UDL HOLDINGS LTD AND ANOTHER v. LEUNG YUET KEUNG AND ANOTHER

HCA 4409/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4409 OF 2002

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Dates of Hearing: 16, 17, 18 and 22 September 2008

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J U D G M E N T

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Nature of this action

1. This is not an action which is factually complicated.  To the contrary, with several exceptions, much of the factual background is not in dispute. 

2. At issue is a single point of law, namely, have the two defendants, who were directors of the plaintiff companies, offended against a rule of equity in successfully bidding for, and thereafter reselling at a profit, a vessel, formerly owned by the 2^nd plaintiff, which was the subject of judicial sale.

3. If the answer to this question is in the affirmative, then the plaintiffs’ action will succeed, and the defendants must disgorge the profit thus made from the sale of the vessel.

4. If the answer to this question is in the negative, the plaintiffs’ action will fail.

The factual background

5. Shorn of detail, the primary facts are in relatively short compass.

6. The case concerns a vessel known as a ‘trailing suction dredger’ named the “KAI HONG”.  Henceforth I shall simply refer to it by name or as ‘the vessel’ or ‘the dredger’; it is a specialized vessel (in 1992 apparently there were no more than 40 such vessels worldwide) which resembles, as its name implies, a sort of ‘seaborne vacuum cleaner’, the utility of which is to create/clear channels on the seabed, and is primarily used in reclamation works.

7. This vessel was owned by the 2^nd plaintiff, Well Raise Investment Limited (‘Well Raise’), which at the material time was a subsidiary of a company known as UDL Ship Management Limited, itself a subsidiary of the 1^st plaintiff, UDL Holdings Limited, a Bermudan company publicly listed in Hong Kong, and the holding company of a group – ‘the UDL Group’ – which comprises over 100 subsidiaries.  There is no doubt but that the 1^st plaintiff is accepted to be the ultimate holding company of the 2^nd plaintiff, Well Raise, which, as I have said, owned the vessel in question.

8. The 1^st defendant, Mr YK Leung, was executive director of the plaintiff companies from June 1993 to January 2000.

9. The 2^nd defendant, Mr SY Wong, was a close friend and business associate of YK Leung, and a non-executive director of the 1^st plaintiff from June 1993 to January 2000; whilst not formally admitted, I do not understand that it is seriously contested that he was at the least also a de facto director of the 2^nd plaintiff during this period.

10. The other main individual protagonist who should be identified at the outset in this case – which at times struck me as resembling little more than the latest instalment of an ongoing family ‘row’, which seems to have lasted for the past decade – is the younger brother of the 1^st defendant who is Mr Leung Yuet Tung: for the duration of this case referred to by counsel as ‘YT’, whilst his brother (with whom he clearly is at odds, and between whom little love is lost) consistently was referred to as ‘YK’.  For ease of reference hereafter I adopt the like appellations.

11. The present dispute arises from a sequence of transactions concerning the “KAI HONG”.

12. By a Bill of Sale dated 28 February 1997, the 2^nd plaintiff, Well Raise, agreed to purchase the dredger from Universal Dockyard Ltd upon an ‘as is, where is’ basis for HK$69.5 million.

13. This purchase was to be facilitated by a tripartite arrangement involving a Japanese financial institution, Nippon Credit Bank (‘Nippon Credit’) as Lender, Well Raise as Borrower, and the 1^st plaintiff, UDL Holdings, as Guarantor.

14. On 5 March 1997 these three parties entered in a Loan Agreement in the sum of HK$48,650,000, which sum was to be used for part-financing the acquisition of the vessel and as general working capital of Well Raise.  It appears that on the same day the Vendor and Well Raise agreed to revise the consideration for the vessel itself to HK$15,460,000.

15. Pursuant to a Deed of Covenant dated 7 March 1997, Well Raise mortgaged the “KAI HONG”, in addition to its rights, title and interest in the insurance policy in respect of the vessel, to Nippon Credit as security for the loan.

16. With the onset of the Asian Financial Crisis in 1998, the UDL Group faced financial difficulties.

17. In the event, Well Raise defaulted upon payment of its loan to Nippon Credit, and the 1^st plaintiff, UDL Holdings, was unable to make repayment to the mortgagee under its guarantee of the loan.

18. Accordingly, on 9 October 1998, Nippon Credit issued a Writ in Rem and Warrant of Arrest against the “KAI HONG” in HCAJ 314 of 1998, and pursuant to the Order of Waung J dated 13 November 1998, the vessel was ordered to be sold.

19. Prior to this court-ordered sale, it seems that the “KAI HONG” had had two accidents after being acquired by Well Raise, both of which had occurred in Taichung Harbour, Taiwan: the first accident was when a fire had broken out in the pump room on 4 April 1998, and the second when the crankcase doors in the port side of the main engine room had been blown off on 25 June 1998.

20. Within the context of the present case, the significance of these accidents – or, at least, the second such accident – lay in the insurance claims that had been lodged in respect of them, and the knowledge of the prospects of recovery thereunder.

21. Following these incidents, UDL Ship Management, as manager of the vessel, had notified its insurer, HSBC Gibbs, of its intention to lodge a claim with underwriters; thus, site investigations were conducted, and survey reports prepared by the Salvage Association in respect of the damage sustained.

22. These insurance claims naturally were of interest to Nippon Credit, the ship mortgagee, to which Well Raise had assigned the insurance policy covering the vessel as part of the security for the loan as thus advanced; pursuant to this arrangement Nippon Credit possessed the legal and beneficial interest in the fruits of these claims, which appear to have been estimated (at least by YT Leung) to be in the region of US$1.1 to US$1.5 million.

23. Subsequent to the Order of Waung J for the sale of the “KAI HONG”, it is alleged by YT Leung that he had secured an offer for the vessel from a potential third party purchaser, one Dragomar S.P.A. (‘Dragomar’), an Italian dredging contractor with whom UDL earlier had been a joint venture partner in the Reclamation Stage 3 Project of the Yau Ma Tei Typhoon Shelter between 1992 to 1995.

24. It is said that at that time Dragomar had offered to purchase the dredger for US$3.5 million on an ‘as is, where is’ basis.  However, the unpaid mortgagee, Nippon Credit, declined to postpone the court-ordered sale of the vessel, which was duly advertised on 22 December 1998, with a closing date set for bids on an ‘as is, where is’ basis, of 7 January 1999.

25. The Invitation to Tender of that date, signed by Madam Carlye Chu, then Acting Registrar of the High Court, is in standard form: in particular paragraph 1 of the advertisement states that the Vessel “is offered for sale as she lies in the waters of Hong Kong in her ‘as is’ ‘where is’ condition without any warranties or guarantees at the date of delivery…”, whilst paragraph 3 of the same document stipulates that “no warranties are given” relating to the vessel’s seaworthiness or condition or that she is fit for any particular purpose, that her equipment is adequately certificated, that the appropriate authority of the country of her present flag will consent to the transfer of title of the vessel, and so forth.  In short, this was the standard-form Invitation to Tender in use at that time, with further information provided as to inquiries that may be made as tenderers “think fit”, and that permission to inspect the vessel might be obtained from the Chief Bailiff, together with information as to where, and by when, tenders should be submitted, and in what form.

26. That which then occurred in terms of the filing of bids pursuant to the advertised invitation to tender for the “KAI HONG” forms the factual origin of this case.

27. Because both the 1^st defendant, YK Leung, and his friend and business associate, the 2^nd defendant, SY Wong, placed bids through nominee BVI companies, respectively Fanwick Limited (‘Fanwick’) and Healthy Wharf Limited (‘Healthy Wharf’).

28. In fact, it appears that the 1^st and 2^nd defendants placed two distinct bids: first, that which has been referred to as a ‘conforming bid’ – by which is connoted a bid conforming to the terms of the published Invitation to Tender – of around US$1.1 million; and second, a ‘qualified bid’ – by which is connoted a bid not conforming to the terms of the Invitation to Tender – of a sum of around US$1.9 million, the qualification therein being that Nippon Credit assign to the purchaser under that bid the benefit of the extant insurance claims which then remained due and payable in respect of the accident damage to the vessel earlier suffered in Taiwan Harbour.

29. To be more precise, on 7 January 1999 the two bids in question were made in the following terms:

(1)     Healthy Wharf (the ‘qualified bid):              HK$14,721,200

(2)     Fanwick (the ‘conforming bid’):                  HK$8,522,800

30. In the event, and as no doubt was anticipated, the Healthy Wharf bid was the highest submitted in the tender pursuant to the judicial sale; notwithstanding that this bid was girt about with the qualification that Nippon Credit assign all its rights and benefits in all insurance policies on the “KAI HONG”, the bailiff chose to act thereon and apparently sought the instructions of the mortgagee (who appeared to be the sole creditor), and Nippon Credit agreed to accept the purchase price tendered by Healthy Wharf.

31. The judicial sale was completed on 21 January 1999, and Nippon Credit assigned to Healthy Wharf all its rights, title, interest and benefit in the insurance claims which had been made consequent upon the damage to the vessel.

32. However, this is not the end of the story.

33. On 6 February 1999, Healthy Wharf assigned these insurance claims to one Excelwise Enterprises Limited (‘Excelwise’), another company controlled by the 1^st and 2^nd defendants, and in turn Excelwise, whilst retaining the benefit to the insurance claims, assigned the “KAI HONG” to Success Team Limited (‘Success Team’), a company likewise controlled by the 1^st and 2^nd defendants.

34. In the event, the vessel thereafter was on-sold by Success Team to a nominee of Dragomar, Fiangen SpA, for the sum of US$3.1 million, that is, some US$1.2 million over and above the purchase price of the vessel consequent upon the successful bid in the judicial sale of the dredger.

35. Shortly thereafter, Excelwise, which had retained the rights in the insurance policies, reached a settlement of the claims with insurance underwriters, and recovered the sum of US$520,778.51.

36. It is these sums, respectively of US$1.2 million and US$520,778.51, which are the amounts claimed by the plaintiffs in this action. 

37. The basis of the case is variously pleaded (at paragraphs 29, 29A and 30 of the Re-Amended Statement of Claim, dated 24 March 2006), but the claim as now propounded is premised upon the assertion that in acting as they did the 1^st and 2^nd defendants were in breach of fiduciary duty owed to the 1^st plaintiff and/or in breach of fiduciary duty owed by the 1^st defendant to the 2^nd plaintiff in the utilization of confidential information available to them as directors for wrongful profits made in the cumulative sum of US$1,720,778.51 (paragraph 29), further or alternatively that the defendants had incurred an obligation to account to the plaintiffs for the profits made by them in the sale and re-sale of the “KAI HONG” (paragraph 29A), further or alternatively that the defendants are holding the profit of US$1.2 million and the proceeds of US$520,778.51 recovered under the insurance policy as constructive trustees for the plaintiffs (paragraph 30).  Interest also is claimed on these sums at such rate and for such period as the court shall decide.

38. This, therefore, is the broad shape of the case now requiring decision by this court.

The issues for decision

39. Although various other issues have been raised on the pleadings (for example, whether the plaintiffs have locus standi to bring this action, and whether at the material time the 2^nd defendant was a de jure, as opposed merely to a de facto director of the 2^nd plaintiff), at the end of the day the good sense of leading counsel has prevailed, and, as argued, the issues for decision in this trial are threefold:

First, in the circumstances of this case were the defendants in breach of a fiduciary duty owed to the plaintiffs, or either of them?;

Second, if so, did such breach lead to consequential loss on the part of the plaintiffs?; and

Third, is there any necessity or justification in the present case to invoke the provisions of section 358 of the Companies Ordinance, Cap. 32?

Viva voce evidence

40. As initially indicated, there are relatively few matters of fact that require a specific finding of the court; indeed, as I understood his able argument, Mr Fung SC boldly advanced the proposition that whatever findings of fact were made by the court within the factually-disputed areas, such would make little difference in light of the legal arguments propounded by the plaintiffs.

41. Be that as it may.  In my view there is in the circumstances no necessity to do more than briefly advert to the oral evidence as it was led before the court, which was in addition to the usual profusion of box files of documents – as to which, in the finest traditions of litigation in Hong Kong, relatively little of this documentation was required to be consulted, or otherwise impacted directly upon the nature of this dispute.

42. For the plaintiff, two witnesses were called: first, Mr YT Leung, who spoke to the background of the decision to purchase the “KAI HONG”, of the allegedly ‘confidential information’ he had imparted to the defendants, and, also, of the concept he had floated before the defendants in terms of wishing this vessel to be purchased at judicial sale with funds supplied by the defendants, and thereafter to be chartered out to him or one of his companies for use in a reclamation project in Singapore; and second, one Mr Kent Wong Ka Wah, who had worked for the UDL Group until 30 September 2005, and whose principal utility in terms of the plaintiffs’ case appeared to be his evidence, firmly disputed by the 1^st and 2^nd defendants, that he had presented to the 1^st and 2^nd defendants at a meeting in or about end of December 1998 the set of files relating to the insurance claims arising from the earlier accidents to the vessel.

43. For the defendants, the 1^st and 2^nd defendants each gave evidence.

44. The first to be called was Mr YT Leung’s older brother, YK Leung, who described the sequence of events that had led to the bidding at auction for the “KAI HONG”, and at the same time touched upon his historically tenuous and regrettably sour relationship with his younger brother, YT, which appeared to have history not directly relevant to the present dispute, and which centered on the manner in which the erstwhile family ‘UDL business’ (which was founded by the brothers’ father in the 1930’s) had developed and been run by YT.  The second witness to be called was his friend, and close business associate, the 2^nd defendant, Mr SY Wong.

45. Let me say immediately that having seen and heard these witnesses, I was considerably the more impressed with the 1^st and 2^nd defendants as witnesses of truth; in listening to their evidence, and in observing their demeanour, I formed the view that these two gentlemen were fundamentally honest and truthful.

46. To the contrary, I was wholly unimpressed with Mr YT Leung, who gave his evidence under an Indemnity contained in a UDL Holdings Ltd Board Resolution dated 1 September 2006 – whereby it was resolved to continue to proceed against Mr YK Leung and Mr SY Wong “with a view to recover losses incurred to the company as a result of their breach of fiduciary duty to the company and/or to recover ill gained profit from their dealing in the purchase and sale of the “Kai Hong”, and further that the company was “to waive any claims against Mr Leung Yat Tung in exchange for [his] cooperation in respect of the case” for the stated reason that “as [Mr YT Leung] is an undischarged bankrupt and has obtained no financial gains, the Company sees no benefit to take any action against [him], but to seek assistance from him to pursue with recovery actions against the other two former directors”.

47. Mr YT Leung currently is the CEO of the 1^st plaintiff, UDL Holdings Ltd, and the terms of the aforesaid Indemnity notwithstanding, it is tolerably clear that he is, and remains, the driving force in this particular litigation (which, I gather, is but one of several pieces of litigation which have been, or currently are being, conducted against his brother), and for my part I formed the view that he did not recollect and retell to the court the history of events with the degree of accuracy that may be expected of the top executive of a listed company – indeed in these circumstances it seemed to be both in his and the 1^st plaintiff’s interests to ensure that his recollection of events should fit the case as now mounted by the plaintiffs against his older brother.

48. Accordingly, and for the avoidance of doubt, in instances wherein the evidence of the two brothers is in conflict on any material fact, I have no hesitation in preferring the evidence of his brother, YK Leung, and also that of the 2^nd defendant, SY Wong.

49. In the particular circumstances I am minded to go further.  There was about this peculiar case a distinct and unappetizing aroma of ‘pay back’ in terms of the present pursuit of his brother by the plaintiffs; YT Leung is now the CEO of UDL Holdings, and has been thus appointed – by a Board containing, among others, his wife, daughter and son – since 2 May 2008 subsequent to his discharge from bankruptcy on 1 March 2008.  In this regard YT Leung was rendered bankrupt in Bankruptcy Proceedings No 2019 of 2000 pursuant to a Petition presented on 14 June 2000 which was issued by Healthy Wharf Limited (YK Leung’s company) on the basis of YT Leung’s failure to pay to that company a debt of HK$3,566,479.37, plus interest thereon: see the judgment in these proceedings of Cheung J (as he then was) dated 1 March 2001, wherein the Bankruptcy Petition was granted, and the subsequent judgment of the Court of Appeal (Hon Rogers VP and Le Pichon JA) dated 19 April 2001, wherein the appeal from the judgment of Cheung J was dismissed. 

50. On his own story YT Leung had been the architect of this scheme to purchase the “KAI HONG” in the judicial sale, and he had been instrumental in broaching the idea with SY Wong and YK Leung, and I regret to say that I took the view that in giving his version of events that Mr YT Leung had a distinct ‘agenda’, and that I neither trusted nor believed crucial aspects within his account of that which actually had transpired.

51. In any event, against the backdrop of these preliminary remarks, I now proceed to make some specific findings of fact.

52. In terms of the evidence of the former company employee, Mr Kent Wong, my view (and my finding on the point) is that he is and was mistaken in his assertion that at the meeting on 29 December 1998 held between Mr YT Leung and his brother, YK, and SY Wong to discuss the acquisition of this vessel that he had attended that meeting, and that upon his departure therefrom he had left the relevant insurance files with the 1^st and 2^nd defendants.

53. Mr Kent Wong had no documentary evidence to support his memory of that which had occurred years previously, and I note also that in this regard there is a conflict between the evidence on the point as given by Kent Wong and by YT Leung: the latter says that the meeting with the two defendants took place in his office, whereas Kent Wong maintains that the meeting occurred in the 2^nd defendant’s office.  It also seems that some 7 weeks after this meeting, in which Mr Kent Wong said that he had handed the files over to the defendants, YT Leung had asked Kent Wong to pass these files to one Mike Tan for processing the insurance claim, presumably with the assistance of these files, which is not necessarily consistent with the version of events now put forward by Kent Wong.

54. In this context I further believe the denial of Mr YK Leung that any such ‘passing of insurance files’ had occurred, and also the like and equally strenuous denial of his business colleague, Mr SY Wong, whose evidence I had no difficulty in believing, and whom I thought was a shrewd and honest man who testified in a down to earth and often humorous manner; he stated unequivocally that the “KAI HONG” had been purchased for long term investment of 4 to 5 years, until it was realized that the plans proposed for the chartering of the vessel by YT Leung did not stand up on the projected figures: “after we won the bid, I was told YT could not afford to charter the vessel…”, information he said he had received subsequently on the telephone from YK when he was in Canada.

55. Mr SY Wong left the court in little doubt that in his view Mr YT Leung had “gone back on his word about chartering the boat”, and that he had been told that in the circumstances there was no alternative but to find a buyer.  It was, he said, a stroke of luck that Dragomar had emerged as a buyer: “a windfall in a way”.

56. In so far as it be necessary formally to decide the matter, I also find that there were two meetings between YT Leung and the 1^st and 2^nd defendants, one on 28December and one on the following day, 29 December 1998, and that at these meetings the 1^st and 2^nd defendants were not informed by YT Leung of any interest on the part of Dragomar to purchase the “KAI HONG” either in repaired state (for US$5 million) or in unrepaired state (for US$3.5 million); to the contrary, I find that the defendants were not told about Dragomar’s interest in the vessel until after the judicial sale, and when it had become clear that YT Leung was in no position to charter the newly-acquired vessel.

57. In the circumstances I am unable to see how it would have been in YT Leung’s interests to have disclosed Dragomar’s interest at such an early stage; he was, after all, careful not to disclose Dragomar’s identity to Nippon Credit, no doubt for fear that the bank might itself take over the sale negotiations; it is also significant that there is no written evidence of any kind before the court to corroborate YT Leung’s story of Dragomar’s willingness privately to purchase the vessel at this point, either in a repaired or an unrepaired state, and Mr Fok, the broker through whom YT Leung said he had reached a tentative agreement with Dragomar to purchase the vessel for use in a dredging project in Thailand, pointedly has not been called.

58. As Mr Sussex pointed out in his closing submission, it became clear later in the evidence of YT Leung that even on his own story (which in salient part I did not accept) that Dragomar never had given any firm commitment to purchase the vessel at any price – in fact, on the documents the figure of US$3.5 million appears to have been a price suggested by Nippon Credit, and YT Leung was wholly unable to explain why in this connection UDL had employed the phrase “your indicative selling price”. 

59. Nor, for that matter, did I comprehend YT Leung’s ‘explanation’ of why Dragomar chose to submit an apparently ‘cosmetic’ bid of only US$1 million at the tender for the “KAI HONG”, which in the circumstances appears make no commercial sense: clearly if Dragomar could have obtained the vessel for that far lower price upon the judicial auction it was entirely in its interests to have done so. 

60. In fact, I agree with the view that the contemporaneous documents tend to suggest that Dragomar did not become interested in a separate private sale until after the judicial auction, their own bid in that tendering process having been unsuccessful.  I agree with Mr Sussex that this thesis is borne out by the fact that apparently YT Leung seems still to have been attempting to persuade his unnamed ‘buyer’ – which he has maintained always was Dragomar – to pay US$3.5 million in December 1998: see the fax from Nippon Credit dated 16 December 1998 to UDL Holdings Ltd, attention Mr YT Leung, wherein there is reference to his discussion of the sale of the vessel “with a potential purchaser in Singapore”.

61. I further find as a fact that YT Leung indeed did persuade the 1^st and 2^nd defendants to bid for the vessel via tender at the judicial sale with a specific view to entering into a charter of this vessel with either YT Leung (or a company owned or controlled by him), that any discussion as to the price that the vessel would fetch at the judicial sale was no more and no less than the subject of speculation, and merely was a ‘guesstimate’ as to the approach of such other bidders as they may have been; in the circumstances, therefore, I do not accept that there was any specific statement by YT Leung to the defendants to the effect that the bids at the tender for the vessel would not exceed US$1 million.

62. To sum up: I find truthful the specific evidence of the defendants as to their ignorance of Dragomar, and its interest in purchasing the vessel, until YT Leung proved incapable of taking the vessel on charter, which had been the original rationale of the purchase plan which he had taken to the defendants.  In this context, I further wholly reject YT Leung’s disingenuous suggestion that his proposed ‘chartering arrangement’ was nothing but a ‘fall back’ position; as Mr Sussex pointed out, this position patently flies in the face of the wording of two letters, each dated 11 January 1999, written by SY Wong on behalf of Healthy Wharf to Samsung Corporation (confirming the “unqualified commitment” on behalf of UDL “as owner” to supply the vessel to Mr YT Leung and his associates “for unfettered use” of the vessel throughout the duration of the [Changi Reclamation Project] “subject to due payment of hire”, and to Leighton Contracts Asia Ltd in like terms [with reference on this occasion to the Tung Chung Development Phase 3A], letters which YT Leung admitted were written on his instructions. 

63. It is also abundantly clear on the face of an handwritten memo from YK Leung to YT Leung dated 25 January 1999, that discussions over a charter arrangement for the vessel collapsed when YT Leung was unable even to pay an economic charter rate: “based on the attached analysis, it would appear that the rates you have offered are so low that it would not even allow the owners [Healthy Wharf] to break even”. 

64. I note also that on this issue YT Leung earlier had confirmed in an affirmation sworn by him in these proceedings, dated 4 March 2002, that he had wanted the vessel for future dredging operations: “Given my knowledge of the background information to this vessel and with a remote chance of keeping this unique vessel for future dredging operations, I approached YK and persuaded him to put in a bid for this vessel.  I understand that YK was uncertain if he had capacity to finance this exercise and so, he invited Mr Wong Sum Yuen, his long time personal friend and non-executive director of UDL Holdings Limited to join as 50/50 equity partner in this exercise.  Healthy Wharf was used as their vehicle…”

65. I would add, finally, that my rejection of the so-called ‘independent’ evidence of Mr Kent Wong as to his attendance at the 29 December 1998 meeting and as to his assertion that he left the relevant insurance files with the 1^st and 2^nd defendants does not mean that I labour under the impression that at the time of the tendering for the vessel at the judicial sale that the 1^st and 2^nd defendants wholly were unaware or ignorant of the existence and unsatisfied insurance claims.  In my view this is improbable.  The defendants may well not have had a grasp of the detail – or even of the precise sum that was likely to be yielded consequent upon settlement of such claims – but both Mr YK Leung and Mr SY Wong struck me as acute businessmen who would not have missed this fact, which in the event was almost certainly mentioned by Mr YT Wong when he proceeded to convince his brother and SY Wong to bid for this vessel; indeed, the ‘non-conforming’ bid as ultimately accepted at the judicial tender was girt about with the qualification that the insurance interests then vested in the mortgagee be transferred to the purchaser together with title to the “KAI HONG”.

66. Accordingly, I approach the legal argument in this case on the basis that I accept, and find to be true, the account of the material events as given by the 1^st and 2^nd defendants, and in terms of disputed matters of fact reject as inaccurate the significant and substantially differing account proffered on behalf of the plaintiffs by YT Leung. 

67. Whilst this conclusion in itself is not necessarily decisive of the issues raised in this case, I do not think correct the correlative submission of Mr Fung SC, who appeared for the plaintiffs, to the effect that, as a matter of law, the plaintiffs’ claim must succeed even if the court were wholly to accept the evidence of the defendants.

68. In light of the foregoing findings of fact, therefore, the balance of this judgment focuses upon the issues of law as raised by the plaintiffs in support of their claim.

(1)     Was there a breach of fiduciary duty owed by the defendants to the plaintiffs?

69. In opening this case on behalf of the plaintiffs, Mr Fung SC pinned his colours squarely to the mast of breach of fiduciary duty on the part of the 1^st and 2^nd defendants. 

70. In this connection he cited the rationale underlying the imposition of fiduciary duties as explained by Mason J (as he then was) in the High Court of Australia in Hospital Products v. US Surgical Corporation [1984] 156 CLR 41, at 96-97, wherein the learned judge observed that it is because the fiduciary’s exercise of his power or discretion can adversely affect the interest of the person to whom the fiduciary owes a duty that “the fiduciary comes under a duty to exercise his power and discretion in the interests of the person to whom it is owed…”

71. Mr Fung further submitted that there are two separate themes to the rule that oblige fiduciaries to account for personal benefit or gain, citing in this regard the observations of Deane J in Kak Loui Chan v. Zacharia (1984) 154 CLR 178, at 198:

“The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest.  The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage…”

72. Mr Fung also addressed the relevant principles governing fiduciary duties owed by directors to companies, citing in this regard the joint judgment of Rich, Dixon and Evatt JJ in the High Court of Australia in Furs Ltd v. Tomkies (1935) 54 CLR 583, at 592:

“In our opinion the decision of this appeal is governed by the inflexible rule that, except under the authority of a provision in the articles of association, no director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and by resolution a general meeting approves of his doing so, or all the shareholders acquiesce.  An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company.  It is no answer to the application of the rule that the profit is of a kind which the company itself could not have obtained, or that no loss is caused to the company by the gain of the director.  It is a principle resting upon the impossibility of allowing the conflict of duty and interest which is involved in the pursuit of private advantage in the course of dealing in a fiduciary capacity with the affairs of the company.  If, when it is his duty to safeguard and further the affairs of the company, he uses the occasion as a means of profit to himself, he raises an opposition between the duty he has undertaken and his own self interest, beyond which it is neither wise nor practicable for the law to look for a criterion of liability.  The consequences of such a conflict are not discoverable.  Both justice and policy are against their investigation…”

73. Both Mr Fung SC for the plaintiff and Mr Sussex SC, who appeared for both defendants, agree that the formulations of relevant principle embodied twin themes – often referred to as the ‘No Conflict Rule’, wherein directors cannot place themselves in a position whereby personal interests conflict with fiduciary duties, or where there is a real possibility of such, and the ‘No Profit Rule’, whereby directors cannot gain any undisclosed profits obtained or received by reason of fiduciary position, or from any opportunity or knowledge resulting therefrom.

74. The difference between the two sides, of course, lies not in appreciation of fundamental principle, but in terms of the application of such principle to the facts of the present case.

75. Given that the essence of the ‘No Conflict’ rule is the absence of conflict between duty and personal interest, clearly the starting point for any evaluation of the existence of such conflict must be to determine whether the alleged fiduciary indeed owed a duty to the plaintiff companies, and was in breach thereof.

76. Clearly, the answer to this question is ‘fact sensitive’: “the rule is essentially a simple one, albeit that it may in some cases be difficult to apply”, per Jonathan Parker LJ in Bhullar v. Bhullar [2003] 2 BCLC 241, at 253c-h.  Equally clearly, it is only if and when the analysis of any factual situation reveals infringement of the ‘no conflict’ principle that the issue of the acquisition of a ‘secret profit’ arises.

77. Mr Fung does not admit of the possibility that there is no conflict arising on the facts of the present case. 

78. His submission at trial on this issue very clearly was made on the basis of his case that the defendants well knew at the time of the judicial sale of Dragomar’s interest in purchasing the vessel, but in light of the specific finding of this court that the defendants did not know of Dragomar’s interest in the vessel at this stage, his consequential position must, I think, necessarily be that the existence of the insurance claims, and their potential value, plus the ability to acquire the interest and benefit under these claims from Nippon Credit, were matters which would impact on the price to be realized for the “KAI HONG”; and, I assume Mr Fung would go on to say, it thus follows that both the defendants and YT Leung were under a duty to communicate this fact to the plaintiff companies.

79. Moreover, asserted Mr Fung, the defendants had not disclosed their intention to bid for the vessel to the plaintiff companies; instead the defendants had placed a ‘strategic bid” for the “KAI HONG”, incidentally outbidding Dragomar in the process, and by letter dated 28 January 1999 from Well Raise to HSBC Gibbs had procured the 2^nd plaintiff to state that it had assigned its insurance claims over the vessel to Nippon Credit, and thereafter had proceeded to make a secret profit by on-selling to Dragomar, and retaining the fruits of the insurance proceeds for themselves, thereby accruing the overall sum of US$1.72 million in clear breach of the defendants’ duties of disclosure to the plaintiffs.

80. In the course of his submission Mr Fung emphasized that the true principle of Regal (Hastings) v. Gulliver [1967] 2 AC 134 is not that should the director happen to come upon commercial information or opportunity which would be beneficial to the company in a capacity other than qua director, he is then at liberty to use that information for personal benefit without referring the same to the company, but, to the contrary, it matters not in what capacity the director receives the information, he nevertheless must refer such information/commercial opportunity to the company of which he is director.  Moreover, contrary to the defendants’ contention, the authorities made it plain, he said, that a director has a duty to pass on information that was “of concern” to the company and was “relevant” for the company to know: see, for example, Industrial Development Consultants v. Cooley [1972] 2 All ER 162, at 173H-J, per Roskill J (as he then was), and Bhullar v. Bhullar, op cit., at 256B-C, per Jonathan Parker LJ.

81. Mr Fung further maintained that it was not relevant that the potential value of the insurance claims arising consequent upon the accidents to the “KAI HONG”, that is, in the area of US$1-$1.5 million, was higher than the sum ultimately realized, since that latter, namely US$520,778.51, represented a ‘settlement figure’ reached with underwriters and related only to the second accident.

82. On behalf of the defendants, Mr Sussex took strong issue with the contention that, on the facts of this case, the defendants properly could be said to be in breach of fiduciary duty to the plaintiff companies.  Quite obviously, he said, there could be no conflict of interest and duty if no duty (or duties) were owed in the circumstances.

83. Mr Sussex took as his starting point the nature of a judicial sale of a vessel such as the “KAI HONG”, observing that it was well-established that once a vessel is ordered to be sold by order of the Court that no-one, including the owner, is able to interfere with such judicial sale, and thus, if the shipowning company, the 2^nd plaintiff, was incapable of doing anything to sell the vessel, so too was the 1^st plaintiff as guarantor company.  In this context he referred to the observations of Brandon J (as he then was) in The “Jarvis Brake” [1976] 2 Lloyd’s Rep 320, at 321:

“I have no doubt at all that, once a ship has been ordered to be sold by an officer of the Court, it is contempt for the owner to attempt to sell the ship himself….he [the owner] must realize that these matters must be left to the Court and that he is not to interfere…”

In this context Mr Sussex also drew the attention of the court to Meeson’s Admiralty Jurisdiction and Practice (3^rd ed), 2003, at paras 4.107, wherein the learned editors note thus:

“Upon an order for sale being made by the court the situation alters, and an attempt to sell the property privately constitutes a contempt of court.  In The “Ruth Kayser” (1925) 23 Ll.L.Rep 95, an order for sale had been made, but the Admiralty Marshal’s brokers had experienced great difficulty because there were persistent rumours that the ship was being sold privately and if that rumour continued it would prevent people from coming to look at the ship.  Hill J said:

‘When an order for sale had been made in [this] Court, and the owner chose to carry out some private negotiations of his own, he would land himself into difficulty, while anyone dealing with him would know he could not give good title.  If an owner in such circumstances got private information, his duty was to bring it to the attention of the Marshal so that everyone might benefit by it.  [I am] not going to have private owners interfering with the orders of the Court when it gave an order that there was to be a sale.  If anyone did interfere, he would have to consider whether it was a contempt of court or not.  If there were any private offers, let them be brought to the notice of the Marshal.  The sale must go on by the Marshal without interference.’”

84. I accept Mr Sussex’s submission that in the circumstances neither the 1^st nor the 2^nd plaintiff itself could bid in the judicial auction: the 2^nd plaintiff, Well Raise, could not, because as a matter of law it could not buy the vessel from itself, and it was only by virtue of a court sale to a third party that clean title could be passed to such purchaser – which is one of the principal advantages of a judicial sale.  Moreover, he said, and apart from the fact that the plaintiffs had no money to bid, any successful bid merely would have resulted in the plaintiffs having an asset against which the creditor, Nippon Credit, could and would have issued a writ offi fa.

85. Accordingly, Mr Sussex argued, if it was correct that there was nothing that could have been done by the plaintiff companies in respect of the judicial sale, then it was difficult to see how or why the defendants as directors owed duties in relation to the judicial sale.

86. In my view it is difficult to disagree with the submission thus advanced on behalf of the 1^st and 2^nd defendants that there was no conflict of interest in the very particular circumstances of this case, because there was nothing that the directors, nor indeed the 1^st and 2^nd plaintiffs, could have done in relation to the court-ordered sale.  Any attempt to obtain bids for the vessel, or to achieve a private sale (even, had the defendants known, which I have held they did not, of Dragoma’s alleged interest in acquiring the vessel) would have amounted to a contempt of court.

87. In a relatively recent English case, Wilkinson v. West Coast Capital [2007] BCLC 717 (Ch.), involving, inter alia, directors’ duties in the context of a ‘maturing business opportunity’ which their company actively was pursuing – and which, if established, would have resulted in the directors being disqualified from securing such ‘maturing business opportunity’ for themselves by reason of the ‘no conflict’ and ‘no profit’ rules – Warren J observed, at 767, para 245:

“The courts have, over the last century or more, had a great deal to say about the duty of directors and their obligations as fiduciaries.  It is clearly of great importance in any case based on breach of duty to be careful to ascertain the scope of that duty.  Some general principles can be set out.  But it must always be remembered that the content of any fiduciary duty is, in the ultimate analysis, fact dependent; it is trite law that not all relationships described as fiduciary relationships import precisely the same duties…”

88. An additional consideration underpinning the defendants’ argument as to an absence of a fiduciary duty in the particular circumstances is that the 1^st and 2^nd defendants did not avail themselves of information or opportunity which was within the scope of the plaintiffs’ business; the contrary, not only were the plaintiffs not in a position to sell the vessel privately, but they were in no position to make use of the insurance information of which the defendants availed themselves, which in any event expressly had been ceded by Well Raise to Nippon Credit by the Deed of Covenant dated 7 March 1997.  In fact, upon the occurrence of an Event of Default (which had arisen due to non-payment of the loan), under the terms of the Deed of Covenant only Nippon Credit was entitled to receive “all claims then outstanding or thereafter arising under the insurances”, so that on any view it could not be said that the insurance information was the property of the plaintiff companies; to the contrary, it clearly belonged to Nippon Credit.

89. Nor do I consider that such information as had been imparted by YT Leung to the 1^st and 2^nd defendants (as to which I have rejected the evidence of YT Leung as to the defendants’ then-knowledge of Dragomar’s interest in acquiring the vessel) was given to the defendants in their capacity as directors of either of the plaintiff companies, nor in execution of their duties as directors, and thus it cannot be said that, in the words of Lord Russell in Regal (Hastings) v. Gulliver (op cit) that the defendants have made a profit “by reason of and in the course of” their fiduciary relationship. 

90. The ineluctable fact was that the plaintiffs had abandoned the “KAI HONG”.  On 5 October 1998 Nippon Credit had given notice of an Event of Default in accordance with clause 11.2 of the Loan Agreement, shortly before the writ in rem was issued and the “KAI HONG” was arrested on 9 October 1998; the service of Nippon Credit’s writ was not acknowledged, and all but the necessary minimum crew had been dismissed.  Hence I fail to see how the vessel remained the property of the plaintiffs, since at that stage it clearly belonged beneficially to the sole creditor, Nippon Credit.

91. If this analysis be correct, as in my view it is, it must follow that the limited information imparted by KT Leung to the defendants as the meetings at the end of December 1998 – which, as I have found, did not include reference to Dragomar’s interest – was not confidential information belonging to the plaintiff companies, and the opportunity of which the defendants availed themselves, that is, to bid and thereafter to acquire the vessel under the judicial sale, was not an opportunity which would have been open to the plaintiffs or either of them.

92. In this context I agree with and accept the submission made by Mr Sussex that whatever information was given to the defendants concerning the real value of the vessel, or as to the likely level of bids in the judicial auction, can have been speculative only on the part of YT Leung, and could not properly be regarded as satisfying the test laid down in, for example, the case of Aas v. Benham [1891] 2 Ch 244, at 255, per Lindley LJ, or in the well-known dicta of Lord Upjohn in Boardman v. Phipps [1967] 2 AC 46, at 124.

93. In my view, therefore, on the facts of this case as found, there was no abuse of fiduciary duty on the part of the 1^st and 2^nd defendants.  I find that his information, such as it was, which came to the defendants did not come to them by reason of their fiduciary position, and the ‘business opportunity’, if such it be characterised, was, by the very nature of a judicial sale, an opportunity open to anyone interested in the acquisition of the “KAI HONG” via the process of judicial sale.

94. The sole piece of information regarding the existence of the insurance claims, and the anticipated quantum thereof (an amount ultimately not realized) was information which in any event belonged to Nippon Credit by reason of the occurrence of the Event of Default by the 2^nd plaintiff, and in the circumstances of this case I fail to understand how or why the defendants could be said to have been under a duty to acquire the vessel for the plaintiff companies, when the 2^nd plaintiff expressly had ceded its right thereto, and had abandoned the vessel prior to the order for judicial sale.

95. It follows, therefore, that I am unable to accept the submission strenuously advanced by Mr Fung on behalf of the plaintiffs that in the circumstances there has been a clear breach of the ‘no conflict’ rule by the defendant.

96. Indeed, in my view there is an air of unreality about this case, and the manner in which it has been framed.

97. Stripped of rhetoric, it seems tolerably clear that the position was as follows.  The prime mover in this scheme, YT Leung, himself a director, went to the two other directors, the 1^st and 2^nd defendants, with a plan to purchase the vessel at judicial sale, ostensibly (as I have found) with a view to a private charter thereof for his own profit.  At this stage the vessel had been left to its fate by the 2^nd plaintiff owner, and a judicial sale has been ordered.  The plaintiffs put in two bids, and the higher of the two (which specifically took account of the prospective insurance recovery) was accepted by the sole creditor, Nippon Credit.  Having thus purchased the vessel, the defendants found that the chartering plan outlined by YT Leung made no commercial sense – in short, the figures simply did not add up, as the spreadsheets demonstrate.  As a result the defendants took steps to resell the vessel to Dragomar, having (as now has been found) been uninformed of Dragomar’s allegedly earlier interest in the vessel prior to such sale.

98. It is from these unpromising scenario that Mr Fung must weave a case of breach of fiduciary duty on the part of the defendants.  Despite the persuasiveness with which he invested the task, in my judgment he is unable to do so.

(2)     Should there be a disgorgement of the allegedly ‘secret profits’ made by the defendants?

99. Having thus found that there is no breach of fiduciary duty which conceptually would ground any duty to disgorge monies under the ‘no profit’ rule and/or to justify any form of account, the answer to this question is self-evident.

100. Against the relevant factual background, and in light of the facts as found, I divine no legitimate basis for the contention that the monies as derived by the defendants upon resale to Dragomar now should accrue to either of the plaintiff companies.

(3)     Section 358 of the Companies Ordinance, Cap 32

101. This is the fallback position of Mr Sussex, and whilst on the findings of this court strictly it is not relevant, lest I be incorrect in the conclusions to which I have come upon the primary issues, I should deal briefly with this argument.

102. It is this.

103. Section 358, Cap 32 is similar to section 60 of the Trustee Ordinance, Cap 29, and empowers the court to excuse, in whole or in part, the liability of a director for default, breach of duty or trust where the court concludes that in the circumstances of the case, it would be fair for a person to be excused where he had acted honestly and reasonably.

104. Mr Sussex has pointed out that Judge Reid QC considered the application of the UK equivalent of section 358 in the case of Coleman Taymar Ltd v. Oakes [2001] 2 BCLC 749, at 770, wherein three questions were mooted: first, did the director act subjectively honestly; second, did the director act reasonably when his actions are viewed objectively; and third, if the answer is ‘yes’ to both questions, the court then should consider whether in the circumstances the director ought to be excused, and if so on what terms.

105. In my firm view these two defendants patently fulfilled both criteria in terms of subjective honesty and objective reasonableness, and thus, if and in so far as there has been any technical breach in this case (which in my opinion there has not), they should be excused from visitation of any consequences thereof.

106. In this connection I accept the submission that the court is entitled to take into account that the plaintiff companies, through the person of YT Leung, who is a director of both, did not come to court with ‘clean hands’, in that I have found that he was not full and frank about precisely what he had, or had not, told the 1^st and 2^nd defendants at the time that he mooted the purchase of the “KAI HONG”, and that in my view he had a clear agenda to use these factual circumstances, under protection of personal indemnity granted by the plaintiff holding company, to extract damages against his older brother, YK Leung, and against the latter’s friend and business associate, SY Wong.

107. My attention also has been drawn to the fact that there is at least a pleaded case concerning whether the Bye Laws of the 1^st plaintiff or the Articles of the 2^nd plaintiff permitted directors to profit from agreements of this nature, and for the avoidance of doubt, and in response to a line of argument that was but faintly alluded to, I agree with the submission that in the case of the 2^nd plaintiff company it is wholly artificial for the plaintiffs now to contend that no disclosure was made to the Board of Directors when the only other director of the 2^nd plaintiff, aside from the 1^st and 2^nd defendants, was YT Leung himself, who clearly was the progenitor of the entire sequence of events and indeed, as Mr Sussex characterised the position, was the “moving genius” behind the sequence of events which has spawned this action.

Order

108. In my view this action was ambitious, artificial, and without obvious merit.

109. I have little hesitation in ordering, which I now so do, that the plaintiffs’ action against the 1^st and 2^nd defendants be dismissed, with an order nisi that costs be to the defendants, such costs to be taxed if not agreed.

110. If and in so far as either side wish to make representations as to costs, an application so to do is to be made within 21 days of the date hereof, absent which the existing order nisi will become absolute.