LI TZE KEUNG v. CHOI YUE MING

1994, No. A3073

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. The plaintiff's claim is inter alias for an account. The claim is based on a partnership that the plaintiff alleged to have been formed pursuant to an oral agreement made in April/May 1993. The defence is that no such agreement existed.

2. The sole question is whether there was such an oral agreement.

3. The Plaintiff's main evidence is his own evidence. The plaintiff also relies on the evidence of a number of his staff members and certain accounts documents.

4. The defence evidence is also mainly that of the defendant himself. He also relies on the majority of the same documents relied on by the plaintiff but he claims that these documents should be given a different interpretation which interpretation shows that no such partnership existed.

5. The issue is really dependant on the credibility of the two parties.

6. The plaintiff, the defendant and a third person called Tung were shareholders of a company Merry Good Company Limited (Merry Good). Each held approximately 1/3 of the shares in the company. The business of Merry Good was mainly in cashmere raw material and garments. The Company owned a retail outlet called Cashmere Collection. The plaintiff was mainly responsible for securing sales orders while Tung for supply of materials. The defendant was more or less a non operative shareholder. The defendant owned a company Avowin Limited (Avowin) and Merry Good had appointed Avowin as contractor for the manufacture of garments. Avowin had connections with factories in China whereby the garments were made for Merry Good.

7. By sometime before April 93, Merry Good was not financially healthy even though Cashmere Collection was making a profit. Tung was discovered to have over priced the raw materials supplied to Merry Good. He was suspected of defrauding the company. At a meeting of directors, it was decided to expel Tung from the board of directors and Tung was reported to the police on allegations of fraud. Police went into investigations which continued into September 1993.

8. After Tung was expelled from the board, Tung spreaded rumours about Merry Good among suppliers of raw materials and clients of Merry Good so much so that their confidence in Merry Good was undermined. Tung also petitioned the court to wind up Merry Good. In addition, Tung wrote to the China State Bank as a result of which the account of Merry Good in the bank was frozen in the sense that Merry Good would have to explain transactions in the account before its facilities could be made use of. The defendant did not have confidence in the future of the company.

9. The plaintiff wanted to save Merry Good. However, in those circumstances, business could not continue in the name of Merry Good. His case is that he and the defendant therefore entered into a joint venture to deal in similar business. It was intended that a new company would be formed to take over the business eventually. Before this new company was set up, the partnership would trade in the name of Avowin and at the same time, it would use the office facilities of Avowin. The staff of Merry Good were retained for the purpose of finishing the outstanding orders of Merry Good and to deal with orders that might come to the partnership. They were to work in the office of Avowin although they would not be employed by Merry Good or employed by Avowin. They were to be the staff of the future company. The plaintiff's evidence is that the defendant agreed that a separate set of accounts would be kept in the books of Avowin and this was to separate the business of the partnership from the business of Avowin. This set is designated X Company account to preserve the identity of the parties.

10. In May 1993, there was a meeting between the staff of Merry Good, the plaintiff and defendant. At the meeting, the plaintiff announced in the presence of the defendant that Tung had been expelled and from then onwards the business of Merry Good would be carried on by a new partnership between him and the defendant. This partnership would trade through the defendant's company Avowin. The staff were also told that they would be employed on the same terms and conditions as before working for the partnership. They were told by the plaintiff that both the plaintiff and defendant would guarantee their wages.

11. The partnership started trading. It is not disputed that uptill December 1993, the Plaintiff had brought to the partnership business transaction worth 18 million in turnover with a net profit of 4.5 million approximately.

12. In August 1993, the plaintiff and defendant discussed their shares in the partnership. The defendant claimed that since he had more capital in the partnership than the plaintiff, he should be entitled to a greater share of the profits. Calculations were made and figures were scribbled out on a piece of paper which is produced. The plaintiff explains that these figures represented their respective shares in Merry Good, the debts owed to them by Merry Good and their respective contributions in cash to the capital. His share was represented by 1 million he borrowed from his former employer Michael Lau, 1.1 million owed to him by Merry Good and $270,000 he paid in cash and cheque. The net result of the calculations was that the plaintiff's capital in the partnership was less than that of the defendant and they agreed that the sharing of the partnership was to be 45/55 between the plaintiff and the defendant.

13. The plaintiff said that a ledger in his name was opened for the purpose of paying the expenses of Merry Good during the period when they were still working on the premises of Merry Good. He and the defendant did not wish Merry Good to close down. The expenses were paid from their partnership funds. He explained that these had to be paid through an account in his name because they did not want anyone to know the connection between X Company and Merry Good. He denied that this was an account of the expenses paid out of personal loans to him by Avowin.

14. The defendant's evidence is that in August 1993, they acquired a limited company called Eternal Mass Limited (Eternal Mass). The plaintiff intended that he should have equal shares in this limited company with the defendant and to achieve that he would put in more capital. Office premises were acquired for the new company to commence business. However, the defendant insisted on having 55% in the new company and this resulted in disagreement and Eternal Mass Limited did not commence business in that event.

15. The plaintiff said that because of such disagreement, they decided to terminate the partnership business. Since outstanding transactions had to be completed, they agreed to continue the partnership until December 1993.

16. In December 1993 the retail outlet Cashmere Collection was sold. The proceeds of sale could not be paid into the frozen account of Merry Good. The money was thus paid into the account of Avowin. The plaintiff was paid 45% of the proceeds of the sale. There was a stock taking by a Mr. Chan Yiu Keung who spent a number of days in China for that purpose and produced a stock inventory dated 28th October 1993. Both the defendant and the plaintiff were each given a copy. The exercise was taken because of the termination of the partnership. The plaintiff said that the sharing of the proceeds of the sale of Cashmere Collection indicated his share in the partnership was 45%.

17. The defendant's evidence is that when Merry Good ran into difficulty after the departure of Tung, he did not think it possible to continue the business of Merry Good. But the plaintiff thought otherwise and sought to keep Merry Good afloat. He and the plaintiff agreed to set up a new company for their continued co-operation and in August 93, Eternal Mass Limited was acquired and office premises were rented for the new company to commence business. They agreed that their shareholdings in Eternal Mass should be equal. They would inject equal amounts of capital since the plaintiff's actual capital contribution was then less than the defendant's. The defendant said in his witness statement, that he had made rough calculations of their actual respective capital contributions in this company on a piece of paper. This is the paper which according to the plaintiff bore the calculations of their respective shares in the partnership. But in his oral evidence, the defendant said otherwise. He said that the figures on this piece of paper were meaningless. In any case, his evidence is because the plaintiff failed to contribute more to the capital of Eternal Mass as promised, the new company was not put into operation.

18. The Defendant said that Avowin operated a cashmere section and after the incident in Merry Good involving Tung, he wanted to keep track of the performance of the cashmere section. He instructed his accountant Mr. Yeung to prepare separate accounts for the cashmere section. These are the accounts in the name of X Company. He said the choice of X Company for these accounts was for no particular reason except for convenience only.

19. He agreed that after the departure of Tung from Merry Good there was a meeting with the staff of Merry Good and both he and the plaintiff were present. At this meeting, they announced to the staff that the two of them would continue to employ them and this was to ensure that they would not lose confidence in Merry Good. He admitted that at that time he did not have confidence in Merry Good any more and what he represented through the plaintiff to the staff was a lie. However, he admitted that he opposed the petition when Tung sought to wind up Merry Good.

20. He denied that the plaintiff had injected 1.27 millions into the company. He said that 1 million of this amount was a loan from Michael Lau to Avowin. This loan was obtained through the plaintiff's assistance. This had been repaid to Michael Lau as was evidenced by the cheque dated 5th September 1993. But he admitted he did not know Michael Lau. It should be noted that neither the X Company account nor the plaintiff's personal account with Avowin shows there was this money. As regards the remaining $270,000, the defendant admitted that two sums of $120,000 and $150,000 were paid into the account of Avowin by the plaintiff but he said these were for repayments of advances by Avowin to the plaintiff. It should be noted that this sum of $270,000 was credited into the X Company account. He said that since the plaintiff wanted to save Merry Good, personal loans were made to the plaintiff to cover the expenses of Merry Good. However, a sum of $60,000 was debited in the defendant's favour for November 1993 in the personal account of the plaintiff. This is inconsistent with his story of personal loans to the plaintiff to save Merry Good.

21. There are two sets of vertical format X Company account. One was produced by the plaintiff and the other produced by the defendant. These two sets covered the same period of time. Both contained an entry on 21st September in respect of $270,000. In the plaintiff's set this was entered as "Investment - Mr. Andrew Lee" whereas in defendant's set, it was entered as "From Mr. Choi". The plaintiff alleged that the defendant's set was a forgery. Expert evidence was called. The expert opinion is not in dispute. The expert examined the entry "From Mr. Choi". Her opinion is that these words were written over writings probably made in pencil which had been first removed. These previous writings were consistent with the initial letters of the word "Andrew". The defendant's explanation was that this was first made by the accountant in draft and the accountant made a correction after he found it was a wrong entry. Unfortunately the accountant was not called to explain why, if indeed it was a correction, it was necessary. He denied that the 4 staff members were employed by any partnership. He relied on the evidence that these employees signed for their salary on vouchers issued by Avowin and that they had claimed against Avowin for wages in the Labour Tribunal.

22. To support his evidence that he injected the money into the partnership, the plaintiff relied on the evidence of Michael Lau and the account of X Company.

23. Michael Lau confirmed that he lent to the plaintiff 1 million dollars which was later repaid. His evidence was not challenged by the defendant. He stated that he did not know the defendant or Avowin and there was no reason for him to lend money to Avowin. The cheque was made out in favour of Avowin instead of the Plaintiff, because the plaintiff requested him to do so.

24. In the X Company account there is an entry of "Investment Mr. Andrew Lee - $270,000". The entries also show that on 18th June 1993 $300,030 were paid to the Shenzhen Mediation Centre. The plaintiff said that he had purchased a cashier order in the sum of $300,030 and the order was payable to the Shenzhen Mediation Centre. The money to buy the cashier order came from his contribution of $270,000 and another cheque drawn on Avowin's account. In the account of the defendant, two sums $120,000 and $150,000 were shown to have been made in favour of the defendant. The Plaintiff said that these entries showed that he had paid into the partnership $270,000.

25. Chan Yiu Keung, Wong Lai Chu and Fok Wai Leung all staff of Merry Good gave evidence confirming that the plaintiff in the presence of the defendant told them at the meeting that despite what had happened with Merry Good, both of them would continue the business in partnership and they would trade through Avowin for the time being until the eventual set-up of a new company to take over the business.

26. One of the staff members, Chan Yiu Keung specifically said that he was expressly asked by the plaintiff and the defendant to obtain orders under the name of Avowin and he considered himself an employee of both the plaintiff and the defendant although he worked under the supervision of the plaintiff.

27. These employees denied they were staff of Avowin. They explained that they claimed against Avowin because they were told by the Labour Tribunal to do so and because they were told by the plaintiff and the defendant to move to Avowin to work for them. Because the plaintiff and defendant were also the bosses of Merry Good, they had also claimed against Merry Good.

28. I find that the calculations made by the defendant on the piece of paper in August 1993 were calculations of the parties' actual respective capital contributions to a partnership between them. The calculations were made for the purpose of determining their shareholdings in the new company. They agreed that each should hold 50% shares in the new company and actual contributions to the capital would be made at a later date. The renting and use of the office in Kwun Tong in September 93 by Eternal Mass, though for a short time, is evidence that the new company had started its preliminary operations and it was only when the defendant reneged and insisted to have 55% shareholding that company operations ceased. The defendant said that the plaintiff rented the office without his agreement and the lease was cancelled because the office was too small. Nevertheless, he agreed to pay compensation for termination of the lease. I do not accept that this was the case. I find the lease of the office was cancelled because of their disagreement in shareholdings.

29. I find that after Tung was expelled, the staff of Merry Good had a meeting with the plaintiff and the defendant. The plaintiff and the defendant told them they would continue the business in the form of a partnership with a view that the business would be taken over by a company to be formed. I do not accept that the defendant was at the meeting merely to make his presence.

30. I do not accept the defendant's version that the X Company account was set up for him to keep track of the performance in the cashmere section of Avowin. There is no evidence that such a section existed in Avowin. I do not accept that it was for convenience that he chose the name X Company. If the account purely related to a particular section dealing with cashmere I see no reason that it could not be given a proper designation such as "Cashmere Section, Avowin." No reason has been advanced by the defendant for not doing so. The defendant's claim that the accountant copied the accounts to keep him informed of the section's profitability is hard to believe. Why should the accountant take up the laborious task of copying when he could have easily, if not better, achieved the purpose by making regular reports to the defendant?

31. I find that Michael Lau lent to the plaintiff 1 million dollars for him to inject into the partnership as his contribution to the partnership capital. I reject the defendant's claim that it was a loan to Avowin. Michael Lau said in his affirmation that he did not know the defendant or Avowin. There was no reason that he should lend the money to the defendant. The defendant admitted in evidence that he did not know Michael Lau. He simply relied on the fact the repayment was made by a cheque drawn on Avowin Account. Michael Lau made out the cheque of 1 million payable to Avowin at the plaintiff's request. Bearing in mind the plaintiff and the defendant were doing their cashmere business through Avowin and the account of the partnership was in the books of Avowin though kept separately, it was reasonable for the Plaintiff to request that the money for injection into the partnership be paid into Avowin.

32. There are two receipts jointly signed by the defendant and the plaintiff acknowledging receipt of $810,993.55 for the sale of Cashmere Collection to the purchaser Rebecca Ko. One of them is for 55% and the other for 45% of this amount. There is also one receipt signed by the defendant on behalf of Avowin acknowledging receipt of the sum of $810,993.55 and another receipt signed by the plaintiff acknowledging receipt of 45% of this sum from Avowin. These receipts show that the whole purchase price was paid by Rebecca Ko and this was paid to the defendant out of which the plaintiff obtained 45%. The evidence of these receipts supports the plaintiff's case that he had 45% interest in the partnership and the account of Avowin was used for the receipt, payment out and sharing of the proceeds of sale between the plaintiff and the defendant. The defendant says in fact no such amount had been received. Only the 1st instalment representing 45% of the proceeds of sale was received. The receipts were signed by him in blank at the request of the plaintiff. Rebecca Ko's evidence appears to support the defendant. However, I do not accept her evidence. I do not accept the defendant being a shrewd businessman himself would have signed receipt for such a substantial sum as $810,995.55 when only less than half had been received. The evidence of receipts speaks for itself. It is evidence which supports the plaintiff's version.

33. On balance of probabilities, I accept the plaintiff's evidence and reject the defendant's. I find a partnership existed between the plaintiff and the defendant. I find for the plaintiff.

34. Judgment is entered for the plaintiff for order of an account and enquires to be taken.

35. Costs to the plaintiff.

(Arthur Leong)

Judge of the High Court