WAH NAM GROUP LTD v. RODERICK JOHN SUTTON AND ANOTHER

CACV 215/2017
CACV 217/2017

(Heard Together)

[2018] HKCA 687

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 215 OF 2017

(ON APPEAL FROM HCA NO 960 OF 2015)

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 217 OF 2017

(ON APPEAL FROM HCCW NO 166 OF 2000)

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J U D G M E N T

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Hon Yuen JA:

CACV215/2017

1.  CACV215/2017 is the appeal of Wah Nam Group Ltd (“Wah Nam”) from a decision of DHCJ William Wong SC given on 5 September 2017 (“the Decision”) striking out its claim in HCA960/2015 against its former liquidators (“the Former Liquidators”). The learned deputy judge struck out the claim on the ground that it contravened the “no reflective loss” principle¹.

CACV217/2017

2.  The action (HCA960/2015) had been commenced by Wah Nam’s current liquidators.  The Former Liquidators had also applied in HCCW166/2000 for the court to reverse that decision of the current liquidators.   The learned deputy judge heard the strike-out application and the reversal application together, and in light of the strike-out, reversed the current liquidators’ decision to commence the action².  CACV217/2017 is Wah Nam’s appeal from that order.

Background

3.1. The background has been set out in detail in the Decision.  The facts material to this appeal are summarized below.

3.2. Wah Nam, a listed company, had³ two subsidiaries Great Strategy Properties Ltd (“GSP”) and Crystal Services Ltd (“CS”).

3.3. In January 2000, GSP and CS acquired all the shares in a company called Summit Mass Ltd (“Summit Mass”) for HK$45 million⁴.  The sole asset of Summit Mass was a piece of land on the mainland (“the Land”)⁵.

3.4. In July 2000, Wah Nam was wound up in HCCW166/2000. 

Appointment of Former Liquidators  

4.1. In January 2001, the Former Liquidators were appointed.

4.2. After their appointment,

- in relation to GSP,

- in April 2001 the Former Liquidators appointed their corporate vehicles formerly known as Chater Secretaries Ltd (“Chater”) and Lansdowne Nominees Ltd (“Lansdowne”) as directors of GSP;

- in relation to CS,

- no new directors were appointed to replace the former directors who had resigned;

- in relation to Summit Mass,

- in 2007-2008, Chater and Lansdowne were appointed directors of Summit Mass.  

5.  According to Wah Nam,

- Chater and Lansdowne were accustomed to acting on the directions and instructions of the Former Liquidators⁶; and

- the Former Liquidators “assumed upon themselves the duties of directors by acting as if they were directors” of GSP, CS and Summit Mass⁷.

Dealings with Shares in Summit Mass 

6.1. In June 2006, George Wong Wai, an employee, servant or agent of Chater, Lansdowne and the Former Liquidators, who had been designated to handle the affairs of Wah Nam and its related companies, allegedly misappropriated the shares in Summit Mass and caused them to be purportedly transferred from GSP and CS to third parties. 

6.2. This was not discovered by Chater, Lansdowne or the Former Liquidators until some 17 months later, in November 2007. 

“Idle Land” notice

7.  In the meantime, after the appointment of the Former Liquidators, no steps had been taken to develop the Land.  In July 2007, the Land was classified as “idle land” by notice from the authorities on the mainland, which meant that it was at risk of being forfeited or resumed.

HCA245/2008 and sanction of settlement

8.1. After the transfer of the shares in Summit Mass came to the Former Liquidators’ notice, in 2008 litigation was commenced in Hong Kong⁸ and on the mainland against the third parties mentioned above. 

8.2. Shortly before the trial was due to take place in Hong Kong in August 2011, there were negotiations for settlement.

8.3. On 12 August 2011, Barma J (now Barma JA) sanctioned⁹ the Former Liquidators’ entry into the settlement, under which GSP and CS received RMB3.35m for the transfer of the shares in Summit Mass to the third parties.  One of the reasons for Barma J’s decision was the imposition of the “idle land notice” over the Land.

Removal and release of Former Liquidators

9.1. By this time (if not earlier), the Committee of Inspection of Wah Nam had become dissatisfied with the Former Liquidators.  

9.2. An application was made by a major creditor¹⁰ to remove the Former Liquidators which concluded with a consent order made by Harris J after a hearing on 2 May 2012, whereby it was ordered that:

“[the Former Liquidators] be removed and released as the joint and several liquidators of [Wah Nam] pursuant to section 200(5)¹¹ of the Companies Ordinance”.

9.3. Reasons were given by Harris J in a Decision given the same day which made it clear that he was not ordering the release of the Former Liquidators pursuant to s.205 of the Ordinance.

HCA960/2015

10.  Some three years later, the current liquidators of Wah Nam commenced proceedings against the Former Liquidators.  In the Statement of Claim, it is pleaded that the Former Liquidators:

(1)     had been negligent in failing to take diligent steps to realize the Land;

(2)     had been negligent in failing to notice and deal with the “idle land” notice;

(3)     had been negligent in failing to safeguard Wah Nam’s assets, including those of its subsidiaries;

(4)     had been negligent in failing to exercise supervision and control over George Wong;

(5)     were vicariously liable for George Wong’s misdeeds.

HCA962/2015

11.1. On the same day, GSP and CS commenced proceedings against George Wong, Chater, Lansdowne, the Former Liquidators, and the company formerly known as Ferrier Hodgson Ltd¹².

11.2. The judge said¹³ that “a careful reading of the pleadings of both actions [HCA960/2015 and HCA962/2015] clearly shows that there is a high degree of overlap of the two statements of claim”.

Former Liquidators’ strike-out applications etc

12.  In 2016, the Former Liquidators applied:

- in HCCW166/2000, to reverse the current liquidators’ decision to commence HCA960/2015;

- in HCA960/2015, to strike out the claim on a number of grounds;

- in HCA962/2015, to strike out the claim on the same grounds as in HCA960/2015 with one notable exception referred to in §13.3 below.

The deputy judge’s Decision

13.1. The grounds on which the Former Liquidators sought to strike out the claims in both HCA960/2015 and HCA962/2015 were based on:

(1)     Barma J’s sanction of the settlement;

(2)     Harris J’s order for release of the Former Liquidators;

(3)     the absence of loss on the ground that the settlement sum was greater than the value of the Land; and

(4)     limitation.

13.2. For the reasons given in his clear and detailed Decision, the judge refused the Former Liquidators’ applications based on the grounds set out above. 

13.3. However, the judge held that Wah Nam’s claim should be struck out on the additional ground that the claim contravened the “no reflective loss” principle.  This principle was not applicable to the claim of GSP and CS, and HCA962/2015 therefore progressed.

Wah Nam’s appeal against strike-out and reversal of decision

14.  Wah Nam appealed the judge’s order to strike-out HCA960/2015 and the reversal of the decision in HCCW166/2000 to commence that action.  For their part, the Former Liquidators have filed a Respondent’s Notice in each appeal to emphasize that the pleaded loss was reflective even though the judge “did not ... specifically state this as an express basis on which the claim in HCA960/2015 should be struck out”. 

Discussion

15.  In relation to the Respondent’s Notices, it is not necessary to deal with them as I think it is reasonably clear from the Decision that the judge had struck out the claim on the ground that the loss claimed by Wah Nam was a reflective loss¹⁴, and Mr Bernard Man SC¹⁵ leading counsel for Wah Nam has not suggested otherwise.

16.  The argument before this court advanced by Mr Man was essentially this: that even though Wah Nam and GSP and CS have sued for the same loss, “there is a distinct possibility that only Wah Nam will succeed against the Former Liquidators, and [GSP and CS] will not; for example ... [GSP and CS] may not succeed in establishing that the Former Liquidators owed ... duties to them as de facto or shadow directors”¹⁶. He submitted that even though a cause of action against the Former Liquidators has been pleaded by GSP and CS in their Statement of Claim which has been verified by a statement of truth, GSP and CS may fail after trial, in which event it would be unjust for Wah Nam to be unable to recover any loss against the Former Liquidators even though it has a different cause of action against them¹⁷.  

17.  As I understand the present state of the law in this jurisdiction, the “no reflective loss” principle is a principle of law which is based on the nature of the loss.  The focus on the nature of the shareholder claimant’s loss as the benchmark of the “no reflective loss” principle is shown in cases where that principle has been applied even though the company has itself declined or failed to sue¹⁸, or has been unable to sue whether for lack of merits¹⁹ or lack of financial resources caused by the wrongdoer²⁰. Even in those situations, the shareholder was not entitled to claim directly against the alleged wrongdoer, because his loss is still only from the fall in the value of his interest in the company.  Depending on the reasons for the company’s refusal or failure or inability to act, his recourse could be to issue a claim against the company or, by way of a derivative action or an application to court to direct a receiver, to sue the wrongdoer on behalf of the company²¹.

18.  In the present case, Mr Man accepts that the loss claimed by Wah Nam is the same as that claimed by GSP and CS, and that the nature of Wah Nam’s loss arises solely from the fall in value of its interest in its indirect subsidiary Summit Mass²², that being its only interest.  That being the case, with respect to Mr Man I cannot see how it can be argued that there can be parallel proceedings by a shareholder (Wah Nam) and by a company (GSP and CS) against the same defendant for the same loss. The shareholder should look to the company and not directly to the wrongdoer, for his loss derives solely from his interest as a shareholder of the company.

19.  Mr Man submitted that Wah Nam should be allowed to pursue its claim because even though GSP and CS may have a viable cause of action on the pleadings, that cause of action might not be substantiated at trial.  However it would be noted that in Basab, the shareholder argued in the Court of Final Appeal that it should be allowed to sue the alleged wrongdoer directly, even though leave had not been granted for a derivative action in the BVI, because the threshold test for a derivative action in the BVI was higher.  Put another way, the shareholder was arguing that he had a better case in Hong Kong than the company which had failed to mount an action in the BVI.  The Court of Final Appeal held, refusing leave to appeal, that it was not an arguable exception to the “no reflective loss” principle²³. 

20.1. Finally I should refer to Mr Man’s citation of Shaker v Al-Badawi and others²⁴where Peter Gibson LJ said²⁵:

“As the Prudential principle is an exclusionary rule denying a claimant what otherwise would be his right to sue, the onus must be on the defendants to establish its applicability. Further, it would not be right to bar the claimant’s action unless the defendants can establish not merely that the company has a claim to recover a loss reflected by the profit, but that such claim is available on the facts”.

20.2. Mr Man submitted that the last words quoted above support his contention that, absent an admission from the defendants, it would only be at trial²⁶ that the court can determine if GSP and CS have a cause of action against the Former Liquidators. With respect, I do not think that is what is meant.  In my view, that passage means only that it is not enough for defendants (who are applying for a strike-out on the “no reflective loss” principle) simply to rely on the fact that a claim has been filed against them.  They would also need to take the court through the company’s pleadings to see if it contains all the facts necessary for it to prove, to support its right to judgment, in other words, a “cause of action”: Hong Kong Civil Procedure 2019 vol.1, 15/1/2.  If the necessary facts are pleaded, then the claim is “available on the facts”. There is no suggestion to the contrary here.

21.  Finally Mr Man also relied on Topping Chance Development Ltd v CCIF CPA Ltd²⁷ but I do not think it is suggested that any principle of law was added or developed in that judgment.

Order   

22.  For the reasons above, I would dismiss the appeals with costs.  There will be an order nisi that there be certificate for two counsel.

Hon Kwan JA:

23.  I agree with the judgment of Yuen JA.

Hon Poon JA:

24.  I agree with the judgment of Yuen JA.