HO PO LING WINNIE v. IP KWAI YING AND OTHERS

HCMP 3098/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3098 OF 2014

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DECISION
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1.  This was an application by the 2^nd and 5^th defendants (respectively “D2” and “D5”) by summons dated 24 April 2015 to strike out §§3, 5 and 9 of the amended originating summons pursuant to Order 18, rule 19(1)(a), Hong Kong Civil Procedure 2015 (“HKCP 2015”) on the basis that they disclose no reasonable cause of action. 

BACKGROUND FACTS

2.  The plaintiff is the sole executrix and sole beneficiary of the estate of Yip Moon Wah Stephen (“the deceased”) who died on 3 January 2013.  She had been co‑habiting with the deceased since late 1993.  The originating summons was issued on 25 November 2014 and amended on 6 January 2015.

3.  D2 is the deceased’s brother‑in‑law and D5 the deceased’s niece.  D2 and the deceased were the directors of the 6^th defendant, Sky Sure Properties Ltd (“the company”).  After the deceased’s death, D5 who has accountancy experience was appointed a director.

4.  The company held 75% of the shares of Landelite Surveyors Limited (“Landelite”) through which the deceased and his business partner had carried on business as surveyors and 45% of the shares of V‑Top Far East Ltd (“V‑Top”) which held a property the deceased owned in Sai Kung.

5.  The deceased never married. He had three siblings.  The 1^st and 3^rd defendants (respectively “D1” and “D3”) are his younger sisters and the 4^th defendant (“D4”) his elder brother.  D2 is the husband of D1 and D5 is D4’s daughter.

6.  At the deceased’s death, the four issued shares in the company were vested in D1, D2, D3 and D4 as nominees for the deceased, each of them being the registered holder of one of the four shares.

7.  Several family meetings took place between May and mid‑July 2014 on each occasion attended by the plaintiff and family members including one or more of D1 to D5 to discuss various issues concerning the estate.

8.  On 27 October 2014, the company commenced an action in the High Court (HCA 2156/2014) against the plaintiff as executrix of the estate for recovery of a debt of approximately $6 million recorded as due by the deceased to the company in its balance sheets (“the action”).  The action was commenced after contact with the plaintiff had been lost in mid‑July 2014 and queries went unanswered.

9.  Four weeks later, on 25 November 2014, the plaintiff issued, inter alia, an originating summons being HCMP 3098/2014 (“HCMP 3098”) seeking relief that can be summarized as follows:

(a) Declarations that the four issued shares in the company were held on trust for the estate of the deceased, orders for their transfer back to the estate and for such transfers to be registered (§§1‑2 and 6‑8 of the originating summons).

(b) A declaration that the action was commenced by the company against the plaintiff in breach of trust (§3).

(c) An order dismissing the action (§4).

(d) A costs order (on an indemnity basis) against D1 to D5 in respect of all the costs of the plaintiff and the company incurred in the action (§5).

(e) Damages against D1 to D5 to be assessed (§9).

(f) As against D1 to D5, costs (on an indemnity basis) of and incidental to the originating summons (§10).

(The originating summons was subsequently amended as described in §13 below).

10.  On the same day (25 November 2014), the plaintiff caused a summons to be issued in the action seeking security for costs from the company in excess of $1 million.

11.  A week later, on 1 December 2014, the company served a notice of discontinuance of the action.

12.  On 5 December 2014, the solicitors for D1, D2, D4 and D5 wrote to the plaintiff’s solicitors regarding HCMP 3098 and set out their clients’ stance, intimating that (subject to certain clarifications) they had no objection to the relief described in §8(a) above.

13.  At the directions hearing on 6 January 2015 Recorder Pow SC made an order granting leave to the plaintiff to amend §§5, 9 and 10 of HCMP 3098, the effect of which was that relief was no longer sought against D1, D3 and D4 but only as against D2 and D5 in §§5 and 9 and the relief in §10 was no longer sought against D3.  Substantive orders relating to the relief described in §8(a) above were also made.  Accordingly, given the notice of discontinuance, that left extant the relief sought in §§3, 5, 9 and 10 as amended. 

14.  Directions were given for the filing of evidence.  The evidence filed raises a number of contentious matters.  For present purposes, the court need not be concerned with either the disputed factual issues or the allegations and cross allegations as to the lack of good faith made by the respective parties.

THE APPLICABLE PRINCIPLES

15.  There is no disagreement over the relevant principles to be applied.  They are set out in HKCP 2015, §§18/19/3‑18/19/6.

THIS APPLICATION

16.  The grounds for the present summons are that:

(1) the court in the present proceedings (HCMP 3098) has no jurisdiction to deal with the costs of the action; and

(2) D2 and D5 as directors of the company were not in breach of any trust in causing it to commence the action.

Breach of trust

17.  It would be convenient to deal first with the issue of breach of trust that appears to underlie the prayers in §§3, 5 and 9.

18.  By §3 of the originating summons, the plaintiff sought a declaration that the company acted in breach of trust in commencing the action against the plaintiff.  The basis for relief is therefore grounded on a breach of trust committed by the company and not anyone else.  But what was the trust said to have been breached that would warrant such a declaration?  

19.  The answer is not readily apparent.  While D2 was a bare trustee of the share that was registered in his name for the deceased, the company itself was not a trustee.  The fact that the deceased was the sole beneficial owner of the issued share capital did not give rise to a trust relationship between the company and the deceased. 

20.  It will be noted that D2 and D5 were the directors when the action was commenced and as such owed fiduciary duties to the company.  But any suit in respect of a breach of trust/fiduciary duty by D2 and D5 as directors would only be maintainable if brought by the company.  Neither the deceased nor his estate would have the necessary locus to complain.

21.  Since there is no possible basis for a cause of action against the company for breach of trust that would warrant the relief sought in §3 of the prayer, §3 cannot stand and must be struck out.

22.  Turning to the relief sought under §5 against D2 and D5 for costs the company and the plaintiff incurred in the action, I make four observations.  First, §5 of the prayer is premised on the company itself having been ‘wronged’ entitling it to be compensated in respect of costs by the ‘wrongdoers’ rather than itself being a ‘wrongdoer’.  It highlights the problem with §3 of the prayer which espouses the opposite position.  Second, the amendment to §5 dropped the claim for indemnity costs for the action against D1, D3 and D4 who were the holders of the other three shares of the company.  That paragraph is now directed solely at D2 and D5.  Third, what D2 and D5 shared was their common directorship of the company at the relevant time.  Fourth, while D2 was a trustee of the one share registered in his name or 25% of the shareholding, D5 was not herself a trustee and did not hold any property on trust for the deceased or his estate.

23.  In those circumstances, Mr Lam (counsel for the D2 and D5) naturally read §5 (and §9) as prayer(s) for relief against his clients in their capacity as directors of the company.

24.  At the hearing Mr Nip (counsel for the plaintiff) clarified the bases upon which D2 and D5 are said to be liable.  He sought to distance himself from the suggestion that D2 and D5’s liability were as directors of the company.  He submitted that D2 who was undeniably a trustee had acted in breach of trust and D5, while not a trustee herself, is liable for dishonestly assisting D2.  (Pausing there, it is to be noted that the very first time ‘dishonest assistance’ reared its head in HCMP 3098 was in the skeleton submissions of Mr Nip received shortly before the hearing of the summons.  The allegation of dishonest assistance is nowhere mentioned in HCMP 3098 itself.  Further, I would observe that such an allegation would normally raise disputed issues of fact which render it unsuitable for the originating summons procedure.)

25.  D2 became a trustee by virtue of a deed of trust dated 1 July 1988 executed between D2 and the deceased in respect of the one ordinary share in the company.  As I understand it, the plaintiff’s case is that apart from express trusts that required D2 to act “in the best interest of the [b]eneficiary”, D2 as trustee also owed common law duties to the beneficiary such as the duty to safeguard ‘trust property’ and the duty not to place himself in a position where his interest may conflict with his duty as a trustee.  As a general statement, it is unexceptionable.

26.  Nevertheless it is important to note that a trust does not exist in a vacuum and without context.  In the present case, the trust arose under the deed of trust.  The relevant trust property is the one share transferred to D2.  It is in respect of that share (being the relevant trust property) and not other property of the beneficiary that his duties as trustee relate and are to be exercised.

27.  The allegation now made is that D2 breached his duties as trustee by procuring the company to commence the action and to make unreasonable requests for accounting documents of its subsidiaries Landelite and V‑Top.  That appears to be premised on D2 being in a position to bring about the matters of which complaint is made.

28.  But as the holder of only 25% of the company’s shareholding it is difficult to see in what way D2 as shareholder could have “procured” the company to do so. In the absence of a proper basis for the premise, the allegation that D2 as shareholder had acted in breach of trust is not tenable.

29.  Notwithstanding the plaintiff’s current stance that the basis of D2 and D5’s liability is not for breach of duty as directors, the nub of the plaintiff’s submissions is that because D2 was a trustee of the share, his duties as such trustee coloured or constrained the exercise of his powers under his other role as a director of the company.  Put differently, the effect of the plaintiff’s submissions is that when exercising his powers as director, D2 was under a broader duty that required him to have regard to the interest of the beneficiary generally.  No authority was cited for this somewhat novel proposition.

30.  While D2 exercised a dual role — one as trustee of the shareholding and the other as a director of the company — the duties that flow from each of those roles are distinct and separate.  Instead of keeping them distinct and separate, the plaintiff did the opposite.  As Mr Lam submitted, the plaintiff was conflating the separate roles of D2 as shareholder and director.  

31.  D2 was trustee of a 25% holding only and any duty as trustee could only be in relation to that holding.  If the duty of a trustee is capable of extending beyond the specific trust asset as the plaintiff suggests, where is the line to be drawn?  In such a case, one set of trust duties would take precedence over the other.  How is that to be determined?  If the duty were to extend beyond the actual trust asset, would it mean that the trustee director must refrain from doing any act that would involve an expense being incurred on the ground that it would correspondingly diminish the assets of the company?

32.  In the absence of clear authority in support I am unable to accept the plaintiff’s approach.  In my view, the deed of trust did not have the effect of placing D2 in a general fiduciary position over the entire shareholding of the company requiring him to safeguard the interest of the beneficiary generally.

33.  Mr Lam cited Miracle Chance Ltd v Ho Yuk Wah David [1997] 3 HKC 811 at 815D‑E as authority for the proposition that where there is an effective board the company in general meeting cannot usurp its powers.  Therefore as a 25% shareholder, D2 could not have intervened in the decision of the board.

34.  Mr Nip’s response was that in the present case there was no effective board in that D2 as director should not have voted in favour of commencing the action because D2 had an ‘interest’ in the action.  

35.  It transpired that the ‘interest’ referred to was the beneficiary’s interest.  But a director’s obligation to disclose an interest in a matter before the board and to abstain from voting is predicated on his having a personal interest that conflicts with the interest of the company.  It is not the situation here and for my part, I cannot see that there was any conflict of interest that would require D2 to abstain from voting.

36.  In passing I would mention that the court was referred to an academic discussion concerning the existence of two lines of authorities as to the proper interpretation of article 82 of Table A.  It was said that the matter should be resolved at trial.  But how Table A is pertinent to the matters before this court is far from clear, much less the need to decide which line of authority is correct.

37.  For all those reasons, a cause of action against D2 for breach of trust is palpably bad.  It is not arguable.

38.  Turning to §9 of the prayer, in response to the court’s question as to what the damages prayed for relate, on instructions, Mr Nip’s initial answer was that they are limited to the company’s costs incurred in the action.  But those costs already form part of the subject matter of §5.  On that basis, §9 should be struck out.

39.  In a last‑ditch attempt to salvage the situation, it was then said that the damages prayed for were in respect of D2 and D5’s breach of trust in procuring the company to make unreasonable requests for accounting documents of Landelite and V‑Top.  But as stated above, the breach of trust claim is a nonstarter.  It follows that §9 must be struck out.

Costs incurred by the plaintiff and the company in the action

40.  I now turn to consider §5 of the prayer.  

41.  The issue is one of jurisdiction.  Section 52A of the High Court Ordinance confers a statutory power on the court to award costs in respect of the costs of and incidental to all proceedings before the court.  As the proceedings before the court are those commenced by originating summons, the question that arises is whether the costs incurred in the action are “incidental” to HCMP 3098.

42.  In Zanussi v Anglo Venezuelan Real Estate and Agricultural Development Ltd (The Times, 18 April 1996), the English Court of Appeal had to consider the question whether the master had jurisdiction to make an award of costs of an earlier case (the 1992 case) in the 1993 case, both actions being between the same parties.  Aldous LJ held that the provision did not confer jurisdiction on the court to award costs other than those incurred before it and as the 1992 proceedings were not incidental to the 1993 proceedings, the master did not have jurisdiction. 

43.  Mr Lam cited other examples to illustrate how courts have construed the phrase “of and incidental to” including the following: Department of Health v Envoy Farmers Ltd [1976] 1 WLR 1018 (holding that costs of proceedings before the Secretary of State were not incidental to the court proceedings); and Aiden Shipping v Interbulk Ltd [1985] 1 WLR 1222, 1226 (holding that costs of an action ordered to be paid by a charterer to a sub‑charterer were not costs incidental to the charterer’s defence of an action by the owner).

44.  In Contractreal Ltd v Davies [2001] EWCA Civ 928, after reviewing various authorities, Arden LJ stated (§41) that:

“… those authorities should show that the expression ‘of and incidental to’ is the time-hallowed phrase in the context of costs and that it has received a limited meaning, and in particular that the words ‘incidental to’ have been treated as denoting some subordinate costs to the costs of the action.”

45.  In response to that line of authorities Mr Nip relied on the decision of Davis J in Roach v Home Office [2010] QB 256 where after reviewing the authorities he held that there was no rule that the costs of one set of proceedings were never recoverable as costs “of and incidental” within the meaning of the English provision corresponding to section 52A and it all depended on the circumstances of each case.

46.  Roach concerned the question whether costs for attending an inquest could be recoverable as costs “of and incidental to” subsequent civil proceedings for damages in negligence.  On the facts of the case before him, the judge considered that the purpose of a party’s attendance, the relevance of such attendance to the subsequent proceedings, the reasonableness and proportionality of the costs so incurred were relevant factors.

47.  But Roach is no answer to Mr Lam’s submissions.  First, Mr Lam was not advocating the existence of any rigid rule that does not admit of exceptions, namely, that costs in one set of proceedings are never recoverable in another set of proceedings.  Rather, his submissions relate to how the courts have approached and construed the words “of and incidental to” the proceedings before the court.  Second, in general, “incidental” connotes something subordinate.  Third, the subject matter of the action (repayment of a debt) and the subject matter of the originating summons (beneficial ownership of the shares in the company and consequential relief) are unconnected and entirely different.  But for the inclusion of relief for costs of the action in the originating summons, the action is quite separate and independent.

48.  For those reasons, I do not consider it arguable that the costs incurred in the action reasonably could be said to be “incidental” or subordinate to the costs of the originating summons.  On the relevant facts, such a position is untenable and unarguable.  By no stretch of the imagination could the costs incurred by the company and the plaintiff in the action be said to be incidental to the costs of HCMP 3098.  I would strike out §5 of the prayer.

CONCLUSION

49.  Accordingly, I order that §§3, 5 and 9 of the amended originating summons dated 25 November 2015 be struck out.  I also make an order nisi that D2 and D5’s costs of this application be paid by the plaintiff.