INTERNATIONAL TUTORS LTD v. AD EXCELLENTIAM LTD AND OTHERS

DCCJ 2715/2015

[2018] HKDC 823

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2715 OF 2015

-------------------------

-------------------------

-------------------------------------------

ASSESSMENT OF DAMAGES

-------------------------------------------

Background

1.  This is an assessment of damages of the counterclaim of the 3^rd plaintiff, Ian Michael Broughton (“IB”) by counterclaim against the 1^st defendant, International Tutors Limited (“ITL”), the 2^nd defendant, James Terence Ffitzroy (“JF”), the 3^rd defendant, Leung Lok Hang Janice (“JL”) and the 4^th defendant, International Tutors Hong Kong Limited (“ITLHK”).  Interlocutory judgment was entered against the said defendants on 1 November 2016.

2.  ITL was founded by IB and JF in March 2011 carrying on tutorial and academic services business.  IB used to be a director and shareholder of ITL.  

3.  In January 2013, IB expressed his intention to leave ITL but agreed to stay until the summer of 2013 initially which stay was subsequently extended until August 2015 after negotiations with JF. IB entered into written agreements to transfer his shares in ITL to JF and JL on 29 August 2013 and the shares were transferred to JF and JL accordingly on 1 January 2014.

4.  On 11 June 2014, IB entered into written agreements with JF and JL respectively which provide for, amongst other things, transfer of further shares by IB to JF and JL.

5.  IB complained JF and JL of non-payment for various transfers of shares as agreed and eventually left ITL on 24 November 2014.  The counterclaim of IB includes but not limited to payment for various shares transfer, disbursement, work done for ITL, director’s allowance, loss of earnings, dividend payment from ITL, and other damages.

Analysis of the evidence

6.  IB came in person to give evidence in court by adopting his witness statement and supplemented his evidence orally.  All defendants were absent for the assessment and adduced no evidence to contradict IB’s evidence. I find IB a credible witness. 

Price of shares transferred to JF

7.  IB claims a sum of $50,000 being the outstanding payment for the further shares already transferred by IB to JF pursuant to an agreement signed between IB and JF on 11 June 2014 (“the 2014 Agreement”).  IB adduces evidence to show that the shares had in fact been transferred to JF but no payment had been made by JF therefor.

8.  JF’s obligation to pay that amount is set out in Clause 6 of the 2014 Agreement which provides, inter alia, that IB will sell an additional 5% shareholding in ITL to JF in consideration of which JF will pay IB a sum of $50,000 on or about 31 January 2015. In the absence of any evidence from JF to counter IB’s evidence, I find this head of claim established.

Price of shares transferred to JL

9.  IB claims a sum of $75,000 being the outstanding payment for the further shares already transferred by IB to JL pursuant to an agreement signed between IB, JL and ITL on 11 June 2014.  IB adduces evidence to show that the shares had in fact been transferred to JL but no payment had been made by JL therefor.

10.  JL’s obligation to pay that amount is set out in Clauses 1 and 2 of that agreement which provide that IB was to transfer 5% of his shareholding in ITL to JL in consideration of which JL will pay IB a total sum of $75,000 by monthly instalments from around September 2014 to 31 August 2015.  In the absence of any evidence from JL to counter IB’s evidence, I find this head of claim established.

Brochure printing & agreed sum to be deducted from dividend

11.  IB claims a sum of $5,000 which consisted of (i) the money IB agreed to pay for the printing of brochures for ITL in the sum of $2,800 as a gesture of goodwill and (ii) a sum of $2,200 which IB agreed to be deducted from his dividend payment at the time such payment is made to reflect some benefits that would accrue to IB as a result of the taking of unpaid leave by some other staff as arranged by JF.

12.  During the assessment of damages, IB verbally confirmed that he would waive his claim for the said sum of $2,800 because he did agree to pay for the printing of brochures.  As for the sum of $2,200, such sum was to be deducted from the dividend payment payable to IB as and when such dividend is paid.  It should however be noted that on IB’s own case no dividend was ever paid to him eventually and as such no deduction of $2,200 from any dividend has been made as a matter of fact.  I therefore find that this head of claim cannot be established.

Overtime work payment

13.  IB claims a sum of $6,000 being payment for the overtime work done by IB in ITL in September and October 2014.  IB alleges that against his advice, JF took some actions which caused a key member of the teaching team to leave and resulted in chaos within ITL.  As a result, IB agreed to work beyond his contracted hours in September and October 2014 to deal with the chaos in return for a sum of $6,000 payable by ITL.  This sum of $6,000 was agreed to be paid as part of IB’s director’s allowance for January 2015 by turning IB’s two weeks’ unpaid paternity leave for that month into paid leave.

14.  Clause (4)(f) of the 2014 Agreement provides that “It is understood IB may take 10 working days’ consecutive unpaid paternity leave.  The DA (Director’s Allowance) will be pro-rated by the equivalent of a total of 50% of one month (i.e. HK$6,000).  IB will not work or teach during the paternity leave period. IB will return urgent or important phone calls during this time.”.  

15.  In paragraph 15 of ITL’s Reply and Defence to Counterclaim, ITL admitted that it agreed to pay $6,000 for IB’s two weeks of paternity leave in January 2015 but payment was not made because IB had resigned as a director on 24 November 2014 before taking paternity leave in January 2015.

16.  Having considered the oral evidence of IB which is not countered by any evidence from ITL, I believe in IB’s version of event and see no reason why IB should be deprived of such remuneration for the extra work which he had actually performed simply because IB had quitted the tutoring business in November 2014 before payment was made.  In any event, judgment on liability is entered.  I am satisfied that the reasonable award under this head is $6,000. 

Outstanding director’s allowance

17.  IB claims a sum of $9,400 being payment for IB’s director’s allowance for work done on certain days in November 2014 pro-rated on the following basis: monthly allowance of $12,000 divided by 30 days = $400 per day multiplied by 23.5 days of work provided = $9,400.  Having considered the oral testimony of IB and the documentary evidence including the 2014 Agreement, I am satisfied that the reasonable amount for this head is $9,400.

Loss of earnings/director’s allowance

18.  IB claims a sum of $110,600 being the loss of earnings/director’s allowance that would have been earned by IB had he not been forced to quit ITL on 24 November 2014 following the various breaches of contract by the JF/JL/ITL and had he continued to work until the end of the contract period as agreed (ie until 31 August 2015).  This sum of $110,600 is calculated as follows: ($12,000 x 9 months[1] = $108,000) + (daily allowance of $400 x 6.5 days[2] = $2,600) = $110,600.  

19.  Whilst IB left ITL because JF and JL had breached their contractual obligations to pay for the shares acquired from IB which caused IB to lose the opportunity to earn the director’s allowance for a period of nine odd months, IB was under a duty to mitigate his loss by finding alternative employment.  Given the very limited evidence available as to the amount that could have been earned by IB by mitigation, I assess the best I could that a period of 4 months should be a reasonable period for IB to find alternative teaching post subsequent to his departure from ITL.  The award under this head is $12,000 x 4 months = $48,000.   

Dividends for 2012-2013

20.  IB claims a sum of $435,306.52[3] being payment of the dividend for the financial year 2012-2013 payable in January 2015 but remains unpaid.  Payment of this sum was agreed in Clause 5.a and also Clause 8 of the 2014 Agreement which provides that “(8) Subject to agreement and compliance with all the terms of this Memorandum of Understanding, ITL will pay a dividend of 100% of post-tax profit for Financial Year Two: 1 September 2012 to 31 August 2013.  The dividend will be paid on 1 January 2015, 50% to IB and 50% to JF.  The dividend will be based upon the accounts as audited by Ronald Lee and Co”.

21.  The said sum of $435,306.52 was admitted in paragraph 26 of ITL’s defence which was adopted by other co-defendants in counterclaim.  Having considered all documentary proof and IB’s oral testimony which is not countered by the defendants to counterclaim, I find that this head of claim is established and would allow the claimed amount in full.   

Dividends for 2013-2014

22.  IB claims a sum in the region of $300,000 to $350,000 being the outstanding dividend payment for financial year 2013-2014 which was payable by ITL in January 2016 but remains unpaid.

23.  Payment of this sum was agreed in Clause 4.II.b of the agreement signed between IB and JF on 29 August 2013 which provides that “(b) For the Financial year 1 September 2013 to 31 August 2014 IB will receive a pro-rated dividend and a pro-rated share of retained earnings of 36.7%.  Thereafter IB will receive a pro-rated dividend and a pro-rated share of retained earning of 30%”. 

24.  Payment of this sum by ITL is also re-affirmed in Clause 2 of the 2014 Agreement which provides that “This Memorandum of Understanding replaces all previous agreements including the Memorandum of Understanding executed 29 August 2013. However all outstanding payment arrangements from the Memorandum of Understanding executed 29 August 2013 remains in force”. 

25.  Such a payment was agreed to be made at a rate of 36.7% of the retained earnings as specifically admitted in paragraph 30 of ITL’s defence which is adopted by other co-defendants in counterclaim.

26.  IB alleges that the defendants in the counterclaim had withheld from him the accounts of ITL for financial year 2013-2014, therefore he does not possess accurate information about ITL’s profits for that year and could only make a reasonable estimate based on all information and evidence he gathered.  IB estimates that 36.7% of the retained earnings for the year of 2013-2014 should be no less than the range of $300,000-$350,000 based on, inter alia, the following evidence:- (i) JF’s verbal representation that the profits for 2013-2014 looked “similar” to those of the previous year (the post-tax profits for the previous year were assessed at $870,613.04 by ITL’s accountant);  (ii) JF’s email to IB sent after close of 2013-2014 financial year indicating that ITL’s profits was well over $1 million that year; (iii) ITL’s internal unaudited profit and loss accounts for the 2013-2014 financial year showing a profits of around $1.7 million; and (vi) some bank statements of ITL.

27.  Having considered all documentary proof and IB’s oral evidence which has not been countered by the defendants to counterclaim, I assess the award under this head at $350,000.  

Purchase price for IB’s remaining shares in ITL

28.  IB claims a sum of $200,000 which represents the price that he would have been paid for his remaining shares in ITL had JF not breached his obligation to acquire IB’s remaining shares.

29.  This price was agreed in Clause 7.a of the 2014 Agreement which provides that “In advance of 1 September 2015 the following arrangements will be made: (a) The sale of the remaining 20% of IB’s share ownership of ITL (i.e. 2,000 shares) with a maximum two year timeframe at a fair price.  Shares sold to JF will be at a price of $100 per share.”.

30.  In light of what is agreed in the said agreement and taking into account the present status of ITL which suggests that the remaining shares held by IB do not likely carry any actual value, I am satisfied as to the reasonableness of the amount claimed.    

Loss of future dividends

31.  IB claims unliquidated damages for the loss of any and all future dividends suffered by IB due to the behavior of ITL, ITHKL, JF and JL constituting an abuse of a minority shareholder.

32.  In the absence of sufficient evidence as to the profitability of the tutoring business and the chance of dividends to be made in future years, I find this head of claim too vague and would not allow any award therefor.

Use of IB’s name and reputation

33.  IB claims unliquidated damages against ITL, ITHKL, JF and JL for using IB’s name and reputation to continue to promote ITL’s business and to profit from the same after IB’s departure from ITL without his permission.

34.  I do not consider that sufficient evidence has been produced in relation to any profit made by JF, JL, ITL or ITHKL through using IB’s name and reputation without IB’s permission.  I would not allow any award under this head.

Failing to hold AGM for ITL

35.  IB claims unliquidated damages against ITL, ITHKL, JF and JL for failing to hold an Annual General Meeting of ITL in violation of sections 429 and 610 of the Companies Ordinance, Cap 622.

36.  I do not consider that any or any sufficient evidence has been produced in relation to any loss suffered by IB as a result of the failure to hold an Annual General Meeting for ITL or any non-compliance of sections 429 and 610 of Cap.622.  I would not allow any award under this head.

Others

37.  In paragraph 45(xvii) and (xviii) of the counterclaim, IB further seeks “all necessary inquiries and accounts in respect of the profits, Director’s Allowance, dividends, shares and/or payment of the share price” and “tracing as against the profits, Director’s Allowance, dividends, shares and/or payment of the share price”.  After obtaining judgment on liability against JF, JL, ITL and ITLHK, IB considers it no longer necessary to seek such further relief (see paragraph 20 of IB’s witness statement). These claims need not be dealt with in the present assessment of damages.

Liability

38.  IB solely claims against JF in relation to the outstanding payment for the shares already transferred to JF in the sum of $50,000, and solely claims against JL in relation to the outstanding payment for the shares already transferred to JL in the sum of $75,000.  Other heads are all claimed against JF, JL, ITL and ITLHK on a joint-and-several-liability basis. IB set out in his Statement of Claim (in counterclaim), in particular paragraphs 38 to 44 thereof, the basis of his holding JF, JL, ITL and ITLHK jointly and severally liable.  In short, IB pleaded that there was abuse of his rights as minority shareholder in ITL by JF and JL.  ITLHK is liable for all the debts and obligations owed by ITL to IB by virtue of section 3 of the Transfer of Business (Protection of Creditors) Ordinance (Cap 49).  JF, JL, ITL and ITLHK have conspired together to cause the various breaches of contract as aforementioned.  JF, JL, ITL and ITLHK are constructive trustees of the profits, director’s allowance, dividends, shares and share purchase money which IB was entitled to but had been received by JF, JL, ITL and/or ITLHK contrary to his interest.

39.  As IB has already obtained judgment on liability against JF, JL, ITL and ITLHK in relation to the matters/causes pleaded in his counterclaim against these defendants, the present judgment only focuses on assessment of damages and shall not cover any analysis on the issue of liability.

Conclusion

40.  Below is a summary of my assessment under the various heads of claim:-

Heads of Claims	Against	Amount Claimed (HK$)	Assessed Amount (HK$)
Share transfer payment owed by JF	JF	50,000.00	50,000.00
Share transfer payment owed by JL	JL	75,000.00	75,000.00
Printing of brochures & agreed deduction from dividends	All defendants	5,000.00	Waived & disallowed
Overtime work payment	All defendants	6,000.00	6,000.00
Outstanding director’s allowance	All defendants	9,400.00	9,400.00
Loss of earnings/director’s allowance	All defendants	110,600.00	48,000.00
2012-13 dividends	All defendants	435,306.52	435,306.52
2013-14 dividends	All defendants	300,000.00-350,000.00	350,000.00
Purchase price for IB’s remaining shares in ITL	All defendants	200,000.00	200,000.00
Loss of future dividends	All defendants	Unliquidated	Disallowed
Use of IB’s name and reputation	All defendants	Unliquidated	Disallowed
Failing to hold an AGM for ITL	All defendants	Unliquidated	Disallowed
		Total:	1,173,706.52

41.  To sum up, JF is solely liable for a sum of $50,000.  JL is solely liable for a sum of $75,000.  All defendants in counterclaim (ie JF, JL, ITL and ITLHK) are jointly and severally liable for $875,000 which is a reduced amount in order to bring the total award within the jurisdiction of the District Court.

Costs

42.  On the question of costs, I consider IB’s claim for costs in the action in the sum of $31,185 reasonable and shall allow it in full by way of summary assessment.

Interest

43.  The judgment entered on 1 November 2016 already caters for interest on the damages to be assessed at judgment rate until full payment.