $29.68 million.

149.  DS then sought out Denise to ask about the high salary figure.  It was only then for the first time that DS learned that the ratio of 70% was applied to calculate David’s bonuses for that year, as opposed to the ratio of 50% which should have been used under the DS Profit Sharing Scheme.

150.  As pleaded, the Unauthorised Allocation amounted to $4,732,681.  This sum represents the difference between the bonus which David actually received, ie with the 70% ratio adopted, and the bonus which he was entitled to receive under the DS Profit Sharing Scheme, adopting the 50% ratio.

151.  In this period, the bonuses were paid quarterly.  For each bonus payment, Denise would prepare a payment requisition form together with the corresponding cheque for DS to approve and sign.  It is not in dispute that DS did sign on them each time. 

152.  What happened was that Denise would prepare these documents under David’s supervision.  She would hand them to DS’s secretary who would then pass them on to DS for signature.  Neither David nor Denise were present when DS signed them.  David never spoke to DS, discussed with him, or specifically drew his attention to the higher percentage of 70% adopted in these bonus payments.  When DS signed, he was not aware that the bonuses were calculated on this basis.

153.  In his witness statement, he said:

“The fact that I signed off on the requisition requests and cheques for the bonus payments including the Unauthorized Allocations to [David] does not mean I agreed to them.”

154.  He further explained that David had been appointed as the finance partner, given his accounting background and seniority within the firm.  In the circumstances, he trusted that David had ensured anything given to him to sign by the accounting staff would be correct.

155.  In the evidence are copies of six sets of payment requisitions and cheques in relation to the bonus payments to David in respect of the 15-month period.  On their face, the documents make no reference to the 70% ratio.  They simply referred to the stated amounts to be bonuses for the respective periods.

156.  DS’s case is that David was not entitled to the Unauthorised Allocation.  They were based on the ratio of 70%.  He had not authorised this ratio before.  When he signed the documents, he was not aware that the unauthorised ratio was adopted.  He never consented to it.  By instructing the accounting staff to allocate bonuses to him based on the unauthorised ratio of 70%, David had abused his position as the finance partner of the firm and received bonuses in excess of his contractual entitlements.

After David’s departure

157.  In about July or August 2016, David went to meet DS with three pieces of paper.  Each contained a table setting out the calculation of his outstanding bonus entitlement, ie for the last four months of his employment with the firm.  The difference between the three tables is that his entitlement was calculated adopting three different ratios of 50%, 60% and 70%.  He went through the three tables with DS for his consideration.  I shall refer to the three tables as “David’s three tables”.

158.  DS contends that David’s three tables show precisely that there was never any agreement between him and David that he would be entitled to bonus at an exceptional ratio of 70%.

159.  The firm issued two cheques dated 2 August 2016 and 11 August 2016 to settle David’s entitlement under the DS Profit Sharing Scheme, with the amount of the Unauthorised Allocation deducted.   With these two cheque payments, DS says that the firm has paid all the contractual entitlements due to David arising out of his employment.    

160.  In the premises, the firm owes no further sums to him.  In HCA 2988/2016, the firm seeks a declaration to that effect.

161.  To complete DS’s case, I reproduce below extracts of correspondence between DS and David in early September 2016. They were arguing about the amount of David’s final payment.  The extracts show the rival stances adopted by the two of them and their respective reasoning.

162.  In his letter dated 1 September 2016, David demanded DS to pay back to him the Unauthorised Allocation.  He wrote:

“It is apparent that I was the most profitable partner generated nearly 64% of the firm’s total collected billings for the financial year ended 30 November 2015. In fact, most of the billings in other departments were introduced by me.

How much was your collected billings for the same period?

While there was nothing in writing between us on the actual profit sharing ratio, it was orally agreed between us and by custom that I was entitled to 70% of my contribution to the firm. Out of my collection, I had to be responsible for my team members’ salaries and bonuses.”

163.  By letter dated the following day, DS replied that it was not in dispute that David was the most profitable partner of the firm but it did not mean that DS agreed to him taking 70% of the billings.  DS wrote:

“The fact that you were the most profitable partner of the firm last year is not in dispute. In fact I have said to you many times how happy I am for you that your practice had grown so well.

…

I am a sole proprietor and you were a salaried partner.  I have not agreed with you that you can share more than other partners.  You know very well that due to my illness it was difficult for me to work full time, and you decided to take advantage of me by increasing your cut to 70% to the detriment of other partners and the firm, that does not mean I agreed to it.  My billings and collections rise and fall, like yours.”

164.  By letter dated 8 September 2016, David retorted that the billing records in respect of the Unauthorised Allocation had been discussed and agreed with DS.  He reiterated his unhappiness concerning the CNT properties and complained how that purchase had prejudiced the interests of him and Shirley:

165.  Lastly, DS replied by letter dated 22 September 2016, denying that he had ever agreed to an increased percentage for David’s bonus for 2014/2015 and the 1^st quarter of 2015/2016.  DS stressed that he bore all the risks of the firm.  In fact, he had signed a deed of indemnity in favour of David.  He asked rhetorically – should David be entitled to all the profits when he was bearing no risks of the firm? 

“So the facts are very clear. Ever since this firm established a participation scheme for salaried partners every single bonus payment to each partner’s team was made on the basis of a 50% sharing. The only exception was in the financial year 2012, and I agreed to that extra payment. You abused your position as finance partner when you decided to leave the firm and just hoped to take all cash of the firm and all productive staff of the firm with you. …

I deny ever agreeing to an increased percentage and you will be put to strict proof of that. As I said had you stayed I am easy with money but since you left with most of the firm’s professional and support staff you will only be given what you are legally entitled, which is 50%.

…

You were a salaried partner of the firm, you were employed by the firm, there was no partnership between you and I at all.  While I respected and supported you all risks of the firm were and still are borne by me.  You had no risk whatsoever as you have a deed of indemnity from me (see attached).  Are you saying you bear no risks, take all profits and were a partner of this firm?”

The amendment to DS’s pleadings

166.  Before leaving DS’s case, I should out set out here one amendment to his pleading in HCA 2988/2016. 

167.  In the original statement of claim filed in January 2017, ie shortly after the commencement of the action, the firm pleaded an agreement reached in 2005 (“DS’s original plea”):

“(1)  Until November 2005, there was no Plaintiff’s Participation Scheme in place and bonuses were distributed by the Plaintiff at its discretion.

(2)  In or around 2005, following several discussions in DS Cheung’s office (the dates of which cannot be recalled now), between DS Cheung, the Defendant and Shirley Chui, (then another salaried partner in charge of the other team in the Corporate Finance Department), a proposal was made by the Defendant to the Plaintiff and an agreement (the “Agreement”)  was reached between the Plaintiff, the Defendant and Shirley Chui that each of the Defendant and Shirley Chui and each other salaried partner of the firm, on a team basis, shall be entitled to 50% of the collected fees of respective team after deductions of the basic salaries and bonus of the partners and solicitors of the team and that this would be the firm’s profit Participation Scheme.”

168.  Hence, in that plea, the firm accepted that there was indeed an agreement reached between DS, David and Shirley in 2005.  The content was however entirely different from the alleged agreement.  In fact, the content appeared to be the same as the DS Profit Sharing Scheme, except for the year.

169.  The statement of claim was amended in December 2017.  The entire document was crossed out and replaced wholesale.  DS’s original plea was removed. 

170.  In his submissions, Mr Wong set much store by DS’s original plea.  Relying on it, he submitted that even on DS’s own case, there was an agreement reached between DS, David and Shirley in 2005. Accordingly, it must be treated as common ground that an agreement existed.  The only dispute is what was agreed then. 

171.  In response, Mr Chain contended that DS’s original plea was obviously a bona fide mistake about the commencement date of the DS Profit Sharing Scheme.  In fact, in cross-examination, when asked about this, DS said that he could not recall precisely when the DS Profit Sharing Scheme started.  He only recalled that it had been in place for some time.  When making the original plea and saying that there was a verbal agreement in 2005 that the salaried partners could share 50% of their collected billings, he was trying to recall the year by reference to the general events happening to him at the time (eg he recalled that 2005 was the year when the firm returned to profit).  Later, from the firm’s records, he deduced that the scheme in fact started in 2011, not 2005. 

DAVID’S CASE

172.  David obtained his degree in social sciences in 1985.  After a first job, he joined Price Waterhouse and acquired his qualification as a certified public accountant.  He built up personal relationship with colleagues there who later became partners or directors of accountant firms.  Meanwhile, he studied law part-time.  He was admitted as a solicitor in 1995.  He wanted to join a firm which would allow him to develop his practice in the corporate and commercial area, given his CPA background.

173.  He eventually joined the firm, which was at that time newly founded.  During the first few years, David worked under the direct supervision of DS, serving his clients.  At that time, David considered that DS was an outstanding lawyer. 

174.  To David, DS was like a mentor, who could give him guidance on his corporate practice because he had entered the field several years ahead of him.  It was DS who gave him the opportunities and training and he was the first one to be promoted as a salaried partner of the firm.  He was grateful to DS for all these.

175.  As a small firm, issues were often resolved and decisions made by direct verbal conversations between DS and David, without any documentation.  The two of them were therefore accustomed to making important decisions verbally.  In any event, in David’s impression, DS was a respectable solicitor and a person who loved to emphasise integrity and who would not go back on his words.  That is why David was happy to rely on the verbal promises and representations made by DS.

The alleged agreement

176.  It is not in dispute that from 2002 to 2004, the firm was not in a good shape financially.  DS contributed substantial sums to sustain the firm.  After 2004, DS was without the means or was simply unwilling to further finance and support the firm. Gradually, the clients of David and Shirley became the major source of revenue.

177.  It is against this background that in 2005, the alleged agreement was reached.  

178.  In a meeting, DS told David and Shirley that he did not want to inject any more money into the firm.  He asked whether they wished to own the firm.  He offered to step down and David and Shirley would stay on to run and manage the firm so that the firm could survive without DS’s financial support.  The firm would be owned by them “in economic terms, in the sense that after meeting all the operating expenses of [the firm], they can keep all their collected billings/profits, and they do not need to share any of those billings/profits with DS” (quoted from the re-re-re-amended defence in HCA 2988/2016). 

179.  In his supplemental witness statement, David distinctly recalled this was what DS said to them during the meeting:

“間Firm係你地嘅，你地賺到錢唔駛分錢俾我”

180.  David and Shirley accepted the offer straight away at the meeting as they both considered that they had built up their own client base which could support the survival of the firm. The alleged agreement was formed.  The meeting lasted no more than 30 minutes.

181.  David was confident in taking up the offer because he was able to survive the financial crisis.  During the loss-making years, David was still able to have IPO projects introduced to him by former colleagues at his former accounting firm.  Both he and Shirley considered that the alleged agreement was an excellent opportunity for them to build up their own business. 

182.  Shortly after the meeting, David and Shirley had a discussion about the implementation of the alleged agreement.  They wanted to have either DS transfer the sole proprietorship to them with him becoming a consultant or retiring, or the business registration of the firm be changed into a partnership by adding their names.

183.  They therefore had a further meeting with DS a few days later to propose the same.  At that meeting, DS clarified that the firm should remain as a sole proprietor.  He wondered why David and Shirley were concerned about this as the firm was a small one with only three partners.  DS then elevated the matter to one of trust and confidence.  He reassured them that he would honour the alleged agreement.  Out of mutual trust and confidence, David agreed to the arrangement.

184.  After the meeting, David and Shirley discussed the matter again.  They both believed that the main reason for DS to wish to maintain the firm in his sole proprietorship was to keep the firm as his “flagship” of his personal business.

185.  Out of trust, David and Shirley did not further request DS to reduce the alleged agreement to writing or to remove their signing limit in the firm’s office account.  Between the two of them, it was agreed that the firm should be “owned” by them in equal shares and that the sharing of profits should follow their performance.

186.  As a result, although DS would continue to be the sole proprietor of the firm to the outside world, in substance it was owned by David and Shirley in economic terms as all the outgoings and overheads would be borne by them and they would be entitled to the billings and profits, to the exclusion of DS.

The firm being DS’s “flagship”

187.  In his witness statement, David elaborated on this “flagship” concept.

(1)  DS had long switched his focus from legal practice to his personal business.  To him, the primary purpose of the firm was not to generate profits as a law firm, but was for image building and to serve as a “flagship” or brand name of his personal business.

(2)  In fact, he did not work as a lawyer at all.  He spent most of his time on his business venture.  However, to maintain his “flagship”, he had to inject capital into the firm.

(3)  Hence, even before the alleged agreement, the firm had been managed by David and Shirley.  DS’s role was minimal, except that he had to inject capital into it to ensure its survival as DS’s “flagship”.

188.  DS would in fact benefit from the alleged agreement.  He would continue to have his “boss” room in the office, and be served with secretary and other employees paid by the firm.  He would remain to be the “boss-on-the-face” of the firm.  This would in fact be considered as critical to DS since it closely related to his own business reputation for his personal business.  Separately, by entering into the alleged agreement, DS avoided the risk of having to pay the cost of redundancy of the employees and other continuing obligations of the firm at that time.

189.  As a result of the alleged agreement, DS stepped down formally and consequently, over the following 11 years, DS’s contribution to the firm had been insignificant as compared to David’s.

190.  The above is the extent of David’s case on the rationale of the alleged agreement, in particular in relation to the notion of the firm being DS’s “flagship”, as revealed from his pleadings and his witness statements.

191.  In cross-examination, David expanded considerably on the “flagship” notion.  He said:

(1)  The firm was to act as DS’s flagship not only in an image building and reputational sense, but also for a substantive business operations purpose.

(2)  Effectively, the firm’s operations would be split into two components.  The “law firm” operation would be owned and controlled by David and Shirley.  The “flagship business” operation would remain owned and controlled by DS.

(3)  For his “flagship business”, DS would have use of the firm’s bank accounts, accounting infrastructure, and corporate secretarial services.  DS could book his personal expenses into the firm as long as they concerned monies from the “flagship business” operation rather than the “law firm” operation.

192.  It is notable that the dichotomy between the “flagship business” operation and the “law firm” operation was introduced for the first time in the trial.  So was the intention that DS could make use of the firm’s bank accounts and accounting infrastructure for the “flagship business” operation.

193.  David’s claims against DS are based on the existence of the alleged agreement.  He also puts forward an alternative case of proprietary estoppel, relying on the same facts.  He contends that the alleged agreement amounts to representations made by DS, David’s assumption of the business risk of the firm and/or the performance of the alleged agreement constitutes detrimental reliance, and this renders any departure by DS from the representations unjust. 

Implementation of the alleged agreement

194.  After the alleged agreement was reached, David and Shirley took over the firm’s business.  They became the real “bosses” of the firm.

195.  As an overview, it returned to profitability after operating at a loss for three consecutive years. Shirley formed her own team with full support from David.  David implemented his plan to strengthen and restructure the conveyancing team and litigation team by bringing in two salaried partners in the financial year 2006/2007. 

196.  In his witness statement, David illustrated this point by referring to an incident in which he injected funds into the firm.  That took place on 28 March 2008.  He injected $130,000.

197.  However, on this payment, DS produced documents showing that the sum of $130,000 was indeed a payment made on behalf of a client and was credited to the firm as money on account for that client. 

198.  Having reviewed these documents, in his supplemental witness statement, David said that due to the passage of time, he could not rule out that the payment was actually made for purpose other than his injecting funds into the firm.

199.  Finally, in cross-examination, when asked about the alleged injection, David confirmed that he never injected any funds into the firm after the alleged agreement.

200.  Returning to DS’s role in the firm, David says that it further diminished.  His contributions had become insignificant.  In fact, he did not regularly come in to the office.  On average, he only came in to the office around two to three days per week, each time usually staying for less than an hour.  He virtually had no file to handle. 

201.  In this regard, David relies on the testimony of the former staff of the firm.  In general, they said that from their personal observations and experiences, David played the role as the “managing partner” of the firm whereas DS did not participate in any act of management and would normally work on his own.  Further, the major decisions were made by David, eg, acceptance of new clients’ matters and staff recruitment.  The key staff would report to David only.

The administration of the firm

202.  It will be recalled that DS relies on the various aspects of the administration of the firm, its management, operational and finance and accounting arrangements to demonstrate that he was its real owner.  I set out below David’s explanations for why these arrangements were not changed following the takeover of the firm by him and Shirley.

203.  First, DS refers to the personal guarantees he gave to the landlord of the office premises and the related bank guarantees provided by his bank over the years.  To this, David says that such arrangement had already been put in place before the alleged agreement.  After that, the arrangement continued as “a kind of customarily practice” and DS did not particularly raise the issue.  In any event, the amount of the deposit was immaterial.  All the rental payments were settled in substance by the collected billings of David and Shirley.  It is also an implied term of the alleged agreement that if the firm failed to pay the rent, David and Shirley would have to indemnify DS for any loss he suffered as a result.

204.  Second, the employees’ compensation insurance was taken out in DS’s name.  He himself was not covered by the insurance.  DS says that this shows that he was the sole owner.  To this, David explains that as DS remained as the sole proprietor pursuant to the alleged agreement, it was a natural consequence that he was not an “employee” for insurance purpose.  There was therefore no need to purchase employees’ compensation insurance for him.

205.  Third, DS refers to the deeds of indemnity signed by him in favour of the salaried partners, including David.  This, DS contends, clearly shows that he bore all the risks and liabilities of the firm and he did so as he was its owner.  To this, David’s reply is that ever since the alleged agreement was entered into, the deed of indemnity applicable to him was considered superfluous or overridden.  None of DS, David or Shirley ever mentioned about the enforcement of the deeds of indemnity since then.  The deeds had indeed never been invoked even where there was a negligence claim brought against the firm in 2008.  In any event, it was an implied term of the alleged agreement that David and Shirley would have to indemnify DS instead.

206.  In general, in this regard, DS says that he was the one who continued to bear all the financial risks and commitments arising from the firm during the period in question.  David’s reply is that the financial risks and commitments were in fact met by the billings of David and Shirley. 

207.  Fourth, DS says that up till 2013, he was the only one with unlimited signing authority for the firm’s bank accounts.  Furthermore, he continued to sign cheques for bonuses to the staff over the years, save for one exception when he was on vacation.  To this, David says that as the sole proprietor of the firm, DS signed the cheques as a “rubber stamp”.

208.  Fifth, DS says he provided overall supervision of the firm.  David retorts that the firm was only a small-sized local law firm and did not have any branch office.  There was no complicated management and administrative issues.  In any event, both David and Shirley were very experienced corporate lawyers.  There was no room for DS to play the “managing partner” role.

209.  Lastly, insofar as DS relies on the minutes of the partners’ meetings to show that he was the “boss”, David has the following general comments:

(1)  The partners’ meetings were held in the form of informal discussions without any chairperson.  DS’s suggestions were casual and general.  His ideas were rarely followed up or implemented by others.  The ultimate decision makers remained to be David and Shirley.

(2)  The minutes were not drafted in a very conscientious or stringent manner.  DS’s casual suggestions and recommendations were inaccurately described as his “decisions”.

Distribution of profits under the alleged agreement

210.  Under the alleged agreement, David and Shirley were entitled to all the profits of the firm.  Notionally, profits were distributed to them as “bonuses”, which were booked as expenses in the financial statements.  The “profits” appearing in the financial statements in fact represented the undistributed reserves owned by the two of them.

211.  When deciding how much profits should be distributed to David and Shirley, the general practice would be as follows. 

212.  After the end of each financial year, normally around late December and early January, David and Shirley would have discussions about the amount of bonuses to be distributed to the staff, and the amount of profit to be taken by the two of them.  The important thing was to ensure that adequate cash would be maintained in the bank accounts to cover the firm’s running expenses for the following two to three months and other future expenses.

213.  Once David and Shirley reached a conclusion, they would discuss with DS, inform him of the conclusion, and ask him to deposit sufficient cash back into the firm’s bank account for distribution.  (As to why it was necessary to do so, see the next section.)  The distribution would normally take place before the Chinese New Year following the relevant financial year.  Occasionally, DS would make suggestions. However, it was up to David and Shirley to decide whether to take up his suggestions.

214.  On the face of it, different “percentage” figures were adopted for profit distribution over the years.  But the major consideration remained the same, namely to ensure there were sufficient funds to meet the running expenses for the next two to three months and other future expenses.  There might be situations where more reserves were required. 

DS made withdrawals from the firm

215.  In his witness statement, David said that under the alleged agreement, in principle, DS was not entitled to make any drawing.  (I pause here to note that while this statement is consistent with the terms of the alleged agreement as revealed in the pleadings and witness statements, it appears to be at odds with David’s oral testimony that under the alleged agreement, DS could make use of the firm’s bank accounts and accounting infrastructure for his “flagship business” operation.)

216.  In the witness statement, David continued to say that in practice, however, DS sometimes made drawings.  The firm did not have very stringent control over these drawings.  Initially, David and Shirley were aware of the withdrawals but did not know about their full extent.  (It was only later in April 2012 that the full extent of the withdrawals was made known to them.)

217.  David explained that at that time, DS had on numerous occasions represented to David that he would return the funds to the firm’s account.  David and Shirley had trust and confidence in him that he would honour his promise.  When asked by David and Shirley, DS was able to deposit sufficient cash back to the firm’s account at the end of the financial year, so as to enable profits for the year to be distributed to David and Shirley.  This arrangement operated smoothly for several years after the alleged agreement was made.

218.  David explained that he and Shirley respected DS very much as he had made great contribution to the firm. In particular, from 2002 to 2004, he injected substantial sums into the firm.

219.  In his witness statement, David cited the financial year 2008/2009 as an example of why DS made a substantial net deposit of just over $2 million into the firm in that year.  This was because David and Shirley asked DS to deposit money back to the firm for profit distribution, which DS did. 

220.  After the end of a financial year, when the amounts of the bonuses and profit distributions were agreed between David and Shirley, David would ask DS directly to arrange for payment of the same.  The reason for David to do so was that he had to ask DS to deposit back the money into the firm. 

221.  From 2005/2006 to 2009/2010, the total net withdrawal by DS amounted to about $8.8 million.  David and Shirley regarded this sum to be “reserves” for the firm.  The reserves were intended to be used for working capital, replacement or upgrading of office equipment and software, refurbishment in case of a move of office, and meeting any shortfall arising from the litigation claim against the firm if the insurance cover was not sufficient.

222.  By then, David and Shirley believed that the “reserves” of about $8.8 million would be more than sufficient.

The David Profit Sharing Scheme implemented in 2010/2011

223.  For 2010/2011, the firm’s revenue reached a record high of over $47 million.  As the firm continued to grow and more salaried partners joined the firm, there was a need to have a formalised arrangement for the proper administration of the firm.  David and Shirley implemented a profit sharing scheme for salaried partners, so as to enable them to get a fair share of their contributions.  To differentiate it from the DS Profit Sharing Scheme alleged by DS, I shall refer to it as “the David Profit Sharing Scheme” below.

224.  Under the scheme:

(1)  David and Shirley would give salaried partners the sum of 50% of the collected billings of their respective teams, part of which was then paid to their team members.  The remaining sum belonged to David and Shirley.

(2)  David and Shirley would usually, but not invariably, adopt a 50% rate when it came to their shares of the collected billings of their respective teams.  They would ask the accounting staff to compile a profit distribution table using a 50% rate first and then would see how much reserve would remain and carry out further distribution if appropriate. 

(3)  The major consideration was always to ensure that there were sufficient funds left in the firm to meet its running expenses for the next two to three months and other future expenses, taking into account that the firm had already kept about $8.8 million as reserves (ie the net sum drawn by DS).

(4)  DS was not entitled to any salary or bonus until he joined the scheme in 2012/2013.

The confrontation in December 2011

225.  In around June 2011, it was discovered that Priscilla Leung, the firm’s then accounting clerk, misappropriated the firm’s money.  She was immediately replaced by Denise.  The latter was then tasked with the investigation of the incident.

226.  After the management account was ready in December 2011, David and Shirley discussed the profit sharing and bonus payment.  Around that time, Denise told them that DS had made huge withdrawals from the firm during the financial year.  He withdrew $8 million on 5 December 2011.  In addition, over the whole year, he made a net withdrawal of around $8.7 million.

227.  David and Shirley confronted DS about the huge withdrawals.

228.  Upon confrontation, DS said that more funds should be reserved in order to finance the future purchase of office premises of the firm.  He invited David and Shirley not to share all the profits for 2010/2011 and to adopt the lower sharing ratio of 50%, just like other salaried partners. 

229.  DS said that it would be better for the firm to have its own office out of concern of potential increase in rent or disruption from having to relocate if the lease was not renewed.  He said that substantial rental savings could be made and the capital gain in the rise in property value could also be captured.

230.  At first, David and Shirley were reluctant to accept this.  However, DS reassured them that if no suitable office premises were found by the end of December 2012, he would return the withdrawn sum on demand, and that he had the financial capacity to do so.  Out of trust and confidence in DS, David and Shirley eventually agreed to his suggestion.   DS was entrusted with the task of identifying a suitable property for the firm. 

231.  After the conversation, DS returned around $13 million to the firm on 6 January 2012 for the purpose of profit distribution to David and Shirley.  They did not therefore further confront DS or request the immediate return of the outstanding sum.  As a result, they only took 50% of their collected billings for 2010/2011.

232.  Returning to the investigation by Denise of the embezzlement discovered in June 2011, it was found out that over the years, DS had paid millions to himself, his personal companies and his family members, including “salaries” paid to his parents, his elder daughter who was residing overseas, and foreign domestic helpers, as purported employees of the firm.  His personal household and domestic expenses, personal entertainment expenses and travelling expenses were booked as the operating expenses of the firm.

233.  David says that DS’s parents were not genuine employees of the firm.  They had never worked at the office. 

234.  Denise reported her findings of DS’s unscrupulous practice to David in about April 2012.  David and Shirley were astonished.  They had never thought that DS, a respectable lawyer, would do something like this.  In his witness statement, David said that “it was in effect stealing money” from him and Shirley. 

Discovery of DS’s purchase of the CNT properties in December 2012

235.  After the end of the financial year 2011/2012, as there was no apparent progress in implementing the office acquisition plan, David and Shirley asked DS to return the outstanding withdrawals made by DS in the previous years.  To their astonishment, DS told them that the money had already been used to purchase the CNT properties.  He was unable to return the entire sum.

236.  David and Shirley discovered that completion in fact had taken place on 18 December 2012 and the properties were registered in the name of the service company. 

237.  They therefore asked DS why he hid the purchase from them and why the purchase was in the name of the service company and complained that, as such, it could not be a purchase for the firm.  DS was unable to give any satisfactory answer.  

238.  The conversation then carried on, as set out in David’s witness statement:

“DS then shamelessly said that he thought the money left by us in the [firm] were not intended to be shared by Shirley and me, which would then be belonged to him and he was entitled to take them away. DS further alleged that his wife was so happy that his colleagues were so nice as not to sharing the profits they entitled and let him draw them away. Upon hearing DS’s “explanation”, Shirley Chui was furious and she challenged DS that there was simply no reason why DS would be entitled to any share of profit from us. Thereafter, regardless of what we said, DS remained silent.”

239.  It was only at the end of the confrontation that DS then said he could explore some “good proposals” to resolve the matter.

240.  As a result, trust and confidence broke down.  To David and Shirley, DS made use of their money for his own investment.  This was a breach of the alleged agreement.  It was also a calculated move by DS to embezzle their money by first asking them to save money in the firm for a specific purpose and then misappropriating it.

241.  Both David and Shirley were very angry and wanted to leave the firm.

242.  Knowing their intention, DS represented to them that they both had interests in the CNT properties and he would come up with a “good proposal” on this, and he would deposit as much as he could for bonus distribution and profit sharing for 2011/2012.

243.  David and Shirley considered that it might be another delaying tactic by DS.  They insisted on the return of all the money taken by DS.  However, DS could only make a net deposit of $3.9 million in 2012/2013.

244.  After this incident, David was thinking of leaving the firm.  DS was in breach of the alleged agreement. He unscrupulously charged his personal expenses as expenses of the firm.  He misappropriated all of the reserves which had been retained over the years for the firm’s development.

245.  On 27 December 2012, both David and Shirley resigned as alternate directors of the service company, because they both were considering leaving the firm.

Shirley left the firm in 2013 and David implemented new controls

246.  Eventually, Shirley left the firm with her team in April 2013.  (It is not in dispute that after her departure, the firm’s performance was materially affected.)

247.  David wanted to leave too. But DS asked him to stay, otherwise the firm would collapse.  DS talked about the longstanding cooperation they had had throughout the years.  He said that after Shirley left, the firm would in effect be David’s.  David then said there would be no use for the firm to be his if DS was to continue withdrawing money from the firm in breach of the alleged agreement.  DS then reassured David that he would not withdraw any money from the firm without David’s consent, and he would come up with a “good proposal” to deal with his interest in the CNT properties in due course. 

248.  Eventually David chose to stay in the firm.  He warned DS that it was his last chance and if he did not keep his promise, David would not give him a second chance.

249.  David also considered carefully the mode of operation between him and DS.  Given that there was no longer any trust and confidence in DS.  He implemented a number of policies and stringent control mechanisms in the firm.

(1)  No substantial reserves would be kept in the firm.  Profit would be distributed to David to the fullest extent possible.

(2)  The accounting department would be under David’s control and supervision only.

(3)  DS would be disallowed to make any withdrawal without a corresponding client matter, unless permitted by David. 

(4)  If DS tried to withdraw money from the firm which was not related to any client matter, the accounting staff would report to David.  According to Denise, there were in fact several occasions when DS attempted to withdraw money through direct contact with the accounting department.  Denise asked DS to seek David’s approval directly. Denise did not eventually see DS further pursue these attempted withdrawals.

(5)  All the cheque books of the firm’s accounts would be kept under the custody of the accounting department and locked in drawer.  Access by DS to the cheque books was restricted and closely monitored by the accounting staff.

(6)  David and Hermann Leung were added as the firm’s bank signatories with unlimited authority.

250.  In practice, the firm would still assist DS to arrange for the payment of certain expenses but this was done on the basis that he had to either make deposits into the firm’s account before payment out or repay the firm within the following month.  DS’s entertainment and travelling expenses had since been much reduced.  They were only reimbursed upon David’s agreement.  For example, in 2013/2014 and 2014/2015, his entertainment expenses were only about $23,000 and $42,000 respectively.

251.  At DS’s request, he was allowed to participate in the David Profit Sharing Scheme as if he was a consultant of the firm.  He was therefore entitled to 50% of his collected billings. 

252.  In 2012/2013, DS’s collected billings were insignificant.  He was only entitled to a bonus of about $270,000 for that year.  In fact, his collected billings in the following years remained similarly insignificant.

253.  In terms of profit distribution, after Shirley left, David decided not to leave money in the firm other than for its daily operation so as to minimise the risk of unauthorised withdrawal by DS.  Profits were generally taken on a quarterly (instead of yearly)  basis.  David adopted a 70% distribution ratio if and when possible.

254.  David contends that all the steps or controls implemented after Shirley left show the existence of the alleged agreement.  This is because DS would only agree to these changes if David was the true owner of the firm.

255.  In terms of signing of cheques for bonus payments and profit distributions, for 2012/2013, they were signed by David as DS was on vacation.  DS asked him to sign the cheques because the firm was David’s.

256.  For 2013/2014, 2014/2015 and the 1^st quarter of 2015/2016, David deferred the cheque signing to DS.  All payment requisitions were approved by DS and all the cheques were signed by him.

257.  In his second supplemental witness statement, David put forward this explanation:

“For daily operational expenses, DS was mainly responsible for signing cheques for salaries and bonuses, rent, tax payment, in line with his role as the “sole proprietor” on paper.

Noting DS remained to be the “sole proprietor” on paper, for good record keeping and for auditing purposes, certain documents have to be stated to be “approved by DS”.”

David decided to leave to set up his own firm

258.  On one occasion in late 2015, DS had a discussion with David about the CNT properties.  Among the many things discussed, DS said that it appeared that the purchase of the properties were the “root of all evil” which caused all the unhappiness between them.  DS therefore decided to sell the properties.

259.  DS alleged that he had taken $10 million from the firm to finance the purchase.  He offered to return $5 million to David for his share after the disposal.  David believed that this was the “good proposal” which DS eventually came up with to cater for David’s interest in the CNT properties.  However, this proposal fell far short of his expectation.  This was because DS had taken much more than $10 million from the firm and DS did not offer to repay Shirley in respect of the properties.

260.  In the end, David decided to leave the firm.  There were a couple of client matters which made him rethink his relationship with DS. He increasingly found himself no longer able to work along with DS in the same firm and it was extremely risky to continue to be a partner. 

261.  In March 2016, David told DS of his intention to leave.  In April, he had another meeting with DS, which Hermann Leung also joined.  David said in the meeting that he was determined to leave the firm and establish a new firm with his team members.

262.  DS eventually agreed to this proposed arrangement.  He further requested that the two firms be formally registered with the Law Society as in association with each other.

263.  The setting up of David’s new firm was done openly and with DS’s consent.  DS had even discussed with David the future cooperation between the two firms.  This is supported by a subsequent letter dated 2 August 2016 from the firm.  There, it was stated that “any further matters introduced under/or executed by you will be on the new basis of 60% … that we discussed while conveyancing matters will remain on the existing basis”.

264.  However, in view of a potential IPO project in which a conflict of interest might arise if the two firms remained in association with each other, they terminated the association arrangement in October 2016.

265.  In mid-May 2016, employees deciding to join David’s new firm signed their termination notices and tendered their resignations.

266.  In the factual premises, David denies that he was in breach of his contractual or fiduciary duties to the firm by reason of undertaking the Preparatory Acts.  He also argues that DS is barred by laches or delay to seek any relief. 

The final payment to David

267.  Even though he was leaving, David still honoured the alleged agreement by ensuring that after the last profit distribution to him, there were sufficient funds left in the firm to meet its running expenses for the next two to three months and other future expenses.

268.  As a gesture of goodwill, in respect of 2015/2016, David did not intend to take all of his team’s collected billings but only intended to take 70%.  That would be in line with the percentage ratio adopted in the previous year of 2014/2015 and the 1^st quarter of 2015/2016.

269.  In fact, there was a meeting between David and DS in about June 2016 in which David told DS that he would adopt 70% as the distribution ratio and if DS agreed, David would “choose to let it be regarding the monies [DS] had misappropriated in the previous years”.  This was done as a gesture of goodwill and to facilitate smooth departure, despite David’s strict legal entitlement under the alleged agreement.

270.  Then DS asked David to prepare a profit distribution table using 50% as the distribution ratio.  David then sensed that DS might decide to dispute his profit entitlement.  As a mid-way approach, David asked Denise to prepare three profit distribution tables.  “David’s three tables” were prepared as a result.

271.  In his supplemental witness statement, David explained this way:

“Obviously, the reason for me to ask Ms. Denise Kwok to prepare 3 tables for calculating my profit withdrawal at different ratios of 50%, 60% and 70% was that after my departure, DS would take over [the firm] and I had to demonstrate to him that under all scenarios, [the firm] was in good financial condition.”

272.  However, in breach of the alleged agreement and without any basis, when calculating David’s final entitlement, ie for March to June 2016:

(1)  DS applied the 50% ratio for David’s profit sharing, as opposed to 70%.

(2)  He made unauthorised deductions from the profit distribution.  These are the Unauthorised Allocation alleged by DS.

273.  On 2 and 11 August 2016, David received cheques from the firm, which purported to settle his final entitlement. The sums were, however, based on the above wrongful calculation.

274.  In cross-examination, David appears to be relying on a billing and collection table for 2014/2015 showing on its face the adoption of the ratio of 70% for that year.  DS’s signature appeared in the bottom corner of the table.  However, David was not able to say how the signature came about.  It was Denise’s oral evidence that generally such kind of table would not be given to DS together with the payment requisition form and the bonus cheques. 

David’s claims against DS and the service company

275.  In the above factual premises, David claims against DS the sum of $7,961,948, which represents the shortfall in the final payment made to him by the firm.

276.  Further, David makes the following proprietary claims.

277.  First, he contends that DS’s personal expenses booked to the firm were money taken by him from the firm. David is entitled to 50% of such expenses.  It is agreed that the 50% entitlement, if established, amounts to $5,152,242.84.

278.  Secondly, David contends that DS’s net withdrawals from the firm during the period in question amounted to misappropriation of moneys by him from the firm.  David is entitled to 50% of such withdrawals.  It is agreed that the 50% entitlement, if established, amounts to $6,824,188.

279.  Thirdly, David makes a claim in relation to the CNT properties.  In his closing submissions, Mr Wong formulated the claim on several bases.  But, in principle, David says that DS misappropriated $13.9 million from the firm to purchase the CNT properties.   The properties were then re-sold at a profit of $10.3 million.  David is entitled to trace the misappropriated funds into the CNT properties and its sale proceeds.  On that basis, David claims a 50% share in the misappropriated sum and the profit made from the sale, which amounts to $12.1 million, ie ($13.9 million + $10.3 million)  × 50%.  This claim is made against DS and/or the service company.

David’s alternative case

280.  In the event that the court finds against David on the alleged agreement and finds in favour of the DS Profit Sharing Scheme, David runs an alternative case that he is nonetheless entitled to bonuses at the ratio of 70% for the 2014/2015 and the 1^st quarter of 2015/2016.  As pleaded, David’s case is:

“… such payments were authorised (insofar as such authorisation is required, which is denied)  by DS, in the sense that DS had consented to those payments by signing on the relevant accounting vouchers, schedules and the cheques and he had approved the audited accounts of DSC for the FY2014/2015 in his capacity as the registered sole proprietor of DSC. DS however wrongfully deducted or withheld HK$4,732,684 (on the basis that, which is denied, [David] is only entitled to a 50% “bonus” of his team’s collected billings)  on 2 August 2016.” (underline added)

281.  If the alternative claim is allowed, David is entitled to $4,732,684. 

THE ISSUES

282.  Parties have submitted an agreed list of issues.  In essence, the material issues are:

(1)  Did the alleged agreement and the David Profit Sharing Scheme exist? 

(2)  If so, was DS in breach of the alleged agreement? 

(3)  If so, what relief is David entitled to in relation to (a)  DS’s personal expenses charged to the firm, (b)  his unauthorised withdrawals from the firm, (c)  the purchase of the CNT properties, and (d)  the final payment due to David from the firm?

(4)  Alternatively, is David entitled to rely on the doctrine of proprietary estoppel to claim the same reliefs?

(5)  If the court finds that the alleged agreement did not exist, has David established his alternative case?

(6)  Was David in breach of his duties to the firm by undertaking the Preparatory Acts while he was still in employment with the firm?

(7)  If so, what should be the relief? 

283.  As regards sub-para (7), it will be recalled that an order has been made that if the court finds that David is liable to give an account of profits, the accounting exercise will be conducted separately.

THE EVIDENCE

284.  The parties have put forward conflicting versions of events, which I have set out in detail above.

285.  The resolution of the factual disputes primarily turns on the credibility of DS and David.

286.  I accept Mr Chain’s submission that the evidence of the nine witnesses called by David do not add much to his case.  As they explicitly acknowledged, none of them have any personal knowledge of any agreement or understanding reached between the partners of the firm, ie DS, David and Shirley.  Their evidence therefore offers little assistance to the court when determining who was or were the true owners of the firm during the period in question.

287.  My task is to evaluate the competing evidence against the backdrop of undisputed and indisputable facts.  I am to weigh the inherent likelihood or unlikelihood of an event having happened, or the apparent logic of events.  Generally speaking, contemporaneous documents which came into existence before the problems in question emerged are of the greatest importance in assessing credibility.  The internal consistency (or inconsistency)  of the witnesses’ evidence should be taken into account.  The court would also be guided by its overall impression of the characters and motivations of the witnesses.  The court should caution itself against the dangers of too readily drawing conclusions about the truthfulness and reliability solely or mainly from the appearance of the witnesses.  See, eg, Re B (Children) [2009] 1 AC 11, para 31; Standard Chartered Bank v Li Wai Ping HCA 10587/2000 and 3575/2003, 17 February 2011, para 19; Hui Cheung Fai v Daiwa Development Limited HCA 1734/2009, 8 April 2014, paras 76 to 82. 

288.  On the whole, I find that the DS’s version of events is overwhelmingly more credible than David’s.  I consider that the following matters are the material considerations in the evaluation exercise.

289.  As remarked in the “Introduction” section, I have before me an extensive set of contemporaneous records of the firm.  They contain objective information against which the parties’ respective cases are to be tested and their competing factual narratives evaluated. 

DS’s case

290.  I will start the analysis by making the observation that on the face of the contemporaneous documents alone, one would readily conclude that David was a salaried partner of the firm, and DS was its sole owner in form and in substance during the period in question. 

291.  For the period up to 2013, it can be said that the objective evidence overwhelmingly points to DS being the real owner of the firm.  It is common ground that a number of changes took place in the firm’s operation after Shirley left in April 2013.  DS has explained how these changes came about.  Prima facie his explanations are, in my view, inherently plausible and logical.

292.  On the face of the records, DS was stated to be the sole proprietor of the firm.  On this, David says that it is a neutral point, if not a point in his favour.  This is because under the terms of the alleged agreement, DS was to remain as the sole proprietor.

293.  However, if one looks at the different aspects of the internal management and operation of the firm, the objective facts on the whole suggest that DS, not David, was the “real boss”.   

294.  At all times until 2013, DS was the only person in the firm who had unlimited signing authority for its bank accounts.  The ability to operate the firm’s bank accounts without limitation is obviously a key, though not conclusive, indicator of who actually owned the monies in the accounts.  It can reasonably be expected that if there had been a change of ownership in the firm in January 2005, steps should have been taken to add David and Shirley to the list of bank signatories with no signing limit and/or to remove DS from the list.  Yet, no change to the signing arrangement was made to similar effect until eight years later.

295.  Also, at all times until 2013, the objective facts show that DS had in fact been treating the firm’s monies as his own monies.  He charged his personal and family expenses to the firm on a frequent basis.  He made withdrawals from the firm from time to time (while at the same time also made injections). 

296.  The issue before the court is this – had he been doing so because the firm was really his?   Or is it the case, as David alleges, that he was not supposed to do so but nonetheless did it in blatant breach of the alleged agreement? 

297.  In these actions, David has not shied away from using strong words to describe the alleged wrongful acts of DS.  In his witness statements, he repeatedly described them as “unscrupulous practice”.  At one point, David said what DS had done was “in effect stealing money” from him and Shirley.  These are very serious accusations, particularly when made against a senior solicitor practising in Hong Kong.

298.  The objective facts are that these alleged wrongful acts took place frequently and continuously after the alleged agreement was made.   They were also committed openly, with the money flows clearly recorded in the firm’s ledger.  How could DS have expected that he could get away with such blatant wrongdoing in the first place, when David and Shirley, being the owners, would have ready access to the firm’s finance documents?  There does not seem to be a ready answer to this. 

299.  The even more inexplicable part of David’s case is that DS in fact got away with misappropriating the firm’s assets on a regular basis for quite some years and it was only in about late 2011 or early 2012 when they eventually found out the extent of such misappropriations from Denise.  The misappropriated sums were to the tune of millions of dollars.  These were sizable sums of moneys.  Yet, David and Shirley nonetheless still had trust in DS and imposed no control to prevent any further unauthorised withdrawals or expenses.  It was only until around December 2012 that trust and confidence completely broke down following the discovery of DS’s purchase of the CNT properties.  And it was as late as in 2013 that David eventually put in place controls to stop DS’s further wrongdoings.

300.  I need to weigh the parties’ rival cases in terms of their inherent plausibility.  The objective facts show that DS had been treating the firm’s monies as his own.  DS says that it is because the monies were in fact his.  David says that they were not DS’s and DS was stealing money from the firm.  It seems to me that by comparison, DS’s case is by far more inherently plausible than David’s.

301.  I next turn to the question of who had been bearing the risks and liabilities arising from the business of the firm.  I consider that to be another key, though not conclusive, indicator of the true ownership of the business. 

302.  In my view, it is a telling piece of evidence that DS continued to be the person who signed deeds of indemnity in favour of the salaried partners, even after the alleged agreement was entered into.  I have reproduced the relevant parts of the deed in para 61 above.  It is plain from the text that the deed was a formal legal document which was meant to be binding and enforceable.  I also highlight the following.

303.  First, it is of note that DS was identified to be the only equity partner.  There was no mention of David or Shirley being the owners of the firm.  The content of the deed is entirely consistent with DS’s case and flatly contradictory to David’s. 

304.  Secondly, giving indemnities to salaried partners is a matter of internal management of the firm.  There is no apparent need or reason to put up an appearance that DS was the sole proprietor of the firm. 

305.  Thirdly, and more importantly, by signing the deeds, DS took up substantive financial obligations vis-à-vis the salaried partners.  According to David’s case, when DS offered to step down from the firm, it was against the background that he was without the means or was simply unwilling to further finance the firm.  In this context, why would DS nonetheless proceed to take up these substantive obligations, which had real financial consequences for him?  It is true that the obligations were contingent and in the end, no claim might be made against DS.  Nevertheless, DS was taking up the risks of having to indemnify the partners if things went wrong.  How likely and inherently plausible is it that an experienced lawyer would assume such risks in respect of a legal business in which he had no interest?

306.  Similarly, DS also assumed the business risk of the firm when he gave personal guarantees to the landlord of the office premises and arranged for his bank to provide guarantees. 

307.  I have set out David’s explanations for these arrangements in which DS took on the business risks of the firm when he and Shirley did not.  I have to say that the explanations do not address the queries I have raised above.  It is one thing to say that the indemnities were never enforced or invoked.  But it does not alter the material fact that by signing the indemnities, DS immediately took up the risk that it might be enforced one day.  In my view, the assumption of the risk says a lot about who really owned the firm.

308.  I need to ask myself the same question as before – did DS assume these risks because he was the owner of the firm?  Or did he do so, despite the fact that he was no longer the owner?  In terms of inherent plausibility, I find DS’s case to be much more convincing than David’s.

309.  In general, I think it is fair to say that owning a business involves both the right to reap the profits and the responsibility to bear the risks and liabilities.  When viewed that way, DS’s case is inherently plausible while David’s case is not as the latter did not seem at any time to have borne any risk or responsibility associated with owning the firm.

310.  As a concluding observation on the issue of assumption of risks, I think DS summed up his stance succinctly in his letter to David dated 22 September 2016.  That was part of the exchange of correspondence in which the two of them were arguing over David’s final payment (see para 165 above).  The essence of the apparent fallacy of David’s factual case was neatly captured by DS:

“While I respected and supported you all risks of the firm were and still are borne by me. You had no risk whatsoever as you have a deed of indemnity from me (see attached). Are you saying you bear no risks, take all profits and were a partner of this firm?”

311.  I next turn to the changes which took effect after Shirley left in April 2013.  It is Mr Wong’s submission that the objective fact that all these changes happened conclusively rebuts DS’s case that he was the economic owner of the firm.  If he had been, DS would not have confined his withdrawals to insignificant bonus or commission from 2013 onwards.  And he would not have acceded to David’s request and ceased charging personal expenses to the firm.  If David had been a mere employee, why would DS, the real boss, have had to listen to him and comply with his request?

312.  In a similar vein, a query arises as to why DS was willing to offer to pay David $5 million to address the latter’s grievance over the CNT properties.  After all, the properties were purely a personal investment of DS.  David had no claim to it at all.  Five million dollars is not a small sum of money.  Why was DS being so generous? Does it not suggest that David in fact had an entitlement to the properties?

313.  In my view, these are all legitimate questions to ask.  These questions were in fact put to DS in cross-examination.  I have recorded his explanations in paras 123 to 126 and 129 above.  My task here is to scrutinise his answers and decide whether they make sense, are inherently plausible and logical, and therefore credible. 

314.  In my view, DS’s explanation is inherently plausible and logical.  He emphasised that David could make request of him in relation to the running of the firm, but he could not impose it on DS, as DS was the boss.  I do not consider that the decision of DS to restrict himself from drawing money from the firm is necessarily inconsistent with him being the owner.  As an owner, DS had the right to do things and not to do things.  He was at liberty to exercise his power and the right not to exercise his power.  If there was a good reason for him not to exercise his power, he might choose not to do so.  But this does not negate the fact that he was the owner.

315.  His decision to restrict his withdrawals and personal expenses should be viewed against the factual circumstances prevailing at that time.  It was shortly after Shirley left.  It is common ground that Shirley had been the star performer of the firm.  After she left, David became the leading salaried partner.  It is inherently plausible that DS would be willing and ready to listen to David and accept his request in relation to the running of the firm.

316.  The other parts of DS’s case are also well supported by the contemporaneous records of the firm and consistent with the objective facts.  As an example, I would highlight the two instances of bonus payments made to Shirley and her team member after they left the firm.  See para 120 above.  These payments corroborate DS’s case on the DS Profit Sharing Scheme.  Also, as Mr Chain submitted, this is evidence positively disproving the alleged agreement, for which David has no explanation or answer.

317.  I also accept Mr Chain’s submission that in terms of demeanour, DS conveyed an impression of a credible witness.  He answered questions directly.  He was not argumentative.  He only gave clarifications, elaborations and explanations where necessary.  When he did not know the answer to a question, he frankly said so.

318.  Lastly, I should address some of the more material challenges or criticisms raised by Mr Wong on DS’s case.

319.  First, DS’s original plea. See para 167 above.  I agree with Mr Chain’s submission that it is plain from the amendments and the contemporaneous records that DS’s original plea was a bona fide mistake about the commencement date of the DS Profit Sharing Scheme.  DS’s explanation in his oral testimony as to how he might have made the mistake is also inherently plausible and logical.  As such, I would not approach the evidence by committing DS to his original plea that there was an agreement made in 2005. 

320.  Second, in cross-examination, with the aid of the agreed table, DS was asked why the DS Profit Sharing Scheme would provide for a bonus ratio of 50% when the table shows that in the previous year, the ratio was indeed higher than 50%.  DS’s reply was that at that time he in fact was not aware of the higher bonus ratio in the previous year.  It was only after the agreed table was compiled pursuant to the court’s direction that he realised that that was the case.  DS indeed commented that it was absurd.

321.  Mr Wong submitted that DS’s explanation is simply a bad one. 

322.  I consider that the query raised by Mr Wong is a valid one.  DS does not seem to have a coherent explanation for that.  It is a point that ought to be taken into account in the overall evaluation exercise.

323.  Third, in his written closing submissions, Mr Wong set out nine factual propositions contained in the witness statements of David and contended that these propositions had not been contradicted in David’s cross-examination.  Applying the rule in Browne v Dunn, there is now no room for DS to dispute these propositions.  More notably, these propositions include David’s case on the confrontation in December 2011 concerning DS’s withdrawals, the confrontation in December 2012 concerning the CNT properties, the changes which took place after Shirley left the firm and DS’s offer of $5 million regarding the CNT properties.  Mr Wong went on to submit that these factual propositions, which are not disputed, are sufficient to dispose of the actions in favour of David.

324.  I am unable to accept this submission.  It is well-known that the rule in Browne v Dunn is not an inflexible one.  It is not broken even if a material matter is not put to a witness, if the witness can fairly and objectively be said to be on notice of it or where the point is so apparent.  Put differently, the rule is breached if in all the circumstances an omission to cross-examine on a specific point is unfair to a witness: Pacific Electric Wire & Cable Company Limited v Texan Management Limited CACV 90, 91, 93 to 96 of 2012, 17 September 2013, at paras 124 to 125.

325.  Here, the factual propositions referred to by Mr Wong constitute material parts of the parties’ respective cases.  They have put forward competing versions of the same incidents in the course of these actions.  In my view, the omission to cross-examine David on these matters, as alleged by Mr Wong, cannot be said to be unfair to David.

326.  Fourth, Mr Wong pointed out that on a number of occasions, DS injected funds into the firm when it had sufficient cash to support its operations.  In cross-examination, DS could not recall the reasons for these injections.  Mr Wong submitted that there was no apparent reason why DS would make such injections when he could have made use of the cash more gainfully elsewhere.  Mr Wong therefore contended that the only possible explanation is that DS deposited the cash under the alleged agreement, as he was obliged to return the monies to David and Shirley. 

327.  I do not consider the argument to be particularly convincing.  On DS’s case, he was the owner of the firm and he made injections and withdrawals as he wished.  That in itself is an inherently plausible allegation.  Mr Wong’s submission does not help to undermine DS’s case.

328.  The above are the more forceful challenges mounted by Mr Wong against DS’s case.  On the whole, I do not think that these challenges or Mr Wong’s other criticisms do much to dent DS’s credibility.

329.  To conclude, DS’s factual case is extensively corroborated by the contemporaneous records of the firm and is consistent with the prevailing objective facts.  His account of events, including his explanation of how the changes in the operation of the firm in 2013 had come about, is inherently plausible and logical, and hence on the whole credible.

David’s case

330.  The same cannot be said of David’s factual case. 

331.  I shall first examine his case on the basis that the alleged agreement is as spelt out in his pleadings, without reference to his oral testimony expanding on the “flagship” notion. 

332.  The weight of the contemporaneous documents and records is predominantly against David.  That is particularly true in relation to the period prior to 2013.  David has a lot of explaining to do in relation to these documents.

333.  In the previous section, I have explained why I find David’s explanations to be much less inherently plausible than DS’s version.

334.  It is David’s own case that he and Shirley became the owners of the firm “in economic terms”. 

335.  However, after the conclusion of the alleged agreement, they were not in effective, let alone exclusive, control of the firm’s bank accounts.  DS remained to be sole person (until 2013)  with unlimited signing power to operate the bank accounts. 

336.  David and Shirley did not assume any of the responsibilities or risks arising out of the operation of the firm.  DS remained to be the person who provided personal guarantee to the landlord of the office premises and he continued to give indemnities to incoming salaried partners.  When the firm suffered a loss as a result of the embezzlement of its former accounting clerk, the ledger showed that the sum was fully booked into DS’s current account in late 2011.  In short, David and Shirley took no risk of the ownership of the firm. 

337.  Furthermore, throughout the 11½ years while the alleged agreement was in place, David never had to inject any capital into the firm. 

338.  One must ask – in these circumstances, how likely is it that David and Shirley were owning the firm “in economic terms”?

339.  In his written closing submissions, Mr Wong contended:

“The short answer is that none of these matters are inconsistent with the oral Agreement, for the simple reason that DS has no difficulty advancing his own case of the oral 50/50 profit-sharing agreement despite these matters. In other words, it was common ground that these matters cannot preclude the existence of an oral profit sharing agreement.”

340.  I have to say that this submission is not fully understood.  The issue before me is whether David’s case is credible.  The fact that the alleged agreement is so much at odds with the prevailing factual circumstances must be a matter which severely undermines his factual case.

341.  On the issue of contemporaneous documents, Mr Chain made the separate point that even if one accepts that the alleged agreement itself was never reduced to writing, if it truly existed, throughout the 11½ years while it was in operation, there must have been some kind of documents that had been generated referring to its existence or its execution.  However, David has failed to produce even one single piece of document in this regard.  He submitted that the complete lack of documentary evidence is astounding and beggars belief.

342.  I share that observation. 

343.  Mr Wong placed much reliance on the new practice which emerged after Shirley left in 2013.  DS had effectively ceased making withdrawal from the firm and charging his personal expenses to the firm.  Mr Wong submitted that the only reason for that was because DS had no entitlement to do so under the alleged agreement.

344.  As discussed above, both parties have put forward rival accounts, trying to explain how the changes had come about in 2013.  It is a matter of evaluating the credibility of the competing explanations.  I do not consider that there is any material which points to the conclusion that David’s reason is the only reason that can explain the changes, as submitted by Mr Wong.

345.  I have found DS’s explanation to be inherently plausible.  On the other hand, I have serious reservation on David’s case as to why DS could have got away with the allegedly unauthorised withdrawals and expenses for so many years, and why David only came to implement the alleged control as late as in 2013, when he had considered DS to be “in effect stealing” his money.  On balance, I find DS’s version of events to be more credible.

346.  I now turn to David’s oral testimony expanding on the “flagship” notion.

347.  I accept Mr Chain’s submission that this represents a departure from David’s pleaded case and amounts to a new case on the alleged agreement.  The most significant new element is that the firm’s operations would be split into two components, namely the “law firm” operation and the “flagship business” operation.  For the latter, according to David’s oral testimony, DS would have use of the firm’s bank accounts and accounting infrastructure for his private businesses.

348.  The new case can potentially explain why there were frequent injections and withdrawals of funds made by DS, as shown in the contemporaneous records of the firm.  However, the new case would be quite irreconcilable with one of the key themes running through David’s written evidence that DS was not supposed to draw funds from the firm under the alleged agreement (although in practice he did).

349.  As such, with the new element added, David’s case on the alleged agreement has in fact become incoherent and internally inconsistent. 

350.  Furthermore, the alleged agreement forms the foundation of David’s case.  It is the basis on which he now makes sizable proprietary claims against DS.  The terms of the alleged agreement are clearly a prominent part of David’s case.  It is inexplicable why David had failed to spell out the new element in his pleadings, which have undergone a few round of amendments in these proceedings, but only mentioned it for the first time when he was in the witness box.  I should also add that David has made three witness statements in these actions, which together run to over 100 pages.  Yet, he did not see fit to expand on the “flagship” concept in any of his written statements.

351.  In light of the above, I do not consider that the new case has advanced David’s case in any way.  If anything, it has in fact gone to undermine his overall credibility.

352.  On the whole, David’s case is unsupported by the contemporaneous documents.  His explanations on why that is so are inherently implausible and unconvincing.  The last-minute change to a fundamental part of his factual case also casts doubt on his credibility. 

FACTUAL FINDINGS

353.  On the balance of probabilities, I find that DS’s factual case is more likely than not to be true.  I accept his factual case on the whole and where it conflicts or is inconsistent with David’s, I reject the latter.  This, however, does not apply to the personal opinion which DS expressed over David’s personality.  It is unnecessary to making any finding in this regard.

354.  More specifically, with reference to the agreed issues, I find that the alleged agreement did not exist.  The David Profit Sharing Scheme did not exist.  David and Shirley never had ownership of the firm “in economic terms” or on any other terms.  They were employees of the firm, assuming the position of salaried partners.  At all times, DS was the sole true owner of the firm.  The DS Profit Sharing Scheme came into effect in 2010/2011.  Bonuses were paid to salaried partners in accordance with the scheme, save for the three exceptions as identified by DS in his pleadings.

355.  In relation to the Unauthorised Allocation, I further find as facts that DS signed on the relevant payment requisition forms and the cheques to David. However, when he signed them, he was not aware that a higher ratio of 70% was adopted in the calculations. He only found out about it in May 2016.  David was the finance partner of the firm.  He had abused his position by instructing the accounting staff to allocate bonuses to him based on the unauthorised ratio of 70%.

356.  I shall deal with the factual findings in relation to the Preparatory Acts below.

RULINGS

357.  Based on the facts as found, David’s proprietary claims based on the alleged agreement must fail.  The alternative claim relying on proprietary estoppel also fails as it is based on the same factual premise. 

358.  I hold that the firm has paid David in full what he was entitled to under his employment, including under the DS Profit Sharing Scheme.

David’s alternative case

359.  On the facts as found, it is clear that David’s alternative case must also fail. 

360.  I have set out David’s plea above.  He specifically pleads that DS had consented to the payments by signing on the relevant documents.  While I have found that DS did sign on the documents, he did not in fact consent to the higher ratio of 70%. 

361.  The relevant factual context here is that David was the finance partner, and DS had relied on him to ensure that the payments were made in accordance with the DS Profit Sharing Scheme.  David however abused his position and instructed the accounting staff to allocate extra unauthorised bonuses to himself. 

362.  Applying the well-known principle set out by the Court of Final Appeal in Ming Shiu Chung v Ming Shiu Sum (2006)  9 HKCFAR 334, at paras 84 and 87, a person is generally held to a document which he has chosen to sign unless there is shown to be a recognised legal basis for concluding that his apparent consent has been in some way vitiated or that reliance on that document by some other person falls into some category of unconscionable conduct justifying relief in equity.  The vitiating factors must be pleaded and established by the evidence.

363.  Here, the fact that unauthorised bonuses had been allocated to David due to his abuse of his position as finance partner has been pleaded and proved. DS should not be held to his signature on the payment documents.  It follows that David’s alternative case which is wholly premised on such signature must fail.

364.  Throughout the trial, Mr Chain had queried the legal basis in support of the alternative case.

365.  I have ruled that the factual premise of the alternative case has not been made out.  It is therefore not necessary for me to go on to consider whether the legal bases are tenable.

DS’s claim based on the Preparatory Acts

366.  I find as facts that when David was still employed by the firm, he had done work and made arrangements in relation to the tenancy agreement and the Law Society registration for his new firm during work hours, and had used the firm’s email system to do so.

367.  I further find that DS had not given his consent for David to engage in such Preparatory Acts during work hours.  DS made clear to David that all of the rights of the firm in relation to David engaging in the Preparatory Acts were expressly reserved.

368.  David, as a senior employee of the firm, was a fiduciary owing a duty of good faith to the firm.  He was not allowed to use the time during which he was meant to be working for the firm to be working for his own interest.  He must not use “company” time other than for “company” purposes: Kao Lee & Yip v Koo Hoi Yan [2003] 3 HKLRD 296, at paras 46 and 57(1).  On the facts as found, David was in breach of his fiduciary duty to the firm by engaging in the Preparatory Acts as identified above.

369.  In this claim, however, Mr Chain relied on further acts of David, including the solicitation of the firm’s clients.  Mr Chain pointed to David’s own evidence in cross-examination that he orally notified the clients that he would leave the firm and some of these clients suggested that they would follow him to his new firm and would terminate their retainers with the firm.  David then drafted standard form termination letters for these clients and submitted the letters to the firm. 

370.  Mr Chain invited the court to find that the solicitation of clients on the part of David, without the consent of the firm, also constituted breach of fiduciary duties, relying on Kao Lee & Yip at para 59(3)  where Ma J (as he then was)  said:

“Finally, I should just mention that even where it is the client that initiates the approach to the partner or employee with the intention that the partner or employee should leave whereupon the client would transfer to him the relevant custom or business, the partner or employee will be in breach of his fiduciary duties if he were to go along with this unless consent is obtained from the beneficiary (whether a fellow partner or the employer): see Sanders v Parry [1967] 1 WLR 753.”

371.  In my view, DS should not be allowed to pursue a claim based on the solicitation of clients because the matter is not properly pleaded.  As such, the issue of solicitation has never become an issue in these proceedings.  I have set out the scope of DS’s plea on the Preparatory Acts above.  In order to pursue the solicitation claim, DS should have, as a minimum, pleaded to the specific acts of solicitation and the names of the wrongfully intercepted clients.  He did not do so.  As his pleadings stand, there is simply no claim of solicitation.

372.  It is true that evidence emerged in the course of cross-examination that may ground a claim of solicitation against David.  However, it would not be procedurally fair to David to make any factual findings or any adverse rulings against him solely on such evidence when the issue of solicitation is never properly identified as an issue to be tried and hence David has never had a proper opportunity to prepare for and answer the claim. 

373.  I note here that in the re-re-re amended defence, David pleads, at para 38(b), that a number of named clients in fact engaged his new firm.  But this does not alter the fact that there was no properly pleaded case put forward by DS in the first place.

374.  What should be the proper relief for David’s breach of fiduciary duties by engaging in the Preparatory Acts of making arrangements for the lease and the Law Society registration for his new firm during work hours?

375.  These are isolated and one-off acts.  While these steps are necessary for the setting up of any new law firm, they are in substance fairly inconsequential steps. 

376.  It will be recalled that an order has been made that if an account of profits is ordered, that will be a separate exercise.  However, it is far-fetched to suggest that David should account to DS for any profits merely by reason of his engaging in the above Preparatory Acts.  No account will be ordered.

377.  I am not prepared to grant any relief save to award the sum of $1 as nominal damages on the basis that David was indeed in breach of his fiduciary duties.

ORDERS

378.  I make the following orders:

(1)  In HCA 2988/2016, there be a declaration that the firm owes no further sums or remuneration to David arising from his employment and position with the firm. 

(2)  The nominal sum of $1 is awarded to DS for David’s breach of fiduciary duties.

(3)  In HCA 3062/2016, David’s action be dismissed.

379.  I make an order nisi that the firm do have costs of the action in HCA 2988/2016, and DS and the service company do have costs of the action in HCA 3062/2016.  In each case, the costs include all costs reserved and are to be taxed if not agreed, with certificate for two counsel.