DCCJ 2386/2016
[2020] HKDC 229
IN THE DISTRICT COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
CIVIL ACTION NO 2386 OF 2016
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BETWEEN
九龍金華護老院有限公司
Plaintiff
and
鄒錚
1st Defendant
鄭錦秀
2nd Defendant
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Before: Deputy District Judge Barbara Wong in Court
Date of Hearing: 14-18 October and 13-14 & 29 November 2019
Date of Judgment: 22 May 2020
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JUDGMENT
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1. This case involves a money claim and counterclaim. It arose from a working relationship among three persons with a long-standing history of amicable co-operation until the unfortunate events recounted in this Judgment set them on a path which led to their roles as litigants before this court.
2. Before this court is a claim by the plaintiff against two defendants who are mother (2nd defendant (鄭錦秀) “Madam Cheng”) and daughter (1st defendant 鄒錚 “Madam Chau”). Madam Cheng was (and still is) founder, director and shareholder of the plaintiff company, which was set up on 12 August 2006 by Lie Tjen Kioe (李貞嬌) (“Madam Lie”), Cheuk Yan Miu (卓仁妙) (“Madam Cheuk”), together with herself (Madam Cheng).
3. In April 2011[1] st defendant became an employee of the plaintiff as an Assistant (助理員), subsequently and soon promoted to the position of Home Manager (主管)[2]
4. The plaintiff sues both defendants for breach of fiduciary duty to it for acting jointly to overpay to 1st defendant, without having been duly authorised by the plaintiff. The amount claimed to have been overpaid is HK$345,200.00. At the beginning and conclusion of the trial, the plaintiff accepted that the defendants had not received their respective salary at HK$20,000 and HK$6,500 between May 2015 and 16 September 2015, totalling HK$119,250.00. Also, the 1st defendant has refused to accept the severance pay at HK$60,350.01 (calculated by the plaintiff on the basis of her monthly salary of HK$20,000) offered to pay to her by the plaintiff[3] st defendant alleges she is entitled to. The plaintiff having accepted that these sums in total ie HK$119,250 + HK$60,350.01 or HK$179,600.01 may be used to set off the amount the plaintiff sues for, and giving credit for these sums, now sues for the sum of HK$165,599.99, which is arrived by deducting the said set off amount of HK$179,600.01 from the plaintiff’s claim of HK$345,200.00 as set out in its Statement of Claim.
The Counterclaim
5. The 2nd defendant (Madam Cheng) counterclaims against the plaintiff for the amount which she claims is due to her under an agreement for profit sharing. The amount counter-claimed is HK$653,480.78.
6. This has been a hard fought case, when nearly all allegations by one side is disputed by the other. Each side was represented by counsel, with the trial taking 8 hearing days, when extensive cross examination and oral submissions took place. There was voluminous documentation placed before the court, most of which was examined in the course of oral evidence before this court, but in the end, there was little of real use in deciding this case.
7. To reach an understanding of the claim and counter-claim, and why the contending sides were at such loggerheads, it is necessary to go into some detail as to how the dispute arose.
THE EVIDENCE
The human protagonists
8. There are four human protagonists in this Case.
9. The first three, Madam Lie Tjen Kioe (李貞嬌) (“Madam Lie”)，Cheuk Yan Miu (卓仁妙) (“Madam Cheuk ”)，Cheng Kam Sau (鄭錦秀) (“Madam Cheng”) (the 2nd defendant) first met in 2002, although the 2nd defendant says that she had known Madam Lie from as early as 1983 when they first met in a gathering of persons involved in the business of operating homes for the elderly. All three have been in this line of business for some considerable time.
10. The fourth, Chau Tsang (鄒錚), who is also called Rebecca, is the daughter of the 2nd defendant. Counsel for the plaintiff Ms Yue in her oral closing submissions, in particular stressed that the three founders of the plaintiff were all along in good relationship until the 1st defendant came into the picture, after which the “chemistry” between the three gradually changed and evolved into the present litigation. Nevertheless, the three remaining co-directors of the plaintiff and of another nursing home (details of which can be seen from the ensuing paragraphs).
History of plaintiff’s business
11. Madam Lie was, in 2002, the sole owner of the Kowloon Tong Elderly Centre (九龍塘護老中心) and of the Kowloon Kam Wah Home for the Aged (九龍金華護老院), having run such homes since the 1990’s. In about August 2002, she sold to each of Madam Cheuk and the 2nd defendant (Madam Cheng), a one-third share in these two institutions.[4] nd defendant) had similar responsibility on Kowloon Tong Elderly Centre (九龍塘護老中心). Then in about July 2006, these three business partners agreed to acquire all the shareholdings in the Hong Ling Home for the Aged Limited (康寧護老中心有限公司) at HK$5.5 million (borrowed from a bank), and combined the businesses of the Kowloon Tong Elderly Centre (九龍塘護老中心) and of the said Kowloon Kam Wah Home for the Aged (九龍金華護老院) (which is named “Old Kam Wah” 舊九龍金華護老院 in this case) into the business of this limited company, and consolidating all operations (including all tenants) into the premises at 3/F, Cambridge Court, 84 Waterloo Road, Kowloon. Thus, all three businesses were merged into one. The plaintiff (Kowloon Kam Wah Home for the Aged Limited 九龍金華護老院有限公司) was incorporated on 7 August 2006[5] [6]
“股東若有疑問（對院舍之財務，管理，購物等）和非議採取召開股東會議來決定，不准在私下議論”[7]
(If the shareholders have any issues (regarding the finances, management or procurement in the Home) and any disagreements, they shall call a shareholders’ meeting to decide the issue and no one shall resolve any issue privately.)
12. On 1 September 2006, acquisition of Hong Ling Home For the Aged Ltd was completed, by then each of these three business partners were issued 1000 shares in the plaintiff and each became a director thereof. Thereafter, the institution at Cambridge Court was re-named Kowloon Kam Wah Elderly Home ( 九龍金華護老院) (“the Home”).
Oral agreement between Madam Lie and Madam Cheuk and 2nd defendant
13. Although Madam Lie and Madam Cheuk and the 2nd defendant (Madam Cheng) were shareholders and directors of the plaintiff, they had other business interests and therefore left the day-to-day management of the business of the plaintiff in hands of the 2nd defendant (Madam Cheng)[8] nd defendant’s (Madam Cheng) remuneration and how the profits arising from the operations of the plaintiff would be shared.
14. It was Madam Lie and Madam Cheuk’s case (and also the plaintiff’s case), that this oral agreement consisted of the following terms:-
(i) daily operations and financial matters were to be handled by 2nd defendant (Madam Cheng) (日常營運及財政事務交由第二被告人負責), according to their witness statements. The 2nd defendant (Madam Cheng) shall initially receive a monthly salary of HK$10,000 but after the shareholders of the plaintiff have recouped their investment in the plaintiff, then the monthly salary of the 2nd defendant shall be adjusted to HK$20,000;
(ii) The profit and loss arising from the operations of the plaintiff shall be reckoned on a monthly basis, and if after expenses, there is a profit, then the 2nd defendant (Madam Cheng) shall have 10% of this profit and the remaining 90%, shall be equally distributed to each of the three shareholders; and
(iii) Cheques issued by the plaintiff should be signed by two directors, ie Madam Cheuk and the 2nd defendant (Madam Cheng)[9]
15. It is not in dispute that due to the trust reposed in the 2nd defendant (Madam Cheng) by the other two directors, it was customary for Madam Cheuk to sign batches of cheques in blank to facilitate the 2nd defendant (Madam Cheng) in her work and this continued until sometime in April 2015 when such practice was stopped as disputes arose between the three shareholders at the time when the tenancy of Cambridge Court premises of the Home was about to expire in September 2014 and steps were taken to negotiate with the landlord for renewal of tenancy.
16. It is the plaintiff’s case[10] nd defendant (Madam Cheng) was according to the aforesaid oral agreement, adjusted to HK$20,000 and 10% of the monthly profits arising from the plaintiff’s operations, if any, were then distributed to the 2nd defendant (Madam Cheng) and thereafter, the remaining profits were equally distributed among the three shareholders. Madam Lie said in her 1st witness statement (paragraph 10) (adopted as evidence in chief) dated 15 July 2016 that profits were distributed from August 2009 until about January 2014[11] [12]
17. The terms of the oral agreement are, unfortunately, a matter under dispute in this litigation.
18. The 2nd defendant (Madam Cheng) also agreed that there was indeed an oral agreement among the three shareholders of the plaintiff in about August 2006 regarding her remuneration, which was agreed to be HK$10,000 and upon the plaintiff have recouped their investment in the plaintiff, then the monthly salary of the 2nd defendant (Madam Cheng) shall be adjusted to HK$20,000 per month; and that cheques issued by the plaintiff should be signed by two directors.
19. But the 2nd defendant (Madam Cheng) alleges that her powers and the terms of profit sharing were rather different. She alleges such terms to be as follows:-
(i) That she would have the power to manage the plaintiff and its business, namely its daily operations and its finances, including but not limited to hiring, termination and dismissal of employment of employees, fixing and adjusting the salaries of employees, and matters relating to their allowances, bonuses and performance pay; and
(ii) That after the capital investment in the business of Kowloon Kam Wah Elderly Home has been recouped, the profits after deducting expenses, plus all profits arising out of the operations of the plaintiff including but not limited to the sale of the plaintiff’s operations and operating licence, the 2nd defendant shall have the right to take 10% thereof as “management fee” and the remaining 90% shall be equally distributed among Madam Lie and Cheuk and the 2nd defendant (Madam Cheng).
20. Contrary to the allegation of Madam Lie and Madam Cheuk, the 2nd defendant (Madam Cheng) in her 1st witness statement (paragraph 9) (adopted as evidence in chief) dated 8 September 2017 alleges that the plaintiff achieved recoupment of capital invested in or about September 2008 (as opposed to August 2009 as alleged by the plaintiff) and that at that time, the three of them (Madam Lie and Madam Cheuk and the 2nd defendant) orally agreed to supplement the original oral agreement of 2006. It is not easy to understand the terms of this alleged supplemental agreement. In paragraph 5 of the Amended Defence, it is expressed as follows:-
“由第二被告從原告人現金盈餘（即原告人的淨盈利及利潤，而原告人有足夠現金以分配公司的利潤）先抽取原告人淨盈利/利潤的現金盈餘的百分之十為管理費，餘下的現金盈餘的百分之九十則平均分給第二被告，李女士及卓女士”。
21. Counsel did not attempt a translation, so the best understanding of the court of this alleged term is as follows:-
“The 2nd defendant may from the operating cash surplus (namely, the plaintiff’s net operating profit and profit, with the plaintiff having sufficient cash for distribution of the Company’s profit) first take 10% from the cash surplus of net operating profit/profit as management fee, the remaining 90% shall be equally distributed among the 2nd defendant, Madam Lie and Madam Cheuk”.
22. The 2nd defendant (Madam Cheng) alleges that from the time of this supplemental agreement until about January 2014[13] nd defendant (Madam Cheng) also alleges that from September 2008, she began to draw a monthly salary of HK$20,000.
23. Also, the 2nd defendant (Madam Cheng) asserts that since May 2010, she has started to get additional HK$3,000 per month as “transportation allowance” from her home in Tuen Mun to the plaintiff’s office or the Home in Cambridge Court.[14] nd defendant (Madam Cheng) acknowledged that Madam Cheuk did sign batches of blank cheques and gave them to the 2nd defendant (Madam Cheng) from time to time for the latter custody with a view to avoiding delay in paying expenses incurred by the plaintiff. However, the 2nd defendant (Madam Cheng) also alleges that as from January 2014 to 16 September 2015 (in her 1st witness statement dated 8 September 2017 at paragraph 45 which was adopted as evidence in chief), the plaintiff, Madam Lie and Madam Cheuk stopped paying her the management fee and failed to distribute the cash profits as agreed under the oral agreement and the supplemental agreement.
Employment of the 1st defendant
24. The 2nd defendant (Madam Cheng) in paragraphs 16 & 17 of her witness statement dated 8 September 2017 asserts that as time went by, her workload in plaintiff was getting heavy and it was getting hard for her to manage things. In the course of a meeting with Madam Lie and Madam Cheuk, the 2nd defendant (Madam Cheng) did raise with Madam Lie and Madam Cheuk that if her daughter (the 1st defendant) then living in Malaysia could come back to help her, her heavy workload may likely be lightened. Both Madam Lie and Madam Cheuk agreed that it may be so. Madam Lie on another occasion asked the 2nd defendant (Madam Cheng) whether the 1st defendant could come to Hong Kong. As a result, the 2nd defendant (Madam Cheng) raised this with the 1st defendant who ultimately returned to Hong Kong for good in January 2011.
25. Thus, in about early 2011, the 2nd defendant (Madam Cheng) informed Madam Lie and Madam Cheuk that her daughter, the 1st defendant, had returned to live permanently in Hong Kong for the purpose of helping her (the 2nd defendant) in managing the business of the plaintiff. The 2nd defendant (Madam Cheng) claimed that ever since the 1st defendant had returned to Hong Kong in January 2011 and before June 2011, the 1st defendant helped with her (the 2nd defendant’s) work in managing the plaintiff for free. However, for convenience and in order to facilitate the 1st defendant in helping in her work in the plaintiff, the 2nd defendant (Madam Cheng), representing the plaintiff, signed a written Employment Contract with the 1st defendant on 1 April 2011, employing the 1st defendant as “assistant” (助理員) with a monthly salary of HK$8,000. The 2nd defendant (Madam Cheng) said such matter had been raised with Madam Lie and Madam Cheuk in March 2011 and she suggested that the 1st defendant be employed by the plaintiff at the monthly salary of HK$8,000[15]
26. The 1st defendant commenced employment with the plaintiff formally on 1 April 2011 at the said monthly salary of HK$8,000. It is pertinent to note that the written Contract of Employment was signed between the plaintiff (with the 2nd defendant signing on behalf of the plaintiff)[16] st defendant, it was specifically stated in paragraph 7 that the monthly salary was HK$8,000 and that there shall be no performance bonus, no periodic annual compensation including double pay, annual bonus, etc. It might also be mentioned in passing that Madam Lie denied the 2nd defendant’s assertion that the 1st defendant had worked for the plaintiff for free for the months of April and May 2011 or at any time from the arrival of the 1st defendant in February 2011 to May 2011 as alleged by the 1st defendant, as it was Madam Lie who suggested to the 2nd defendant (Madam Cheng) in the first place to let the plaintiff recruit the 1st defendant so that she could familiarise with the business of the plaintiff and let the 1st defendant to take up the helm from the 2nd defendant (Madam Cheng) in due course. Thus, Madam Lie stressed that there was no such necessity for the 1st defendant to work for the plaintiff on a pro bono basis and in any event, since under the written Contract of Employment, employment of the 1st defendant formally began on 1 April 2011. As it was the 2nd defendant who managed the Home, Madam Lie could not understand why the 1st defendant was not given salary in April and May 2011[17]
27. In cross examination, the 1st defendant added to this history, alleging that she came to Hong Kong with her family in late January 2011. She started to go to work in the Home from February 2011, on a regular pattern for 5 days a week after she sent her children to school for the purpose of learning or familiarizing herself with the operations of the Home. And her husband Mr Lee Chung Kit also joined her, both working as “volunteers” from January 2011 to about April 2011. The 1st defendant in particular testified that she did not receive any salary from February to May 2011 and she remembered her husband did not receive any salary until later. Madam Lie questioned why this should be the case[18] st defendant, confronted the 1st defendant with records that showed that her husband received salary even as early as in February 2011 (HK$6,800 salary paid to him in February 2011)[19] st defendant was asked who raised the salary of her husband in such rate within short time. In reply, the 1st defendant said it was the 2nd defendant (Madam Cheng) who raised the salary of her husband, the son-in-law of the 2nd defendant (Madam Cheng). The 1st defendant disagreed with the counsel for the plaintiff when the latter suggested to her that, given this evidence, (1) there is no mechanism for pay increase between 2011 and 16 September 2015; (2) the payment of salary and increase of salary at such rate (including those paid to the 1st defendant) were done at the whim of her (1st defendant) or her mother (2nd defendant) and they were all “underhanded secret dealings” (「鍾意加就加，私相授受」).
28. On or about May 2011, the 2nd defendant (Madam Cheng) informed Madam Lie and Madam Cheuk that she would like to lessen her workload in the plaintiff and in due course passed the helm to the 1st defendant. It was agreed among the three shareholders of the plaintiff that the 1st defendant was to be appointed “Home Manager” (主管)[20] st defendant was formally appointed as “Home Manager”. This was evidenced by a letter dated 1 June 2011 formally appointing the 1st defendant to such effect but at the revised monthly salary of HK$20,000 effective from 1 June 2011[21] nd defendant (Madam Cheng) in particular pointed out in that letter that, apart from the post, salary and working hours, “other terms and conditions in the previous contract remain unchanged”. The letter communicating these altered terms to the 1st defendant was signed by the 2nd defendant (Madam Cheng) acting as “Principle” (sic) of the plaintiff[22]
29. It is, however, in dispute as to how the monthly remuneration of the 1st defendant (daughter) and the 2nd defendant Madam Cheng (mother) was adjusted after the promotion of the daughter to the post of “Home Manager” (主管) with effect from 1 June 2011. On the one hand, the 2nd defendant (Madam Cheng) said that she had reduced her original salary plus travel allowance of HK$23,000 to HK$10,000[23] st defendant) would take the mother’s original salary of HK$20,000 plus HK$3,000 travel allowance. The 2nd defendant said both Madam Lie and Madam Cheuk had agreed to such arrangement. However, Madam Lie and Madam Cheuk stated that they had both agreed to the appointment of the 1st defendant as Home Manager with effect from 1 June 2011 with a salary of HK$20,000 which was agreed as a swap with the salary originally to be received by the 2nd defendant. In return, the 2nd defendant (Madam Cheng) would only receive HK$6,500 as “transportation expenses”. Madam Lie and Madam Cheuk say that this was the only compensation agreed upon then and subsequently. Thus, they say that the 2nd defendant (Madam Cheng) without authority and in breach of fiduciary duty, and without informing them and obtaining their consent, unilaterally increased the salary and allowances of the 1st defendant and contrived to pay bonuses to the 1st defendant. They also allege that the 1st defendant, as Home Manager and keeper of the records, should have known that the 2nd defendant (Madam Cheng) had no authority to require the plaintiff to pay her the additional salary, allowances and bonuses she received, and that therefore, she was in breach of her fiduciary duty to the plaintiff in receiving these additional payments without bringing this to the attention of the other two shareholders and receiving their approval therefor. This will be analysed later in this Judgment in conjunction with the defence case.
Kang Fook Rest Home for the Aged Limited ( 康福護老中心有限公司) (“Kang Fook”) which runs Kang Fook Rest Home (康福護老中心)
30. Sometime in September 2013, the Kang Fook Rest Home for the Aged Limited (康福護老中心有限公司) (“Kang Fook”) was started by the plaintiff. It was the testimony of Madam Lie[24] nd defendant (Madam Cheng) informed her in tears that she could not get along with the 1st defendant because, although they were mother and daughter, they did not see eye to eye in running the Home at Cambridge Court. After discussion among the three shareholders (Madam Lie and Madam Cheuk and the 2nd defendant), it was decided that Kang Fook would be started by the plaintiff and that its day to day operations would be overseen by the 2nd defendant (Madam Cheng), so that she would not need to clash with her daughter, the 1st defendant.
31. Madam Lie’s aforesaid narrative was not agreed to by the 1st and 2nd defendants, who insisted that, since February 2014, the 1st defendant was put in charge of both homes at the same time and therefore deserved to be paid more by the plaintiff and be promoted to the rank of 行政主管 (which the defence did not provide for an equivalent English expression but this should be different from the post of “Home Manager” (主管) as set out in the letter on 1 June 2011 from the plaintiff to the 1st defendant) by reason of increase in workload and longer working hours[25] nd defendant (Madam Cheng) said that, representing the plaintiff, she increased the salary of the 1st defendant from HK$25,000 to HK$30,000. The 2nd defendant (Madam Cheng) also said that she had in fact raised this pay rise and promotion of the 1st defendant with Madam Lie and Madam Cheuk in early 2014 and they both agreed. The 2nd defendant (Madam Cheng) also said that due to the management and revamp (管理改革下) by the 1st defendant, the Home was upgraded to the Social Welfare Department (SWD) level of Grade A1 in 2013[26] [27] nd defendant (Madam Cheng) that all credit for such upgrade must go to her daughter (the 1st defendant). The 2nd defendant (Madam Cheng) in particular alleges that while the revenue of the Home of the plaintiff drastically increased after it was upgraded to Grade A1, the plaintiff needed to increase manpower and expenditures on salaries in order to maintain such grading and standard.
32. The 2nd defendant (Madam Cheng) said that in December 2014, she gave a copy of the plaintiff’s salaries expenditure report[28] nd defendant (Madam Cheng) to sign various documents whenever she came to the Home and she would do so without generally looking, trusting the 2nd defendant (Madam Cheng). The salaries records must have been one of these documents, Madam Lie said. Madam Lie, at trial was asked whether she had ever seen the salary record. She replied that “no one report to me, and also I used not to see it. Everytime I came, I was asked to sign only. For Plaintiff Company, I trust the 2nd defendant and thus did not ask to look at documents.”
33. This one salaries record page bearing the signature of Madam Lie represents one of the puzzling features of this case. On the one hand, it is the defence case that Madam Lie & Madam Cheuk were constantly kept informed by the 2nd defendant (Madam Cheng) as to the operations of the plaintiff including the expenditures which can be seen from the 2013, 2014 & 2015 accounting reports copies allegedly provided by the 2nd defendant to them[29] nd defendant (Madam Cheng) to prepare this solitary document (the November 2014 salaries expenditures) and then procured Madam Lie’s signature on it?
Expiry of Lease at Cambridge Court
34. The lease of 3/F, Cambridge Court, the premises by which the plaintiff had hitherto conducted the Kowloon Kam Wah Elderly Home (九龍金華護老院) (the Home), was due to expire in September 2014. There is no dispute that sometime in July 2014, the landlord had asked for over 60% increase in rent[30]
35. It is the evidence of Madam Lie and Madam Cheuk (which is not controverted by evidence by any of the two defendants) that sometime before September 2014, they employed a law firm to seek from the landlord, a reduction of rent and in the course of these discussions, they asked the 2nd defendant (Madam Cheng) for details of the expenditure of the plaintiff, including staff pay records, which could be used as justification for rent reduction. But this was not forthcoming from the 2nd defendant (Madam Cheng) despite repeated requests made to the 2nd defendant (Madam Cheng).
36. Sometime in December 2014, the plaintiff’s then solicitors received a letter from the landlord’s solicitors indicating that a Miss Chau (周小姐) and the landlord had, in about September 2014, agreed a temporary tenancy for 6 months from 28 September 2014 at HK$620,000 for the plaintiff’s premises[31] st defendant but that was denied by the 1st defendant[32] st and 2nd defendants.
The formation of Le Grand Silverjoy Limited (“Le Grand”) and business merger between Le Grand and plaintiff
37. On 29 September 2014, a company was set up by the name of Le Grand Silverjoy Limited (耆樂天地有限公司) (“Le Grand”). Sometime between this date and 5 November 2014, Madam Lie and Madam Cheuk, the 2nd defendant and Mr Chan Yuk Choi Peter (“Peter Chan”) became directors and shareholders of Le Grand.
38. At the first directors’ meeting of Le Grand held on 5 November 2014[33] nd defendant (Madam Cheng) would each contribute HK$3 Million and the remaining HK$15 Million would be borrowed from banks. The shareholdings would accordingly be 40% to Madam Lie, 20% to Madam Cheuk, 20% to the 2nd defendant (Madam Cheng) and 20% to Peter Chan. It was also agreed, inter alia, that Le Grand would purchase from any other institution Grade A1 (甲一級) beds at HK$80,000 each and Grade A-2 beds (甲二級) at HK$60,000, and private beds at 6 months’ residential fees exclusive of other charges[34]
39. At the 2nd Directors’ Meeting of Le Grand, held on 17 November 2014, it was further agreed that the shareholding of the 2nd defendant (Madam Cheng) be adjusted to 15% (instead of original 20%) and her 5% was taken up by Mr Peter Chan, who thereupon become a 25% shareholder of Le Grand, the other shareholdings remaining unchanged[35]
40. By the time of the 6th Directors’ Meeting of Le Grand, held on 13 April 2015, new premises for Le Grand had been acquired and plans were put into place to transfer the beds of the plaintiff and 曉光（紅磡）護老中心to Le Grand and preparations for the move have begun. The meeting agreed upon a capital call of HK$5 million for daily operational expenses. It must have been this month that an agreement was struck between the plaintiff and Le Grand for a merger of their businesses. The business merger was achieved by the purchase of beds from the plaintiff by Le Grand. Le Grand also purchased beds from 曉光（紅磡）護老中心which belonged to Madam Lie.
41. By the end of the month of April 2015, the 2nd defendant (Madam Cheng) had received a cheque from Le Grand for HK$762,667 as her share for the transfer of the public beds of the plaintiff to Le Grand. The 2nd defendant (Madam Cheng) also received another cheque for HK$738,719.33 as her share for transfer of private beds of the plaintiff to Le Grand. Receipt of these sums was agreed by the 2nd defendant (Madam Cheng). In fact, Ms Ng Lai Man, the accountant involved in doing this accounting exercise of the sale of public beds and private beds pointed out in the hearing that the 2nd defendant (Madam Cheng) was the first one among the three directors or shareholders of the plaintiff to have received the sums from the “notional sale” of public and private beds while Madam Lie and Madam Cheuk received their sums by a few more instalments subsequently. Madam Lie (as well as another witness, the said accountant Ms Ng) provided an explanation as to how this sum was arrived at[36] nd defendant (Madam Cheng). The 2nd defendant (Madam Cheng) denies this and suggest that these transactions represented a sale of asset by the plaintiff resulting in a profit and the profit sharing should be made in accordance with her version of the oral agreement and supplemental agreement as set out in her Counterclaim.
42. In fact, because of the purchase of beds by Le Grand from the plaintiff, none of Madam Lie and Madam Cheuk as well as the 2nd defendant (Madam Cheng) needed to pay any immediate cash for their shareholdings in Le Grand. Each of the shareholders of Le Grand had residual capital contributions responsibility to Le Grand after the merger of the businesses of the plaintiff with Le Grand as well as the merger of the business of 曉光（紅磡）護老中心with Le Grand, but it appears that they would probably have relied on the earnings of the Le Grand business creating distributable profits which are then used to pay for their share of capital contribution. As at the date of the hearing, it is not known if the capital contribution of each of the four shareholders of Le Grand had been fully met.
43. The final chapter in the business transaction between the plaintiff and Le Grand took place on 26 January 2016, when Madam Lie and Madam Cheuk and the 2nd defendant (Madam Cheng) transferred each of their 1000 shares in the plaintiff to Mr Chan Yuk Choi Peter and his nominees[37]
Discovery of alleged overpayment to 1st defendant
44. It was the testimony[38] st defendant was still using the internet account with the bank by herself and in May 2015, they also advised the bank to stop the internet account. During the summer, Madam Lie and Madam Cheuk chased for the accounting records of the plaintiff from the defendants without success and finally sometime in September 2015, Madam Lie and Madam Cheuk sent an agent Mr Chan Sing Tak (陳盛德) to visit the office of the plaintiff to peruse its accounting records, following which it was found that between June 2011 and April 2015, the 1st defendant was overpaid HK$345,200.00 by way of additional salaries, allowances and bonuses which they have never authorized[39] st and 2nd defendants deny that there has been any over-payment and this is one of the main matters in contention in this case.
Alleged failure to hand over records
45. By the minutes of the 15th Meeting of Le Grand, held on 23 November 2015, it was unanimously resolved that Le Grand would take over all the company records, accounting records and audited accounts of the plaintiff for the period 1 April 2008 to 16 September 2015 and that Mr Chan Sing Tak (陳盛德) would contact the 2nd defendant for the receipt of these records at 11 am on 26 November 2015.
46. It was the testimony of Madam Lie that the records were only partially recovered by Mr Chan Sing Tak (陳盛德). In the course of trial, the defence produced a letter dated 10 August 2018 whereby the solicitors for the defendants handed over 26 bank passbooks on account no. 04349810272305 with the Nanyang Commercial Bank and 164 sets of cheque stubs and 2 sets of cheques for the aforesaid account to the plaintiff. Counsel for the plaintiff then indicated that the plaintiff no longer pursued the production of cheque stubs.
47. Madam Lie and Madam Cheuk says that the accounting records which are still missing comprised tax returns, complete staff payroll records, MPF records, etc which are required for the purpose of verifying the financial accounts of the plaintiff. The plaintiff therefore seeks the return of these records from the defendants. During the opening submissions, counsel for the plaintiff emphasised that the plaintiff’s requests for all kinds of documents in relation to financial situation of the plaintiff for the relevant period, was to enable matching exercise and verification to be done. The plaintiff in particular requested for (1) Petty Cash documents in 2008 & 2015 (as plaintiff only has the records of petty cash from 2009 to 2014 at Bundle B1 at pages 295 to 309) & (2) Missing Financial Statements between 1 April 2008 till 31 March 2014.
THE ISSUES
48. The following are the three issues agreed by the parties for determination by this court:-
(i) Whether the 1st defendant was overpaid the amount of HK$345,200.00 and whether the defendants are liable to repay this amount or any amount after set off of severance pay due to them;
(ii) Whether the defendants are liable to return the accounting records, tax returns and payroll records to the plaintiff; and
(iii) Whether the plaintiff owes the 2nd defendant the sum of HK$653,480.73.
DISCUSSION AND DETERMINATION
Issue (i): Overpayment of salary and allowances to the 1st defendant
Approach of the court
49. It is not in dispute that the 1st defendant did receive the alleged sum of HK$345,200, but the 1st defendant denies that it is an overpayment and alleges that this amount had been agreed by the 2nd defendant who, she alleges, had full authority and justification to approve these payments to her, and in any event, these payments were agreed to by Madam Lie and Madam Cheuk. Madam Lie and Madam Cheuk deny these allegations.
50. One distinctive feature of this case is that among the many documents placed before the court, there was only one board meeting minute of the plaintiff admitted into evidence, although there was a pre-incorporation meeting resolution of the shareholders (see: paragraph 11 above). The minute of the Board Meeting of the plaintiff recorded a meeting held on 21 December 2015, by which time, there were quite a number of directors from Mr Peter Chan’s side (in light of the transaction with Le Grand)[40] st defendant for overpayment of salaries and allowances. The solicitors’ firm, now representing the plaintiff, before this court, then on 23 December 2015 issued a demand letter to the 1st defendant pursuant to the plaintiff’s aforesaid Board Resolution[41]
51. In light of the dearth of board resolutions of the plaintiff, it would be necessary for the court to find an anchor within the evidence to test the different allegations of oral agreements put forward by the parties. The best anchor the court can find in these proceedings are, apart from the pre-incorporation resolution referred to in paragraph 11 above, the only two documents which evidence the terms of employment of the 1st defendant. They are:-
(i) The Employment Contract, in Chinese, dated 1 April 2011 between the plaintiff and the 1st defendant[42]
It is a printed form, which suggests that it is a standard employment contract used by the plaintiff. It is quite a thorough document setting out in four pages, the terms as to salaries, allowances, working time, leave, and so on. In particular, paragraph 7 of this Employment Contract sets out the salary of the 1st defendant as HK$8,000, including 3 meals to be provided by the plaintiff, but it specifically states that there is no 「勤工獎」(performance pay) and「僱員並無任何定期每年發放的酬金，包括雙糧，年獎等」(the employee shall have no regular annually paid remuneration, double pay or annual bonus).
(ii) A letter in English dated 1 June 2011, signed by the 2nd defendant, appointing the 1st defendant as Home Manager of the plaintiff[43]
This letter revises the 1st defendant’s salary to HK$20,000 per month effective from 1 June 2011. In the second paragraph, it is stated: “Your working hours will be changed to 9:00 am to 7:00 pm from there onward. Other terms and conditions stated in the previous contract remain unchanged”.
52. From the above evidence, it appears that the plaintiff had a convention of signing formal written contracts with its employees using a pre-printed form with a comprehensive set of terms. It would also appear that any variation to the terms of such written contracts would, more probable than not, as in the case of the letter of 1 June 2011, be also committed to writing. Thus, from the above evidence, the plaintiff could reasonably expect that any further variations to the Employment Contract, beyond the letter of 1 June 2011, if such variation exists, to be recorded in writing and adduced into evidence. This was not done, and thus any variation said to have been approved orally by the 2nd defendant or orally ratified by the shareholders, must be looked at with a high degree of care.
53. It is a well-established principle of assessment of evidence that any court must test all oral allegations not only against contemporaneous documents objectively proved, but also as to their internal consistency and whether the person alleging the oral evidence had been caught lying in an important issue before the court (see: The Ocean Frost [1985] 1 Lloyd’s Rep 1, at p 57, per Lord Goff, LJ, as he then was, and the authorities citied in Hui Cheung Fai v Daiwa Development Ltd [2014] HKCFI 650 by Deputy Judge of the High court, Eugene Fung, SC, from paragraphs 77 – 82).
The allegations of the defendants
54. The allegations of the two defendants may be summarized as follows:-
(i) That by virtue of the oral agreement between the three shareholders of the plaintiff (and they were also directors of the plaintiff), the 2nd defendant (Madam Cheng) had full authority to fix the 1st defendant’s salary;
(ii) That there is no conflict of interest on the part of the 2nd defendant (Madam Cheng) in fixing the salary of her daughter, the 1st defendant;
(iii) The remuneration set by the 2nd defendant (Madam Cheng) was in the circumstances justified;
(iv) If the consent was necessary (which is denied), because the additional remuneration was easily ascertainable, and having trusted Madam Cheng (the 2nd defendant), Madam Lie and Madam Cheuk chose not to inquire; and
(v) In any event, Madam Lie and Madam Cheuk were actually informed by the 2nd defendant (Madam Cheng) of the salary increases of the 1st defendant and they expressed no objection.
55. In support of these allegations, and accepting that they bear the burden of proof of their allegations, both the defendants gave oral evidence, the material respects of which were contradicted by the oral evidence of Madam Lie and Madam Cheuk. It will therefore be necessary to analyse the evidence given by both sides against the documentary evidence before the court.
The Scope of Authority of the 2nd defendant
56. The primary allegation of the defendants is that it is within the scope of the authority of the 2nd defendant (Madam Cheng) for her to approve the salary and other allowances of the 1st defendant. There is no board minute relating to the scope of authority of the 2nd defendant (Madam Cheng). The allegations of the 2nd defendant (Madam Cheng) as to the scope of her authority must therefore be considered with care. A company, being a legal person, can only act by its directors or persons authorized by the directors or by the constitutional documents of the company, and generally speaking, authority given to any person acting for the company, must be clear and unequivocal and should normally be made in writing. An oral agreement as to delegation of authority could not be regarded as generally accepted practice for a legal person, and thus, whoever alleges the existence of such an oral agreement, must adduce clear evidence to prove, that on a balance of probabilities, that such an agreement exists against the denial of other directors, as has happened in this case.
57. It is common ground that the day-to-day management of the Home at Cambridge Court was delegated to the 2nd defendant (Madam Cheng) but the scope of this delegation, at least with regard to remuneration for the 1st defendant, is disputed. From the evidence of Madam Lie and Madam Cheuk, the delegation was an oral agreement without precise definition, with the expectation that the 2nd defendant (Madam Cheng) would consult them in matters of material importance to the running of the Home. In particular, they ensured that at least two members of the board should sign cheques of the plaintiff, thereby making sure that matters of importance would be discussed and agreed among themselves. Between 2011 and sometime in July 2014, Madam Cheuk fell into the habit of signing cheques in blank, based on trust that she reposed on the 2nd defendant (Madam Cheng) and to facilitate the work of the 2nd defendant (Madam Cheng), but she denied that this would imply enlarging the scope of authority of the 2nd defendant (Madam Cheng). Madam Cheuk stressed in trial that it was due to her trust of the 2nd defendant (Madam Cheng) and convenience that she did so.
58. The evidence of both Madam Lie and Madam Cheuk was that they expected the 2nd defendant (Madam Cheng) as their representative and the 1st defendant, as Home Manager, to ensure proper management of the Home and to provide them with information whenever they required it. It was this understanding which made them seek from the 2nd defendant (Madam Cheng), payroll records when they met at their lawyer’s office when the need to lobby the landlord of the Cambridge Court premises came about and in order to do this, it was necessary to show the expenditure of the Home. But it is the evidence of Madam Lie and Madam Cheuk, which I believe, that despite repeated attempts, the payroll records were not forthcoming and in about July 2014, the matter came to a head after meeting at the offices of the plaintiff’s lawyer in the continuing effort to lobby the landlord. At this meeting, the 2nd defendant indicated that the monthly salary expenditure of the Home was HK$750,000 but on the way back to the Home, the 2nd defendant indicated to Madam Lie and Madam Cheuk that not all the salary expenditure of HK$750,000 was paid by cheque HK$750,000 as about HK$300,000 was paid through internet banking or autopay.[44]
59. Subsequent to this meeting, Madam Lie and Madam Cheuk repeatedly requested the 2nd defendant (Madam Cheng) to produce the salary or payroll record in order to enable the lawyers to negotiate with the landlord on behalf of the plaintiff. Nevertheless, nothing came forward from the 2nd defendant (Madam Cheng). Madam Lie and Madam Cheuk became suspicious. Madam Cheuk then said, in her witness statement[45]
60. As Madam Lie and Madam Cheuk continued to deal with the tenancy matter of the plaintiff, they began to sense that the accounts were not in good order. In Madam Lie’s words 「眾多賬目不清」[46] nd defendant (Madam Cheng) and then when they discovered that the 1st defendant was using the internet banking, these two ladies, in May 2015, instructed the said bank to stop internet banking.
61. It is alleged by the 2nd defendant (Madam Cheng) that the scope of this delegation extends to her authority to deciding by herself the remuneration of the 1st defendant. That alleged delegation is however contradicted by the fact that the 2nd defendant (Madam Cheng) had to discuss the initial appointment of the 1st defendant with the plaintiff with Madam Lie and Madam Cheuk, and 2 months later, the 1st defendant’s appointment as Home Manager at the salary of HK$20,000 was also discussed with the other two shareholders and directors of the plaintiff. Whatever the position with regard to other employees, it was clear that as to the 1st defendant, the three shareholders and directors had at least on two occasions, reserved to themselves the right to agree upon her remuneration of the 1st defendant and accordingly, it was unlikely that they would expect anything less in the future. In these circumstances, this would have been a matter for discussion among the shareholders under the Pre-incorporation Shareholders’ Resolution referred to at paragraph 11 above.
62. Another matter which is tellingly contradictory to the existence of a delegation of power to the 2nd defendant (Madam Cheng) to fix the 1st defendant’s salary at her discretion is that it would have been the reasonable expectation of the Madam Lie and Madam Cheuk that the management conventions of the plaintiff would be observed, namely, that any further improvement to the terms of remuneration would be on writing with a reference to the other terms of the terms of the printed employment contract entered into between the 1st defendant and the plaintiff on 1 April 2011. Such written material is wanting in the evidence. This lack of written evidence in relation to the improved remuneration of the 1st defendant suggests a degree of surreptitiousness on the part of both the 1st defendant and the 2nd defendant (Madam Cheng) in avoiding what was a convention or practice of using writing to vary terms of the Employment Contract. The rhetorical question this raises is that why would it be necessary to avoid committing the change of employment terms of the 1st defendant to writing when it was conventional practice to do so, unless it was to avoid having to reveal this to the other two directors who expected this to take place after discussion?
63. Furthermore, the payroll records were not made available to Madam Lie and Madam Cheuk despite repeated requests until sometime in September 2015, by which time the tenants of the plaintiff had moved into the premises of Le Grand. However, they managed to send an agent Mr Chan Sing Tak to attend the offices of the Home, and took the opportunity to peruse the payroll records, when it was discovered that the 1st defendant had been paid salaries, allowances and bonuses well above that set out in the plaintiff’s letter to the 1st defendant of 1 June 2011. These additional sums came to HK$345,200, a sum which is not disputed between the parties, the only question being whether it was a sum which had been properly paid.
64. The simple proposition which may be put is this – if the 2nd defendant (Madam Cheng) did in fact have the power to grant her daughter, the 1st defendant, these additional payments, why was it necessary to do so only orally when there was a practice to record additional terms to her Contract of Employment in writing after discussion between the three directors. The Pre-incorporation Shareholders’ Resolution referred to in paragraph 11 above, would suggest to the 2nd defendant (Madam Cheng) that this was patently not a matter which could be privately resolved by her alone.
65. The other question is why was it necessary for the 2nd defendant and 1st defendant to withhold from Madam Lie and Madam Cheuk the payroll records of the plaintiff? The evidence of Madam Lie and Madam Cheuk, is that the complete accounting records and payroll records of the plaintiff [47] st day of trial which counsel for the defendants Mr Chau said were in fact referred to in the Exhibit CKS-2 disclosed in the witness statement of the 2nd defendant (Madam Cheng) dated 8 September 2017, but for unknown reason or somehow it did not occur to them, that only part of them (only 3 pages of payroll records were provided which were marked as pages 353 to 355 in the trial bundle) were initially provided to those acting for the plaintiff and only after litigation had commenced. Such omission was apparently only discovered on the first day of trial or shortly before the trial, and the defence applied for leave to produce the remaining payroll records (which consisted of 45 pages and were paginated as pages 356-1 to 356-44 on the trial bundles). Counsel for the plaintiff Ms Yue originally strongly objected to such late production on the ground that (1) the plaintiff was taken by surprise by such move on the part of the defence counsel as the plaintiff has asked the defendants to provide for these documents some 4 years ago in November 2015. Thus, these documents should have been be provided a few years ago not just on the 1st day of trial[48] [49]
66. Finally, under this heading, the court will now deal with the closing submissions of counsel for both defendants, in which the following additional points were made:-
(1) That although the employment contract did not contain any entitlement to allowances, bonuses or double pay, it did not preclude Madam Cheng (the 2nd defendant) from having the power to fix or grant, on the plaintiff’s behalf and in addition to the contract, the allowance, and/or bonuses of employees, including Madam Chau’s (the 1st defendant’s);
(2) There being no entire agreement clause in the written employment contract of the 1st defendant, such contract was “not exhaustive” and therefore, there could be and indeed there was, a collateral contract containing the additional remuneration received by the 1st defendant; and
(3) Clause 25 of the Memorandum of Association of the plaintiff (Kowloon Kam Wah Home For the Aged Ltd) provided for the powers of Directors “to engage, suspend or dismiss the employees of the Company, and to fix and vary their salaries or emoluments” and this power was exercised by the 2nd defendant as director with delegated power by the directors or with the expressed agreement of the other directors (see Bundle 1 at p 348).
67. Regrettably, the court can find no merit in these arguments. These arguments are all circular, and they do not answer the critical central question, that is, whether the 2nd defendant (Madam Cheng) had the authority or delegated powers to alter the terms of employment of the 1st defendant set out in writing.
68. In light of the foregoing discussion, I hold and determine that the 2nd defendant (Madam Cheng) had no authority to change the terms the Employment Contract of the 1st defendant dated 1 April 2011 (Bundle B3 at p 782 to 785) with the plaintiff beyond the terms set out in the plaintiff’s letter of 1 June 2011 (which revised the rank and salary of the 1st defendant to Home Manager at the monthly salary of HK$20,000) (Bundle B3 at p 787).
Conflict of interest of the 2nd defendant
69. The way the claim was put was that the 1st defendant was in breach of fiduciary duty in accepting the additional remuneration and that she was assisted in this breach of fiduciary duty by another breach of fiduciary duty on the part of the 2nd defendant (Madam Cheng) who is a director of the plaintiff. In the final analysis, the matter can be better approached in this way. The 2nd defendant (Madam Cheng) is clearly a fiduciary to the plaintiff, being one of its directors. If she had no authority to approve the additional remuneration for her daughter and yet, as in this case, she persisted in so doing, she would obviously be in breach of her fiduciary duty to the plaintiff.
70. The 1st defendant was a Home Manager, charged with the day-to-day administration of the plaintiff and the keeping of records for the Home. She would not normally be in a fiduciary relationship with the plaintiff as a director of the Company would. As Lord Wilberforce giving the judgment of the Privy Council in New Zealand Netherlands Society “Oranje” Inc v Kuys succinctly stated: “The subject matter over which the fiduciary obligations extend is determined by the character of the venture or undertaking for which the partnership exists, and this is to be ascertained, not merely from the express agreement of the parties,…but also from the course of dealing actually pursued by the firm ”[50]
71. In this case, the 1st defendant must have known that in her case, it was the conventional practice of the plaintiff to ensure that her terms of employment are set out in writing. It is also more probable than not in the circumstances that she must have known that her terms of employment as contained in the plaintiff’s letter to her of 1 June 2011 had been the subject of discussion between her mother and the other directors of the plaintiff, namely, Madam Lie and Madam Cheuk. Yet, she was willing to accept an oral direction from her mother, the 2nd defendant (Madam Cheng), when she must have known that this runs contrary to practice established to date in her case. She would also have seen that the blank cheques signed by Madam Cheuk and must have noted the trust reposed in her mother, the 2nd defendant (Madam Cheng) to ensure that conventional practices are observed. Yet she even failed to assist the 2nd defendant (Madam Cheng) to produce the Company’s payroll records at a crucial time when these records were needed to demonstrate the expenses of the Home so as to convince the landlord that a massive rental increase was not realistic.
72. In these circumstances, acceptance of the additional pay on the oral directions of the 2nd defendant (Madam Cheng) should have put the 1st defendant on notice that the 2nd defendant (Madam Cheng) may not have been duly authorized and it was incumbent upon her, the 1st defendant to make inquiries with Madam Lie and Madam Cheuk, who would come to the Home from time to time or who would otherwise be easily contactable. Yet she had not only patently failed to make these inquiries and failed also to hand over the payroll records in timely manner when such was requested by Madam Lie and Madam Cheuk, piling upon herself suspicion that she was intent upon hiding her additional remuneration from the other directors of the Company, and putting her own interest ahead of the plaintiff, her employer. This could also amount to knowingly assisting her mother (the 2nd defendant) to act in breach of her (the 2nd defendant’s) fiduciary duty as a director of the plaintiff, but this is not alleged in the pleadings.
73. The legal analysis could also proceed on another basis. Since the 2nd defendant (Madam Cheng) had no actual authority to increase the 1st defendant’s remuneration, she, the 2nd defendant (Madam Cheng), may have ostensible authority to deal with an outsider[51] st defendant could be considered as an outsider. She entered the employment of the plaintiff on the basis of her relationship as a daughter of the 2nd defendant (Madam Cheng) and that accordingly the bond of trust, which they shared, could work to the benefit of the running of the Home.
74. More probable than not, the 1st defendant must have known full well that the matter of her remuneration was a matter which would have to be discussed among the directors and that any additional payment would likewise have to be discussed. How else would a neophyte in elderly homes like the 1st defendant have been promoted to Home Manager after a few months in the job, if not for this kind of special relationship and agreement with the other directors[52] nd defendant was the Head of the Home (院長) and therefore had authority.
75. Even if the 1st defendant was not strictly an insider, an oral direction by her mother contrary to the established conventions of the plaintiff setting out the terms of employment in writing, was so unusual that it must have put her on notice that there was something amiss with such an oral direction by her mother, and the right and prudent thing to do, in her position of Home Manager, would have been to make inquiries with the other directors of the plaintiff.
76. Accordingly, I hold and determine that the 1st defendant had acted in breach of her fiduciary duty as Home Manager of the plaintiff in accepting the additional remuneration merely upon the oral direction of the 2nd defendant (Madam Cheng), who is so doing, was also in breach of her fiduciary duty to the plaintiff. Alternatively, the 1st defendant was put on notice of the lack of authority of her mother, the 2nd defendant (Madam Cheng), and should have made inquiries and sought the consent of the other directors before accepting the enhanced remuneration, which was something she did not do.
Fair Remuneration
77. There is nothing in the doctrines of the Common Law that fairness is a determinant of a legal relationship based upon contract. It is the terms of the contract which control the rights of the parties and not any external notion of fairness. The question for the court is whether the additional remuneration received by the 1st defendant had been properly authorized. If there is no properly authorised remuneration, then there is no legal warrant for finding for the 1st defendant, however fair it would have been for her to receive it by virtue of her performance. Thus, having found that the 2nd defendant (Madam Cheng) had no authority, this is not a matter I need to consider.
78. However, even on this level, Madam Lie denies that the performance of the Home had been enhanced by the performance of the 1st defendant, who, as Madam Lie points out, had no experience in running any elderly home, and she had barely 4 years of experience by 2015. It is the evidence of Madam Lie that the number of elderly residents (counted by the number of beds) dropped year by year ever since 1st defendant started to work in the Home of the plaintiff in 2011. The defence, in reply to such allegation, in cross examination of Madam Lie put it to her that the upgrade of the Home to A1 class required meeting the stringent standards set out by the government including more space in between beds and this had reduced the number of beds allowed. Madam Lie fairly agreed this but also testified that the upgrade was due to the collective efforts of all concerned (要靠大家力量去幫 plaintiff upgrade), and not solely because of the 1st defendant[53] st defendant was the Home Manager, including but not limited to the upgrade and renovation etc.[54] st defendant in the plaintiff’s Home at Cambridge Court can be objectively reflected or inferred from the business of the Home ever since February 2011[55] st defendant could not be said to be capable as the number of beds dropped from 190 to 120 after the 1st defendant came to the Home. Madam Lie, under cross examination reiterated that in assessing one’s performance especially for someone in the position of the 1st defendant, one should look from an objective perspective. For businesses like elderly homes, the number of residents played pivotal role in maintaining the business. Madam Lie testified to the effect that although “it’s not appropriate” to classify the residents as “assets”, what counts in substance is the number of beds or residents in a home as it is the main source of incomes or revenues.
79. Since I have determined that the 2nd defendant had no authority to increase the remuneration of the 1st defendant, I do not strictly have to decide this question of fairness. However, as much evidence was adduced, I have to say that on balance, I believe that Madam Lie’s evidence is more reliable, bearing in mind her long experience in running homes for the elderly. Also, Madam Lie disagrees with the 2nd defendant (Madam Cheng)’s assertion that her daughter also ran the Kang Fook Elderly Home because Home Manager cannot manage two homes (“主管不能兼顧兩間護老院”). Madam Cheuk also said that all along the 1st defendant only managed the Home at Cambridge Court. Madam Cheuk even said that “as a matter of fact, it was her mother (2nd defendant) who assisted the 1st defendant in managing the Home, it’s impossible to arrange the 1st defendant to manage other elderly home(s).”[56] st defendant could have helped her mother (the 2nd defendant) in Kang Fook after work. Madam Lie adamantly said “No such need!”. The running of the Kang Fook home was given to the 2nd defendant (Madam Cheng) for the precise reason that she could not stand working with her daughter. Given the 1st defendant’s scant experience, giving her charge of two homes, even after work or as defence case in that the 1st defendant who managed the plaintiff also was helping her mother, the 2nd defendant (Madam Cheng) to manage Kang Fook (the expression used by the defence was “D1輔助管理 Kang Fook”), is not credible and therefore, I prefer Madam Lie’s (and Madam Cheuk’s) evidence in this respect.
Madam Lie and Madam Cheuk could have checked on the 1st defendant’s pay
80. Counsel for the defendants relied on a case where a principal knew that his agent was receiving commission and therefore it was unnecessary for the agent to disclose the precise amount of his commission to his principal. The relevant principle was helpfully summarized by Mr Justice Simon in FHR European Ventures LLP & ors v Ramsey Neil Mankarious & Ors [2011] EWHC 2308. In particular, counsel for the defendants relies on paragraph 80 of Justice Simon’s judgment, where the learned Judge cites with approval, the following passage from Bowstead (on Agency) at 6-084:-
“……where the [the principal], …. Knows that [the agent] will receive something from the other party, he cannot object on the ground that he did not know the precise particulars of the amount paid. Such situations often arise in connection with usage and custom of trades and markets. Where no usage is involved, however, the principal’s knowledge may require to be more specific ”.
81. The circumstances of this case are a far cry from that of a case of disclosure of commissions by an agent to his principal. Whilst the 1st defendant is clearly an agent of the plaintiff in her capacity as Home Manager of the plaintiff, determination of her remuneration is a feature of the corporate governance of the plaintiff and it is a matter which falls within the powers of the directors. Mere knowledge that the 1st defendant was being paid, does not mean that the plaintiff would be encumbered with whatever the 2nd defendant (Madam Cheng) decided to pay her. In the discussion set out above, I have determined that the 2nd defendant (Madam Cheng) had no authority to increase the 1st defendant’s remuneration and that the actions of the 2nd defendant (Madam Cheng) were so uncharacteristic of the conventions of the plaintiff that she, the 1st defendant, must also have been put on notice that her mother may not have such authority, that she (the 1st defendant) should have made due inquiries.
82. Finally, when there is a series of conduct by the 2nd defendant (Madam Cheng) seeking to deny access of the payroll records to Madam Lie and Madam Cheuk, as found by this court to be the case, it lies ill in her mouth to assert that they could have easily checked the status of her remuneration. In the circumstances, I do not see how this allegation can be substantiated on the facts of this case.
Informed consent given by Madam Lie and Madam Cheuk in any event
83. The facts underlying the assertions of the defendants under this heading are subsumed by their factual allegations under each of the above headings, as to which this court has ruled against the defendants. The defendants finally seek to deploy another legal stratagem, which is, that if any director had been in breach of fiduciary duty, all or the majority of shareholders could still ratify the wrongdoing. The facts, as found by this court, negate any agreement by all or a majority of the shareholders of the plaintiff, since they are the same persons.
84. There are myriad allegations by Madam Lie and Madam Cheuk of wrongdoings by the defendants. This court considers that these allegations have now become peripheral matters and should no longer take up time and space, suffice it to say, that the court, having heard the oral evidence of Madam Lie and Madam Cheuk (as well as the evidence of the accountant Miss Ng Lai Man testified for the plaintiff) and the oral evidence of the two defendants, far prefers the evidence of the former, for their internal consistency as well as their consistency with the contemporaneous documents.
Conclusion on issue (i)
85. The culmination of the above findings is that the 2nd defendant (Madam Cheng) had breached her fiduciary duty to the plaintiff by enhancing the remuneration of the 1st defendant beyond that set out in the plaintiff’s letter to 1st defendant of 1 June 2011, without consent of the board of directors or the majority of the shareholders of the plaintiff. The 1st defendant, having been put upon inquiry that the oral direction of the 2nd defendant (Madam Cheng) to increase her additional remuneration that the 2nd defendant (Madam Cheng) was not or may not be authorized to do so and without seeking the consent of the other directors of the plaintiff, was in breach of her fiduciary duty to the plaintiff to receive it or is not otherwise entitled to do so. This conclusion entails joint and several liability of the defendants to repay this additional remuneration, agreed to be in the amount of HK$345,200 to the plaintiff.
Set-off
86. In paragraphs 22 and 23 of the Re-re-Amended Defence and Counterclaim, the defendants claim to set off salaries and severance pay owed to them in the event they are found liable to return HK$345,200 or any sum adjudged to be returnable by them to the plaintiff.
87. As regards the 1st defendant, the plaintiff agrees that the amount of set off should be based on the remuneration of the 1st defendant as set out in the plaintiff’s letter to the 1st defendant of 1 June 2011. This letter sets out a monthly salary of HK$20,000. The plaintiff does not accept that the salary of the 2nd defendant (Madam Cheng) should be any more than the HK$6,500 agreed between them in June 2011. Thus, the set-off agreed by the plaintiff as unpaid salary from 1 May 2015 to 16 September 2015 for both defendants, according to the plaintiff, would come to HK$119,250. The plaintiff accepts that the severance pay of the 1st defendant, based on her monthly salary of HK$20,000 is HK$60,350.01 , giving a total set off in the amount of HK$179,600.01, agreed by the plaintiff as a set-off by the defendants.
88. As to the 1st defendant, this court has found that her remuneration should be based on the plaintiff’s letter to her dated 1 June 2011. Thus, any back pay and severance pay should be based on a monthly salary of HK$20,000. It is not the function of the court to adjudicate on severance pay, the only course open to the court is to allow a set-off based on the plaintiff’s calculation of severance pay.
89. The court understands that the 1st defendant has started proceedings in the Labour Tribunal for back pay and severance pay. This court shall have to leave it to the 1st defendant to pursue her claim in the Labour Tribunal in the event she considers the severance pay offered by the plaintiff to be inadequate.
90. As far as the 2nd defendant (Madam Cheng) is concerned, the court again has to choose between the contending oral evidence of Madam Lie and Madam Cheuk against that of the 2nd defendant (Madam Cheng). It is the evidence of Madam Lie and Madam Cheuk that after it was agreed that the salary of the 1st defendant would be increased to HK$20,000 per month, the 2nd defendant (Madam Cheng) would only take a monthly allowance of HK$6,500. The 2nd defendant (Madam Cheng) would of course continue to have profit sharing as agreed subject to there being profits from the operations of the Home. Furthermore, Madam Lie gave oral evidence to the effect that after the 2nd defendant (Madam Cheng) moved to Kang Fook in early 2014, because she complained to Madam Lie that she did not see eye to eye with her daughter, the 1st defendant, Kang Fook paid her HK$20,000 per month. It is the plaintiff’s case that the 2nd defendant (Madam Cheng) was appointed as service provider (承包商) of Kang Fook around late December 2013.
91. The 2nd defendant (Madam Cheng) in evidence however said that the monthly allowance of HK$6,500 was contemptuous bearing in mind her position and that she was entitled to much more. Looked at this objectively, the reason for promoting the 1st defendant to Home Manager at a monthly salary of HK$20,000 must have been to free the 2nd defendant (Madam Cheng) from the onus of carrying the day-to-day management of the Home, and also, the 2nd defendant should have known that it would not be easy to convince Madam Lie and Madam Cheuk to give HK$20,000 as monthly salary to her daughter who had, as at June 2011, just 4 months experience in running the Home, unless she (2nd defendant) could make a compromise by receiving less remuneration in return. After all, the Home is a business. All directors including the 2nd defendant have been in the business of running homes for quite sometime. Everything has to be played in accordance with commercial principles if profits have to be made and maximized. Thus, it would make sense to reduce the 2nd defendant’s remuneration. Whether HK$6,500 a month, as salary or transportation allowances, was contemptuous is a matter of subjective opinion, and also it is clear from the evidence that the 2nd defendant as a mother of the 1st defendant was willing to swap her original salary of HK$20,000 for the daughter in return for receiving a reduced amount of just HK$6,500, whether as allowance or not. This makes sense as on the one hand, it is understandable mother loves her own daughter and wanted to give the best to the daughter, on the other hand, such motherly love could not be done at the expense of a commercial judgment or decision or consideration unless perhaps the business is a sole proprietorship owned by the mother. In the present case, after all, the plaintiff was running a business as a home for the elderly. To ensure the business can run on a profitable basis or to be continued, stringent control of expenditures on salary is reasonably expected. In any event, there is no warrant for the 2nd defendant (Madam Cheng) to unilaterally increase her own salary without agreement from the other directors. In the circumstances, this court can only find that the 2nd defendant (Madam Cheng) was entitled to no more than HK$6,500 per month as the basis for her back pay.
92. The plaintiff allows no severance pay to the 2nd defendant (Madam Cheng). As this court is not in a position to adjudicate on severance pay, this matter must be left to the Labour Tribunal, if the 2nd defendant (Madam Cheng) were to wish to pursue this as a separate claim.
93. In light of the foregoing discussion, this court will allow, as offered by the plaintiff, a set-off of the amount of HK$60,350.01 (severance pay of the 1st defendant, based on her monthly salary of HK$20,000 ) AND HK$119,250 representing her back pay as well as the back pay of the 2nd defendant (Madam Cheng) for the period 1 May 2015 to 16 September 2015 based on the monthly salary of HK$20,000 for the 1st defendant and HK$6,500 as the allowance payable to the 2nd defendant (Madam Cheng), giving a total of HK$179,600.01 as set off against the claim of the plaintiff against both defendants.
Issue (ii): Remaining books and records of the plaintiff
94. It cannot be disputed that in their positions as Home Manager and Director of the plaintiff, the 1st and 2nd defendants having had possession, control and custody of the books and records of the plaintiff must account for such records and must hand them back to the plaintiff upon demand.
95. It is not in dispute that certain records have been handed over to the plaintiff, but there remains, according to Madam Lie, audit reports, employees’ payroll records, tax returns, bank statements, MPF records and other banking records, etc still missing. It is the defendants’ evidence that they have handed over everything, but if that is the case, why does the plaintiff’s directors say that the plaintiff is still missing records?
96. In these circumstances, the best course for the court to take is to order that the 1st and 2nd defendants to account to the plaintiff for all the records of the plaintiff in their possession, custody and control while in their positions of Home Manager and Director of the plaintiff respectively. As a first step in compliance with this order, the defendants shall provide the following information on affirmation or affidavit, within 21 days from the date of this court’s judgment:-
(i) Where were the books and records of the plaintiff kept;
(ii) State the categories of books and records kept by the plaintiff;
(iii) State what books and records were handed over;
(iv) State what books and records, if any, remained to be handed over and where are they kept now.
97. The plaintiff may apply to the Registrar for further directions for enforcing this order, including an appointment to cross examine the defendants on the affirmation/affidavit filed and other directions as may appear fitting in the circumstances.
Issue (iii): The 2nd defendant’s Counterclaim
98. The 2nd defendant (Madam Cheng) counterclaims for an amount of HK$653,480.73 based on the calculations set out in paragraphs 26 and 27 in the Re-re-Amended Defence and Counterclaim filed in these proceedings. This counterclaim is based on calculations deriving from the following principles:-
(i) The sums for the purchase of beds by Le Grand from the plaintiff should be notionally added to the cash pool of the plaintiff and considered part of the profits of plaintiff. These sums are HK$6,320,000 for the government beds and HK$2,216,157.90 for private beds. For the month of April 2015, this cash pool should notionally be HK$8,634,187.25.
(ii) Based on this addition to the cash pool of the plaintiff, the 2nd defendant (Madam Cheng) should get the first 10% from the notional cash pool every month from April to July 2015, and the remaining amount the 2nd defendant (Madam Cheng) should get one third thereof, accumulating to HK$3,498,867.03 for this period payable to the 2nd defendant;
(iii) The 2nd defendant (Madam Cheng) had to contribute HK$1,344,000 as her investment in Le Grand and received from Le Grand, the sum of HK$1,501,386.30, and deducting these sums from the sum of HK$3,498,867.03 payable to her, the sum of HK$653,480.73 remains owing to her.
99. These principles, according to the evidence of the 2nd defendant (Madam Cheng), come from the oral agreement and the supplemental agreement she had with Madam Lie and Madam Cheuk. The terms of this alleged oral agreement and supplemental agreement are set out in paragraphs 18 – 21 above.
100. For ease of reference, the alleged terms of the oral agreement are set out again as follows:
(i) That she (the 2nd defendant) would have the power to manage the plaintiff and its business, namely its daily operations and its finances, including but not limited to hiring, termination and dismissal of employment of employees, fixing and adjusting the salaries of employees, and matters relating to their allowances, bonuses and performance pay; and
(ii) That after the capital investment in the business of the Home (Kam Wah Elderly Home) has been recouped, the profits after deducting expenses, plus all profits arising out of the operations of the plaintiff including but not limited to the sale of the plaintiff’s operations and operating licence, the 2nd defendant (Madam Cheng) shall have the right to take 10% thereof as “management fee” and the remaining 90% shall be equally distributed among Madam Lie and Madam Cheuk and the 2nd defendant (Madam Cheng).
101. Madam Lie and Madam Cheuk agrees that there was indeed an agreement for profit sharing but disagrees with the terms alleged by the 2nd defendant (Madam Cheng). The important difference between Madam Lie and Madam Cheuk and the 2nd defendant (Madam Cheng) is that only profits arising from operations are subject to distribution. At the time when they made this oral agreement, which was back in 2006, the idea of sale of the plaintiff’s operations could not have remotely entered into their minds.
102. Contrary to the evidence of Madam Lie and Madam Cheuk, the 2nd defendant (Madam Cheng) alleges that the plaintiff achieved recoupment of capital invested in or about September 2008 (as opposed to August 2009 as alleged by the plaintiff) and that at that time, the three of them (Madam Lie, Madam Cheuk and the 2nd defendant) orally agreed to supplement the original oral agreement of 2006. As said, it is not easy to understand the terms of this supplemental agreement. In paragraph 5 of the Amended Defence, it is expressed thus:-
「由第二被告從原告人現金盈餘（即原告人的淨盈利及利潤，而原告人有足夠現金以分配公司的利潤）先抽取原告人淨盈利/利潤的現金盈餘的百分之十為管理費，餘下的現金盈餘的百分之九十則平均分給第二被告，李女士及卓女士」。
103. As stated in paragraph 21 above, counsel did not attempt a translation, so the best understanding of the court of this alleged term is as follows:-
“The 2nd defendant may from the operating cash surplus (namely, the plaintiff’s net operating profit and profit, with the plaintiff having sufficient cash for distribution of the Company’s profit) first take 10% from the cash surplus of net operating profit/profit as management fee, the remaining 90% shall be equally distributed among the 2nd defendant, Madam Lie and Madam Cheuk”.
104. Madam Lie and Madam Cheuk vehemently deny that there was a supplemental agreement at all. In addition, they say that the transaction between Le Grand and the plaintiff was a sale of the interests of the three shareholders of the plaintiff to Le Grand and that is a matter completely separate and has nothing to do with the oral profit sharing agreement they had with the 2nd defendant (Madam Cheng).
105. The court has to bear in mind that the burden of proof is upon the 2nd defendant (Madam Cheng) that she indeed was, on a balance of probabilities, owed the sum set out in her counterclaim. As the 2nd defendant’s evidence is essentially based on her allegation of an oral agreement and a supplemental oral agreement between her and Madam Lie and Madam Cheuk, it is necessary to carefully consider the 2nd defendant’s allegations against other evidence before the court.
106. First of all, the 2nd defendant’s allegations are denied by Madam Lie and Madam Cheuk. As to the original profit sharing agreement, the evidence of Madam Lie and Madam Cheuk was that any profit sharing must arise from the operations of the Home operated by the plaintiff. They say that there could not have been a term including profits arising from sale of the operations of the plaintiff as at that point in time, the operations of the Home at Cambridge Court was just beginning and the prospect of sale would not have been within the remotest imagination of the parties. This evidence accords with common sense.
107. The 2nd defendant’s formulation of the oral agreement, not only offends common sense but is a formulation not usually found with a person unsophisticated in the law as the 2nd defendant certainly appeared to the court to be. In any event, the 2nd defendant failed to explain under cross examination as to how the formulation came about. She testified that she consulted her daughter (the 1st defendant) and lawyers subsequently and they said she had received less than what she should have. In the circumstances, the court cannot accept the formulation of the 2nd defendant of the terms of the oral agreement but would accept the terms of the oral agreement as testified by Madam Lie and Madam Cheuk, namely, that any profit sharing must arise from the operations of the plaintiff only.
108. Madam Lie and Madam Cheuk also vehemently deny that there was any supplemental oral agreement with the 2nd defendant (Madam Cheng) in the terms alleged or at all. The only oral agreement as to profit sharing was the original profit sharing agreement as to profits arising from earnings from the operations of the plaintiff only. In light of this vehement denial, the court must equally consider the terms of the 2nd defendant’s alleged supplemental agreement.
109. The language of the alleged supplemental agreement is convoluted and difficult to understand. Firstly, a distinction is being made between 淨盈利 and 利潤, namely net profit and profit. “Net profit” is more easily understandable than “profit”. “Profit” could mean a number of things, including gross profit. Secondly, there is a reference to cash surplus. It is not usual, as Madam Lie points out in her evidence, to draw out all surplus cash. The problem is that the company needed to pay operating costs and pay wages and suppliers. That is of course the case with any company and thus, the company law allows only distribution of net profit. Also, a company must keep cash reserves not only for paying accrued debts but also to cater for contingencies. That also explains why the plaintiff still keeps its bank account even now. The accountant Miss Ng Lai Man said that, while the plaintiff is no longer in operation, the bank account is still retained for the purpose of paying certain items such as tax, severance pay for the defendants, etc. Ms Ng pointed out that tax refund was paid into that bank account. Thus, this formulation of the 2nd defendant (Madam Cheng) not only offends common commercial sense but is also uncertain in meaning. When faced with terms of agreement which appears simple to understand, as in the case of the oral terms put forward by Madam Lie and Madam Cheuk and the convoluted and uncertain terms put forward by the 2nd defendant (Madam Cheng), the court must prefer the former. In the circumstances, the court cannot find for the terms of the oral agreement and the supplemental agreement put forward by the 2nd defendant (Madam Cheng).
110. The simple and readily understandable formulation of the oral agreement regarding distribution of profits from the operations of the company, put forward by Madam Lie and Madam Cheuk, has to be the preferred version. In many cases before the Common Law courts, when a court is faced with a number of different versions of evidence, some more complex than others, one device of logic, popularly called the Ockham’s Razor (popularised by an English Scholastic Theologian, William of Ockham, circa 1287 – 1347), is often used, though I hasten to add, that is not the only device, such as reliance upon contemporaneous documents, to be deployed as the circumstances at hand require. The Ockham’s Razor states that faced with a number of explanations, some more complex than others, the simplest is more likely to offer the true explanation. Here the version put forward by Madam Lie and Madam Cheuk is much simpler and much more in accord with common sense. This, must, therefore, be the version to be preferred. Put in another way, as the burden is on Madam Cheng to prove her case, the balance of probabilities illustrated by the evidence, does not favour her case.
111. Given that the court did not find for the 2nd defendant (Madam Cheng) in her version of the oral agreement and supplemental agreement as to profit sharing, the court would still have to consider whether on the version of the oral agreement by Madam Lie and Madam Cheuk, whether the counterclaim would still succeed. In engaging in this exercise, one must look to the nature of the transaction.
112. There is very little documentary evidence before the court on how profits were distributed. Before the court is a set of hand-written ledgers (see paragraph 16 above and exhibit at Bundle B1 at pages 213-224) produced by Madam Lie. These handwritten records showed a distribution of profit between the three directors of the plaintiff for a number of years from 26 August 2009 to 27 January 2014[57]
113. In the documents before the court, are a set of Financial Statements of the plaintiff with an unqualified audit opinion issued by C & W (CPA) Limited for the accounting years ended 31 March 2013, 2014 and 2015, namely that the auditors opined that these financial statements showed a true and fair view of the financial position of the plaintiff as at these dates. These audited financial statements provide the following information of relevance to this court:-
(i) In every year, no director had been received director’s fee, remuneration, or MPF[58]
(ii) In every year, no dividends were declared;
(iii) In each year, the directors took loans in equal amounts from the company (such loans were non-interest bearing and had no fixed repayment dates):
2013[59]
2014[60]
2015[61]
HK$
HK$
HK$
Madam Lie
486,769
1,504,208
1,889,070
Madam Cheuk
486,769
1,504,208
1,889,070
2nd defendant
486,769
1,504,208
1,889,070
(iv) The Income Statement for the year ended 31 March 2015 showed a loss of HK$541,233 after provision for taxation (Trial Bundle B3 at page 770).
114. These financial statements showed that since no dividends were declared, the directors took equal amounts of loans from the company for their own use. The court will not, and cannot speculate, on how the directors decided to “share profits” given the information set out in these financial statements, but these financial statements showed no profits by 31 March 2015, explaining why the handwritten records of the plaintiff did not show distribution after January 2014.
115. The reason for embarking on the transaction with Le Grand was that there was no prospect of operating profitably in the Cambridge Court premises, given the large increase in rent demanded by the landlord[62]
116. The court notes that the defendants allege that it was inappropriate for Madam Lie & Madam Cheuk to cause the distribution of 「院友搬遷同意書」(resident’s consent for relocation)[63] [64] st defendant who told her (Madam Lie) in about March 2015 that it was inappropriate to distribute such consent for relocation forms to the residents when consent for relocation from SWD had not been obtained and this was tantamount to misleading the residents or their families. Madam Lie denied she had ever scolded the 1st defendant as such, but she pointed out that the fact is that the beds were transferred to Le Grand with the agreement of the residents. Madam Cheuk under cross examination testified that she could not remember whether Madam Lie had scolded 1st defendant in this regard but she remembered that the 2nd defendant did not cooperate or support the matter of relocation of residents. The case of the defendants is that beds represented an asset of the plaintiff and once they are transferred, the monies derived comes back to the plaintiff as part of its revenue and will cycle through the Income Statement of the plaintiff as an income. The court however received no evidence of the accounting policies of the plaintiff except those contained in the financial statements, and those financial statements showed that the plaintiff operated at a loss as at 31 March 2015 (see paragraph 113 above).
117. The transfer should best be characterised as a business merger, whereby the beds in the Cambridge Court Home were transferred to Le Grand and notional values were attributed to these beds to off-set the amount of investment which is required from Madam Lie and Madam Cheuk and the 2nd defendant in Le Grand.
118. The evidence of Madam Lie (supported by her accountant Miss Ng Lai Man, 吳麗雯 who also testified in court) is that this was a business merger, the terms of which were agreed among all parties, including the 2nd defendant (Madam Cheng). No cash flowed between Le Grand and the plaintiff and this was an arrangement whereby the three shareholders can participate in Le Grand as shareholders thereof without having to pay cash. The full calculations are set out by Madam Lie in a handwritten note (“the Note”), which she said she had handed over to the 2nd defendant (Trial Bundle B3 at page 912) (see note at top: “呈鄭錦秀”) as to the terms of the business merger whereby the beds in the Cambridge Home (subject to agreement of the tenants) were transferred to Le Grand at the notional values set out in the Note and whereby the amount of investment required by Madam Lie (as 40% shareholder of Le Grand), Madam Cheuk (as 20% shareholder of Le Grand), the 2nd defendant (as 15% shareholder of Le Grand) and Mr Chan Yuk Choi Peter (as 25% shareholder of Le Grand) and their share of their liability to the bank loan of Le Grand, were set out. Madam Lie testified that this handwritten note was prepared by herself. It reflects that Madam Lie is an experienced business lady even though she could not help losing her patience or temper at times during cross examination when she found the questions asked was either repetitive or nonsense to her.
119. Pursuant to the aforementioned terms, the three shareholders of the plaintiff had to make capital contributions set out in the handwritten Note proportionate to their shareholdings, take proportionate responsibility for repayment of principal and payment of interest for Le Grand’s bank loan of HK$15 Million, with the result that after each taking monies from Le Grand (the 2nd defendant in two cheques, one for HK$762,667 and another for HK$738,719.30, Madam Cheuk in two cheques one for HK$314,667 and another HK$738,819.30, and Madam Lie also in two cheques, one for HK$1,162,666 and another HK$204,1525.30), leaving future capital contributions for the 2nd defendant as 15% shareholder of Le Grand at HK$2,161,143.30, Madam Cheuk as 20% shareholder of Le Grand at HK$3,829,987.20 and Madam Lie as 40% shareholder at HK$6,562,553.60. These calculations were confirmed by Miss Ng Lai Man at trial and in her witness statement together with her cross-audits table (對賬表) and records that were exhibited at Bundle B3 at pages 936 to 940.
120. In her evidence, Madam Lie also produced handwritten notes of dividends paid by Le Grand for 11 November 2016, December 2016, and February 2017, according to the shareholdings of the shareholders (see: Bundle B3 at pages 914 – 916). It is not known whether these three ladies pocketed these monies or used them to make their outstanding capital contributions to Le Grand. The latter is the probable course adopted as Madam Lie re-iterated in her evidence that no cash was involved in the business merger and it would appear unlikely that the three ladies anticipated that they would dig into their pockets unless it was necessary.
121. The court notes that in January 2016, Madam Lie and Madam Cheuk and the 2nd defendant (Madam Cheng) transferred their shares in the plaintiff to Mr Peter Chan Yuk Choi and his nominees, but they remained as directors of the plaintiff. This transfer of shares marked the final step of closing the operations of the plaintiff.
122. Then, what is the nature of this transaction and did it produce profits from the operations of the plaintiff? The short answer is that no accounts were produced by the plaintiff for this transaction, and so, no one is any wiser whether there were profits, and if there were the only persons having any interest in them are the plaintiff and the new shareholders.
123. In any event, whatever profits were generated, if there were indeed profits generated, could not be profits generated from the operations of the plaintiff, as the sale of beds is a one-time sale and not revenue derived from operations of the plaintiff. By the end of March 2015, the plaintiff, according to its audited financial statements, was generating a loss after provision for taxation. If the plaintiff had to bear the massive rental increase, it would become insolvent very soon.
124. Whatever agreement with regard to the sharing of profits in the old business in the plaintiff would by March 2015 be totally unrealistic, bearing in mind the dismal state of the business of the plaintiff and the prospect of the even more momentous event of the massive rental increase, which rental negotiation started back in June 2014.
125. Thus, the transaction entered into between the three shareholders of the plaintiff and Le Grand could only have been the result of an attempt to save the business interests of Madam Lie, Madam Cheuk and Madam Cheng by exchanging these interests for an investment in Le Grand. This exchange was done by means of an injection of beds from the plaintiff but also injection of beds from Hiu Kwong (Hung Hom) Elderly Centre which was operated by Hiu Kwong Group Ltd (曉光) (which belongs to Madam Lie) and purchase of beds from elsewhere to create a new business.
126. A new agreement would have to be reached to allow the business to continue in a newly organized form. Thus, any old agreement as to sharing of profits must have given way to this new agreement. It is not realistic in the circumstances for the 2nd defendant (Madam Cheng) to assert that the old oral agreement for profit sharing persists at that point in time.
127. What was agreed in the transaction between the plaintiff, Le Grand and the three original shareholders of the plaintiff, was an entirely new agreement based on real necessity. Furthermore, the 2nd defendant (Madam Cheng) had not only become a shareholder of Le Grand, she had given up her interest in the plaintiff and accepted at least three payments of dividend as the record shows. This shows that any oral agreement as to profit sharing in the plaintiff can only be seen as history overtaken by the agreement reached and acted upon by the three original shareholders of the plaintiff.
128. In the circumstances, the court finds itself unable to find evidence of sufficient probative value to support the 2nd defendant’s counterclaim.
DISPOSITION
Judgment sum and interest
129. In light of the foregoing findings, the court finds for the plaintiff in its claim of HK$345,200, but allows a set off in the amount of HK$179,600.01. Thus, judgement is hereby given to the plaintiff and entered into the court’s record in the sum of HK$165,599.99 against the 1st and 2nd defendants jointly and severally.
130. The demand letter having issued to the 1st defendant on 23 December 2015[65] [66]
131. Interest at the judgement rate shall apply to the consolidated sum of HK$165,599.99 plus interest calculated up to judgment date, until payment.
132. The court would again make it clear that this court has no jurisdiction to order severance pay and if the defendants do not find the set off of severance pay acceptable, they are free to seek whatever they believe to be appropriate sums from the Labour Tribunal.
Books and records of the plaintiff
133. The court having found that both the 1st and 2nd defendants are duty bound to account to the plaintiff for the whereabouts of the books and records of the plaintiff and if they are still in their possession, custody and control, to hand over such books and records to the plaintiff, makes a Declaration to this effect and orders the defendants to account for such books and records to the plaintiff. In compliance with the aforesaid Declaration and Order, the defendants shall either jointly or severally do, within the next 21 days, file into court an affirmation or affidavit providing the following information:-
(i) Where were the books and records of the plaintiff kept;
(ii) State the categories of books and records kept by the plaintiff;
(iii) State what books and records were handed over;
(iv) State what books and records, if any, remained to be handed over and where are they kept now.
134. The plaintiff shall have the right to apply to the Registrar for cross-examination of the 1st and 2nd defendants and to apply for such other orders and directions which may be given in order to enforce the aforesaid Declaration.
Dismissal of the Counterclaim
135. The Counterclaim is dismissed.
Order nisi as to costs
136. The court will make an order nisi that the costs of this action and the counterclaim be paid by the defendants jointly and severally to the plaintiff, with certificate for counsel, to be taxed, if not agreed at the District Court Scale. If there is no application for variation within 14 days hereof, this costs order nisi shall become absolute.
CONCLUDING NOTE
137. The court notes that the 2nd defendant (Madam Cheng) continues as a shareholder in Le Grand. It is hoped that years of long-standing amicable co-operation of the three business partners (Madam Lie and Cheuk and the 2nd defendant) would continue and that this litigation closes an episode of rancour between them. There is much wisdom in the ancient saying: 化干戈為玉帛 (The Pursuit of War should best be replaced by the Pursuit of Wealth). As the New Lunar Year brings in a new cycle of the Chinese Zodiac, the court wishes the partners a fresh start and the business of Le Grand the best of good fortune and prosperity and that the parties in this case will share in that prosperity having put aside their differences.
138. Finally, the court would like to thank counsel on both sides for their assistance and diligence. Although counsel for the defendants did not win this case, the court would like the defendants to know that their counsel have fought valiantly for their cause, and they could not have chosen a better champion.
139. But for the intervention of the unforeseen events of recent months, one after another including the worldwide coronavirus, the lives of all of us would not have been so disrupted. As a result, this judgment could only be made available to the parties now despite its readiness for delivery some time before handing down today. We are reminded, yet again, that whilst Man proposes, it is God Who finally disposes. May all concerned be blessed with Good Health and Happiness for now and for the times ahead!
( Barbara Wong )
Deputy District Judge
Ms Percy P S Yue, instructed by Stephen Lo & P Y Tse & Co, for the plaintiff
Mr Ian Chau, instructed by Wong, Hui & Co, for the 1st & 2nd defendants
[1] See the Employment Contract dated 1 April 2011 signed between 2nd defendant (as representative of plaintiff) and 1st defendant in Exhibit Bundles at p 225 to 229 & 781 to 785. Evidence in the hearing shows that 1st defendant started to work in about January or February 2011, 2nd defendant’s witness statement (adopted as her evidence in chief) said that 1st defendant did not receive any pay for work done while counsel for the plaintiff in her cross-examination of 1st defendant confronted 1st defendant with payment records which showed 1st defendant (and her husband) received pay from the plaintiff but it was only until 1 April 2011 that Employment Contract was signed between the plaintiff and 1st defendant.
[2] This post is different from the post of 行政主管, see paragraph 31 herein.
[3] See the letter dated 23 December 2015 issued by solicitors for the plaintiff to the 1st defendant (Madam Chau) at Trial Bundle B1 at p 259-265 (which was exhibited in Madam Lie’s witness statement as Exhibit 9).
[4] See Agreed Chronology of Events and para 5 of the Amended Statement of Claim (B1/item 25 at pp 198-200)
[5] See Bundle B1 at page 351
[6] See the Minutes of Shareholders’ Meeting of the Plaintiff at Bundle B1 at pp 201 to 202
[7] See Bundle B1 at page 202, also exhibited as Exhibit 2 in the Witness Statement of Madam Lie.
[8] During trial, Madam Lie testified that before the plaintiff started business, she had an oral agreement with Madam Cheuk and the 2nd defendant whereby the 2nd defendant was responsible for daily operations and management. Madam Lie pointed out that “the 2nd defendant had not run or managed big sanatorium before, we (Madam Lie & Madam Cheuk) as directors said no problem, if you had any problem, let us discuss. She did discuss with me. All along worked well.”
[9] Madam Lie testified that the 2nd defendant’s role was for daily operations. Madam Cheuk will sign all the cheques. Madam Lie said “I mostly signed cheques for Hiu Kwong Group, all I requested was for having two signatories i.e. Madam Cheuk and the 2nd defendant”.
[10] The defence case is that the recoupment of investment took place a year earlier in September 2009. See ensuing paragraph 20 for details.
[11] Both the plaintiff and the defendants have no dispute that the distribution of profits ended in January 2014, though there is dispute as to when distribution of profits started. Plaintiff said it started in August 2009 while the defence said it started one year earlier in September 2008. The disputes were (1) when the plaintiff recouped the investment on the plaintiff and (2) thus when the 2nd defendant started to take $20000 as her monthly salary.
[12] Bundle B1 at pp 213-224
[13] See para 5 of the Re-re-amended Defence and para 9 of 2nd defendant witness statement dated 8 September 2017.
[14] See para 45 of 2nd defendant’s witness statement dated 8 September 2017 . It is never the case of the plaintiff that 2nd defendant (Madam Cheng) was ever allowed or entitled to any transportation subsidy or allowance. In so far as 2nd defendant (Madam Cheng) is concerned, the plaintiff’s case is that she was given salary (subject to agreement on discussion) and bonus on net profits according to the plaintiff’s version of the oral agreement.
[15] See paragraphs 16 & 17 of the 2nd defendant (Madam Cheng)’s witness statement dated 8 September 2017 at Bundle A at pages 108-109. During cross examination, Madam Lie said there was no discussion of salary when she persuaded the 1st defendant to come. Madam Lie explained that “because the 1st Defendant had never involved in Sanatorium business, thus, gave her a post as assistant for $8000 salary. This was proposed by the 2nd Defendant and we (Madam Cheuk and I) did not object.”
[16] See Bundle B3 at page 782.
[17] See para 2 & 3 of the supplementary witness statement of Madam Lie dated 3 January 2018 at p 151-152 at Bundle A.
[18] See para 2 of the supplementary witness statement of Madam Lie dated 3 January 2018 at p 151-152 at Bundle A. The 1st employment contract dated 1 April 2011 was signed by the 2nd defendant (as representative of the plaintiff) with the 1st defendant (employed as “assistant” with salary of HK$8,000) when the 1st defendant formally entered into employment with the plaintiff. The court was baffled how come the 1st defendant was not paid even in April & May 2011 (if that was the case), when the 1st defendant testified that she did not receive any salary between February and May 2011, bearing in mind that her mother (2nd defendant) was also involved in managing the Home with her.
[19] See Bundle B3 at pages 356-21.
[20] See paragraph 18 of 2nd defendant’s witness statement dated 8 September 2017 at Bundle A at pages 109-110. At trial, the testimony of Madam Lie was that “in June 2011, the 1st defendant was no longer an assistant, she was a 主管. Yes, in about May or June 2011, Cheng (the 2nd defendant) discussed with Cheuk and I on whether Cheng (the 2nd defendant) will give her $20,000 salary to her daughter while the mother (2nd defendant) said she would only get transportation subsidy $6,500, I trust her so we agreed.”
[21] See the latter half of paragraph 18 of 2nd defendant’s witness statement dated 8 September 2017 at Bundle A at page 110.
[22] Bundle B3 at page 787.
[23] See paragraph 18 of 2nd defendant’s witness statement dated 8 September 2017 at Bundle A at pages at 109 to 110.
[24] See para 9 of the supplementary witness statement of Madam Lie dated 3 January 2018 at p 154 at Bundle A).
[25] See para 25 of the witness statement of 2nd defendant dated 8 September 2017 at p 112 at Bundle A.
[26] See para 23 of the witness statement of 2nd defendant dated 8 September 2017 at p 112 at Bundle A.
[27] See para 25 of the witness statement of 2nd defendant dated 8 September 2017 at p 113 at Bundle A.
[28] It can be seen at Bundle B3 at page 809. It was referred to in para 26 of the witness statement of 2nd defendant dated 8 September 2017 at p 112 at Bundle A.
[29] See paragraph 15 of the 2nd defendant’s witness statement dated 8 September 2017 at pages 107 to 108.
[30] See Madam Lie’s 1st witness statement dated 15 July 2016 at Bundle A at page 96 at paragraph 13.
[31] See Bundle B1 at page 231 for this letter which is in Chinese.
[32] See para 14 of Madam Lie’s 1st witness statement dated 15 July 2016 at Bundle A at page 96 which said the 1st defendant denied she was the “周小姐” who had agreed with the landlord for a 6 months tenancy with effect from September 2014 at HK$620,000 per month. 1st defendant had in fact negotiated with the landlord but the defence’s version in this regard can be seen in paragraph 30 of the 2nd defendant (Madam Cheng)’s witness statement dated 8 September 2017 at Bundle A at page 115, whereby the 2nd defendant (Madam Cheng) said that in about July 2014, when the tenancy in the Home at Cambridge Court was about to expire in September 2014, the landlord requested to increase the monthly rent from HK$406,000 to HK$ 650,000. Madam Lie and Madam Cheuk indicated they did not want to renew the tenancy. Instead they proposed to sell the Grade A1 private bed quotas and public bed quotas in the Plaintiff to Le Grand Silverjoy Ltd and then sold their shares in the plaintiff, which was a licencee of an elderly home, to a third party. The 2nd defendant (Madam Cheng) said she and her daughter (1st defendant) did not like this proposal as they both thought that the Home could still make profits despite rental increase. Thus, the daughter (the 1st defendant) continued to negotiate with the landlord with a view to secure a lesser rental increase. The 2nd defendant (Madam Cheng) said her daughter (1st defendant) ultimately managed to persuade the landlord to reduce the rental increase to HK$580,000 per month, but Madam Lie and Madam Cheuk both opposed the continuation of the operation of the Home. The 1st defendant proposed to Madam Lie and Madam Cheuk that her mother (2nd defendant) could use another company 「康瑞護老樂園有限公司」to acquire all their shares in the plaintiff above market price but this was rejected by Madam Lie who allegedly scolded the 1st defendant 「想揾食？行開啲啦！」(for trying to devour her earning asset and get out of her way!).
[33] Bundle B3 at pp 849 to 850
[34] Bundle B1 at pp 318-320 & Bundle B3 at p 849
[35] Bundle B1 at p 329 & B3 at p 851
[36] See Bundle B3 at pp 912- 913
[37] See the plaintiff’s documents provided ie Companies Registry Filing at Bundle B3 at pp 804-827
[38] See para 16 of Madam Lie’s 1st witness statement dated 15 July 2016 at Bundle A at page 97 & See para 9 of Madam Cheuk’s witness statement dated 14 September 2016 at Bundle A at page 102.
[39] See para 18 of Madam Lie’s 1st witness statement dated 15 July 2016 at Bundle A at page 98.
[40] Bundle B1 at p 257 which was Appendix 9 referred to in para 22 of Madam Lie’s 1st witness statement dated 15 July 2016 at Bundle A at p 98.
[41] Bundle B1 at p 259.
[42] Bundle B3 at pp 782 - 785
[43] Bundle B3 at p 787
[44] See para 13 of Madam Lie’s 1st witness statement dated 15 July 2016 at Bundle A at pages 96 to 97 & para 7 of Madam Cheuk’s witness statement dated 14 September 2016 at Bundle A at page 101.
[45] See paragraph 7 of Madam Cheuk’s witness statement dated 14 September 2016 at Bundle A at page 101.
[46] See para 16 of Madam Lie’s 1st witness statement dated 15 July 2016 at Bundle A at page 97.
[47] The Amended Statement of Claim asked the Defendants to provide for all accounting records and payroll records between 1 April 2008 and 16 September 2015 “提供有關原告人公司營運的所有賬目及職員薪酬記錄，2008年4月1日至2015年9月16日”.
[48] Counsel for the plaintiff referred to Bundle B3 at p 872 that stated the time frame for the defendants to provide the documents and records required by the plaintiff.
[49] Defence counsel Mr Chau said he was only instructed to take up this case shortly before the pre-trial review on 2 September 2019. The court noted from the pleadings that different counsel acted for the defendants.
[50] [1974] R.P.C. 272 at p 276/line 35. This case is also reported in [1973] 1 WLR 1126, 1130 C-D.
[51] Hely-Hutchinson v Brayhead Ltd &Anor [1968] 1 QB 549.
[52] Madam Lie testified that “the $20000 salary of the 1st Defendant was given by her mother the 2nd Defendant, the pay rise was in the speed like a lift, I did not know about her salary increase (further) at that time. Everything is given by her mother, the 2nd Defendant”. Madam Lie further said “In the usual course, somebody without experience cannot get $20000 salary but this case is special, she is the daughter of the 2nd Defendant, and we care the 1st Defendant too. So, we agreed on her salary to $20000.” Madam Lie said “I only knew the 2nd Defendant had only asked for $6500 as transportation subsidy, because the 2nd Defendant said she gave her $20000 salary to the 1st Defendant (her daughter)”.
[53] Madam Lie when she was cross-examined. She was asked:
Q. Now the Plaintiff now upgraded to Grade A1, is it counted as part of the performance 業績?
A. Madam Lie said “要靠大家力量去幫! The upgrade of the Plaintiff to Grade A1 was not solely because of D1!”
[54] See para 10 of Madam Cheuk’s witness statement dated 14 September 2016 at Bundle A at page 102. “2015年12月15日，原告人收到第一被告人發出的警告信，內容表示要對我和李女士採取法律行動追討欠薪及遣散費，並到處訴苦，說自己管理三間安老院舍。我知道我、李女士及第二被告人只安排金華護老院一間安老院舍給第一被告人管理，事實上是由她媽媽即第二被告人從旁協助，也不可能給第一被告人管理其他安老院舍。而在第一被告人管理金華護老院期間，李女士亦經常派遣專業團隊幫忙，當中包括但不限於院舍升級買位、內部裝修督促和設計施工等。”
[55] Madam Lie testified that「一個人有無能力, 要看業績、看個人才能、是否得人心!」
[56] See para 10 of Madam Cheuk’s witness statement dated 14 September 2016 at Bundle A at page 102. “2015年12月15日，原告人收到第一被告人發出的警告信，內容表示要對我和李女士採取法律行動追討欠薪及遣散費，並到處訴苦，說自己管理三間安老院舍。我知道我、李女士及第二被告人只安排金華護老院一間安老院舍給第一被告人管理，事實上是由她媽媽即第二被告人從旁協助，也不可能給第一被告人管理其他安老院舍。而在第一被告人管理金華護老院期間，李女士亦經常派遣專業團隊幫忙，當中包括但不限於院舍升級買位、內部裝修督促和設計施工等。”
[57] Trial Bundle B1at pp 213 - 224
[58] Trial Bundle B3 at pp 736, 758, 775
[59] Trial Bundle B3 at p 737
[60] Trial Bundle B3 at p 759
[61] Trial Bundle B3 at p 777
[62] Please see footnote 28 above. It is the case of the 2nd defendant that she and her daughter (1st defendant) still thought that the Home could still make profits when the 1st defendant ultimately negotiated with the landlord to a lesser rental increase to HK$580,000 per month instead of the original asking increased rental of HK$650,000. But this is still a drastic increase in rental from the original rent of HK$406,000.
[63] See Exhibit CKS-15 produced by the 2nd defendant Madam Cheng referred to in paragraph 33 of her witness statement and it can be found at trial bundle B3 at p 890 to 891.
[64] See Exhibit CKS-14 produced by the 2nd defendant Madam Cheng referred to in paragraph 32 of in her witness statement and it can be found at trial bundle B3 at p. 888 to 889.
[65] B1/259
[66] The note issuing banks are HSBC, Standard Chartered and the Bank of China.