Lam v Mo
[2018] NZHC 2920
•9 November 2018
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-Ā-TARA ROHE
CIV-2013-485-1736
[2018] NZHC 2920
BETWEEN MAN FUNG LAM, YUET MING BETTY WONG and MORAL DRAGON LIMITED
PlaintiffsAND
CHIU CHEUNG MO and LILY YUET HA WONG
First Defendants
AND
SUNLINK DEVELOPMENTS LIMITED
Second Defendant
AND
PLIMMERTON HEIGHTS
CONSTRUCTION LIMITED
Third DefendantAND
STEVEN WEE HONG LEE
Fourth Defendant
Hearing: 14 May 2018 Appearances:
R J B Fowler QC for Plaintiffs
M R C Wolff and S P Gunatunga for First, Second and Third Defendants
No appearance for Fourth DefendantJudgment:
9 November 2018
JUDGMENT NO 2 OF WILLIAMS J
LAM & ORS v MO & ORS [2018] NZHC 2920 [9 November 2018]
Introduction
[1] By judgment dated 16 May 2017 I ordered the second and third defendants to give an account in accordance with pt 16 of the High Court Rules 2016.1 An account-taker was appointed and duly completed her report on 15 December 2017. Following that report the parties remained in disagreement over the following matters:
(a)entertainment costs;
(b)wages, salaries and remuneration payments;
(c)legal fees attributable to the second and third defendants;
(d)unsold sections;
(e)plaintiff’s responsibility for losses in the Plimmerton development;
(f)account-taker’s fees;
(g)off-sets.
[2] These matters were the subject of a further hearing on 14 May 2018. At that hearing counsel pragmatically suggested that I make in-principle rulings on each of the contested items and leave it to the parties to settle monetary figures for reference back to the Court in due course. I adopt that approach accordingly and turn now to address each item separately.
[3] For ease of reference, in this judgment I refer to the plaintiffs as Mr Lam, the first defendant as Mr Mo, the second defendant as Sunlink and the third defendant as Plimmerton.
1 Lam v Mo [2017] NZHC 997, [2018] NZCCLR 2 at [219].
Entertainment costs
[4] This item related to entertainment costs claimed by Mr Mo through the companies.
The parties’ positions prior to the hearing
[5] The total entertainment costs claimed by Mr Mo were $139,000. The account-taker noted these to be high. The account-taker recorded that, in line with Inland Revenue policy, half of these costs should be treated as personal drawings by Mr Mo.2
[6] Mr Mo agreed. Mr Mo’s accountant, Mr Lang, suggested that the nature of property development is that extensive interaction is required with contractors, lenders, surveyors, builders and potential customers before work can even begin. He submitted that generally 100 percent of entertainment expenses can be claimed by directors and that the costs in this case were legitimately incurred and in accordance with general trade practices.
[7] Mr Lam’s accountant, Mr Taylor, suggested that the project was straightforward and entertainment costs would only be required over five years of the project. An independent agent was required to facilitate sales meaning that Mr Mo would not have needed to incur these costs to make sales. Mr Lam suggests that at best
$1,000 per annum (total of $6,000) is reasonable.
The parties’ positions at the hearing
[8] At the hearing, Mr Lam reinforced that this was a straightforward property development with independent agents. He reinforced that there was a timing mismatch between when entertainment costs were incurred and the “lifecycle” of the development. He suggested that there would only have needed to be a lot of interaction with agents, banks and contractors in 2003–2007.
2 See Entertainment expenses: What you need to know about making claims (Inland Revenue, April 2018). According to this report, 50 per cent of entertainment costs are tax deductible.
[9] Mr Mo acknowledged that the Inland Revenue guidelines were not entirely relevant and had been used by the account-taker as “something to cling to”. Mr Mo reinforced that unless something can be pointed to that shows that the entertainment costs were unreasonable, the account-taker’s assessment must remain.
Assessment
[10] Legitimately incurred entertainment costs are able to be entirely attributed to the company. The account-taker’s reference to the Inland Revenue guidelines is not entirely helpful as this refers to what tax deductions are available for these expenses. The Inland Revenue guidelines detail that some entertainment expenses are 50 per cent tax deductible and others, 100 per cent.3
[11] The real question is what “reasonable” entertainment expenses would be. The margin of difference on this item of account is substantial; between $6,000 and
$69,258. Neither party provided a principled basis upon which to determine what “reasonable” expenses would be in the context of a building development. In particular, Mr Lam has not suggested a principled or evidential basis upon which to prefer Mr Taylor’s suggestion that $1000 entertainment expenses per annum would be reasonable. There is no explanation for why the figure of $1,000 has been chosen and what this takes into account. In the absence of reliable evidence to the contrary, it is my view that the account-taker’s figure of $69,258 is as good an estimate as any of what might be reasonable entertainment expenses. I decline to disturb the account-taker’s finding.
Wages, salaries and remuneration payments
[12]The focus here was the cost of Mr Mo and his staff’s remuneration.
3 Entertainment expenses, above n 2, at 6.
The parties’ positions prior to the hearing
Salaries
[13] Mr Taylor, for Mr Lam, suggested that shareholder salaries were “unreasonably high” and not consistent with development or sales activity. He took particular issue with the salaries in 2014–2016 as limited business activity took place at that time. Mr Taylor suggested that $50,000 per annum in the five key years of development and
$30,000 in the eight years of lot sales would be equivalent to paying for independent management services. He suggested than an appropriate salary for the period is therefore $490,000. This is $604,000 less than the actual remuneration provided.
[14] Mr Lang, for Mr Mo, suggested that the salary must be considered in the context that the development had been underway for 21 years, not just the 11 he was paid for. If this is taken into account, his average salary for each of the 21 years is $53,627. Mr Lang submitted that this figure is reasonable given the hours that Mr Mo worked, the length of the development, and his level of skill.
Wages
[15] Mr Taylor, for Mr Lam, appeared to accept that $45,000 annual wages is reasonable but submitted that annual wages in 2015/16 were high when compared to project activity in those years. He noted that there were no employment records and hence that the account-taker had no basis for accepting the amounts claimed.
[16] Mr Lang, for Mr Mo, submitted that all wages were legitimate expenses, as evidenced by tax records that were provided to the account-taker. The wages paid are said to be less than had contractors been hired. The wages were therefore fair and reasonable.
The parties’ positions at the hearing
[17] Mr Lam submitted that this was a straightforward property development where legal fees were paid by the purchasers. There was no need for a full-time manager
being paid $100,000 per annum. Mr Lam reinforced that a total of $490,000 for 13 years would have been appropriate.
[18] Mr Lam conceded that wages paid to others were not directly challenged but had a bearing on Mr Mo’s salary.
[19] Mr Mo submitted that there was not enough evidence on balance of probabilities to allow a Court to depart from the account-taker’s view and noted that allowances for time and skill put into a business are appropriate.4
Assessment
Wages
[20] As Mr Lam was prepared to accept the wages paid to staff, I find these to be a legitimate company expense.
Salary
[21] The contest in relation to Mr Mo’s salary is whether $1,094,000 or $490,000 is an appropriate deduction.
[22] In my view, while Mr Lam has raised queries with the account-taker’s assessment, no evidence has been provided to displace the account-taker’s acceptance that $100,000 was an appropriate salary. Mr Lam has not provided any evidence to support the proposition that $50,000 and $30,000 would be appropriate salaries for a manager in this kind of development. The independent view of an experienced commercial chartered accountant is to be preferred in the absence of cogent evidence to the contrary.
Legal fees (second and third defendants)
[23] Legal fees of $226,127 (excluding GST) were incurred in defence of these proceedings. The parties were unable to agree on the treatment of those fees.
4 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433.
In particular the question was how much of that amount should be attributed to and met by Mr Mo personally as opposed to the defendant companies.
The parties’ positions prior to the hearing
[24] The account-taker was unsure whether the legal fees should be treated as personal costs of Mr Mo or attributable in part to the companies.
[25] Mr Lam submitted that a small allowance may be a legitimate company expense to recognise that the second and third defendants’ presence in the litigation was useful for the purposes of discovery and so that they would be bound by the outcome.
[26] Mr Lang, for Mr Mo, gave evidence that legal fees are a company expense that was legitimately incurred. The companies had no choice but to defend themselves in the proceedings. It was submitted that Sunlink and Plimmerton were important in the proceedings given the claim by Mr Lam that funds were being channelled through these companies and that Sunlink was paying salaries. Mr Mo submitted that the majority of the substantive proceeding related to claims about Sunlink and Plimmerton and therefore that two thirds of their legal fees should be attributed to the companies.
The parties’ positions at the hearing
[27] Mr Lam accepted that the companies had some role in the proceedings: providing access to records. Other than that, Mr Lam submitted that there was no requirement for separate and singular representation and evidence. Mr Lam submitted that $26,000 of legal fees should be attributed to Sunlink and Plimmerton and
$200,000 should be attributed to Mr Mo personally.
[28] Mr Mo drew the Court’s attention to the fact that an account of profits of Sunlink and Plimmerton was sought in Mr Lam’s second amended statement of claim. He submitted that it would therefore be odd to suggest that these parties were only joined for discovery purposes. Mr Mo suggested that the primary target of the litigation was not Mr Mo but funds from the Cuba and Dixon street properties.
Mr Mo submitted that it is the pleading that is important, not how the case actually played out and that each of Mr Mo, Sunlink and Plimmerton should pay one third of Sunlink and Plimmerton’s legal fees.
Assessment
[29] I accept that the companies were required to be joined so that they would be bound by any orders affecting their assets or interests. But in my view the primary target in this litigation was Mr Mo himself. To the extent that Sunlink and Plimmerton were engaged, it was because they were effectively extensions of Mr Mo, or more accurately instruments of the joint venture but which he nonetheless treated as mere extensions of himself.
[30] I consider therefore that he should be required to bear the lion’s share of the cost of defending this proceeding. The fees therefore will be shared two thirds to Mr Mo personally and one third divided equally between Sunlink and Plimmerton.
Unsold sections
[31]This relates to the proper treatment of two unsold sections.
[32] The first has a rating value of $225,00 and the second of $560,000. The second section is, it is thought, contaminated with asbestos which will likely require, according to the account-taker, between $1.15 and $1.7 million to remediate. Costing for other options has not been sought.
Parties’ position prior to the hearing:
[33] Prior to the hearing, neither of the parties expressed a view on how to account for these sections.
Parties’ position at the hearing
[34] Mr Lam submitted that it was unclear whether the section was in fact contaminated. He suggested that the local authority has no record of this.
[35]Mr Lam suggested that there were three options to deal with the sections:
(a)value the sections now and add them “into the mix”;
(i)Mr Lam pointed out that this may not be a straightforward matter as one of the sections could be of particular value to Mr Mo as it is adjacent to his property.
(b)give Mr Lam a share in the proceeds after the sale of the sections; or
(c)make an order vesting title in both sections to Mr Lam and Mr Mo as tenants in common.
[36] Mr Mo saw no easy way to deal with these sections without coming back to the Court. Mr Mo suggested an option for Mr Mo to purchase at rateable value (RV) or sell the sections and add the profits into an account of profits as a whole. Mr Mo submitted that the only way to have certainty on value is to rely on RV.
Assessment
[37] It is not possible for this matter to be finally determined at this stage. Neither party has presented a clear view on treatment and there is too much uncertainty about the value and condition of the sections for it to be fair for the Court to order a particular course of action. It is by no means clear whether these properties will be a boon or a burden to their eventual recipients. It seems to me that this is a matter that ought to be separately agreed in a pragmatic business fashion, but if that proves impossible I will entertain an application for an appropriate vesting order.
The burden of losses for Plimmerton
[38] Sunlink made a profit but Plimmerton made a relatively significant loss. At issue under this heading is the extent to which the Lams should share in that loss.
[39]Mr Lam noted the Court’s finding that:
[158] … To the extent that Plimmerton Heights produced income from the Plimmerton subdivision, David held 35% of the shares in that company for the Lams also.”
[40] As such, he submits that the joint-venture only involved a sharing in Plimmerton’s profits, not losses.
[41] Mr Lam further submitted that he had not entertained any prospect of going into construction and that it was Mr Mo who chose to inject wealth obtained from the Cuba and Dixon street properties into a property development venture. The Lams had no input into the fact that the property development turned into a venture which made a loss. Mr Lam did not consider that this submission required recalling the substantive judgment.
[42] Mr Mo submitted that this challenge involves an impermissible relitigating of matters. If this Court decides to entertain this challenge, Mr Mo submitted that a joint venture partner cannot “cherry pick” parts of the venture which it wishes to be considered as joint. The profit was only derived because of the loss (i.e. by investing resources into building the business) and as such, the loss must be accounted for.
[43] Mr Mo submitted that this issue represented Mr Lam attempting to re-litigate matters and hence cannot be dealt with at this stage. However, in the alternative that it is not considered to amount to re-litigating, Mr Mo submits that Mr Lam’s submissions ignore the fact that losses for Plimmerton may have led to profits for Sunlink. Mr Mo submitted that to try and “unlink” the companies would be artificial.
Assessment
[44] Setting aside the question of whether this submission amounts to an impermissible re-litigation of concluded issues or an attempt to achieve recall without the necessary application, I accept that at least some clarification would assist. I am satisfied that the losses attributable to Plimmerton are to be borne by the joint venture. It is factually inaccurate to suggest that the Lams had no knowledge of the prospect of construction at the Plimmerton subdivision. As Mr Lam himself said, the 1997 trip to
Bangkok was to source building materials and kitchen units for the Plimmerton subdivision.5 This can only be because he too, expected that the development would involve some residential construction. Plimmerton was the entity that undertook that work.
[45] In any event the reference to “income” at [158] of the substantive judgment should not be read as meaning net profit. Plimmerton’s losses are losses of the joint venture.
Account-taker’s fees
Parties’ position at the hearing
[46]Mr Lam noted the direction given in the substantive judgment:
[220] The costs of the account taker will be met from the funds of Sunlink Developments Ltd. The account taker will provide an estimate of his or her reasonable costs within five working days of appointment, and Sunlink Developments shall immediately pay into court by way of security, that sum or a bond in terms acceptable to the Registrar securing payment of such sum.
[47] Mr Lam submitted that despite this passage, the Court is not precluded from now deciding where costs should ultimately be imposed. He noted that had there been no breach of fiduciary duty there would be no need for account-taking.
[48] Mr Mo submitted that the judgment records that payment is to be made by Sunlink. Sunlink did not have funds to pay for the account-taking and so Mr Mo paid for the account-taker’s work.
Assessment
[49] At [220] of the judgment, I directed that Sunlink must fund the account-taker. To revisit that would require a recall and reissue of the substantive judgment. There is no application before me to that effect and if there was it would be most unlikely to succeed in terms of the well-settled applicable principles.
5 Lam v Mo, above n 1, at [40].
Offsets
[50] According to company accounts Sunlink Investments Limited lent $38,635 to Sunlink and when the former was removed from the Companies Office Register, Mr Mo wrote the debt off and credited an equal amount in the accounts of Sunlink. The accountant, Mr Lang suggested this amount should be treated as a shareholder’s advance by Mr Mo personally, of that sum and accounted for in final calculations. The respective positions of Mr Lam, Mr Mo and the account-taker are:
Mr Lam Mr Mo Account-taker $38,635 sum is irrelevant. $38,635 owing to Mr Mo from Sunlink Developments. Not raised with account-taker.
[51] I agree with Mr Lam that the sum claimed to be owed to Mr Mo is irrelevant. The sum was not owed to Mr Mo but to Sunlink Investments and it was written off. This sum is not within scope of the exercise currently being undertaken.
Interest
AParties’ positions at the hearing
[52] Mr Lam submitted that interest should run from the termination of the joint venture on 20 June 2013. Mr Mo submitted that interest is at the discretion of the Court. Mr Mo suggested that interest should be offset by interest on the
$276,000 already advanced to Mr Lam and the $770,000 owed to Mr Mo by Plimmerton.
BAssessment
[53] Mr Lam will be entitled to interest in the usual way. I do not accept that it is appropriate to make the off-sets suggested by Mr Mo. As I noted in the judgment at [149], the Lams’ funds had been under the control of Mr Mo for some considerable time before being attributed to the Plimmerton joint venture. There is therefore no good reason for me to exercise any discretion in respect of interest in favour of Mr Mo in those circumstances.
Conclusion
[54]I therefore make the following findings:
(a)50 per cent of the entertainment costs are payable by Mr Mo;
(b)the wages paid to staff are a legitimate company expense;
(c)Mr Mo’s salary was appropriate;
(d)Sunlink and Plimmerton’s legal fees will be shared two thirds to Mr Mo and one third equally between Sunlink and Plimmerton;
(e)Plimmerton’s losses are losses of the joint venture;
(f)the account-taker’s fees are payable by Sunlink;
(g)the offsets said to be owed to Mr Mo are irrelevant; and
(h)Mr Lam is entitled to interest in the usual way.
[55] The parties are agreed that the next step is for final calculations to be made by them on the basis of the above findings. If the parties have been able to agree the treatment of the two unsold sections that too should be addressed. Final orders will be made when the appropriate joint memorandum is provided together with appropriate draft orders. I direct that this be filed in 15 working days of this judgment.
Costs for Mr Lee
[56] Churchman J made costs orders in relation to the fourth defendant, Mr Lee, in February this year. Costs and disbursements were fixed at $73,639.69 against the plaintiffs. A cheque in the sum of $20,684.81 was paid by the plaintiffs to Mr Lee’s solicitors. The shortfall of $52,954.88 has not been paid.
[57] By memorandum of 10 May 2018 Mr Lee sought an order directing that such part of any final award against the first to third defendants as equals that shortfall, be paid by those defendants to Mr Lee instead of the plaintiffs.
[58] I will consider that issue when the final calculations have been completed. If the plaintiffs wish to make submissions on that particular question, they should file them at the same time as the final calculations and draft orders are filed. Any submissions in response should be filed within five working days of then. If no submissions in reply are received, I will proceed on the basis that Mr Lee’s memorandum of 10 May 2018 contains such submissions as he wishes to make. I will decide that matter on the papers unless the parties indicate they wished to be heard further.
Williams J
Solicitors:
Paul Cheng & Co, Wellington for Plaintiffs
Morrison Kent, Wellington for First, Second and Third Defendants