TSANG YUE JOYCE v. STANDARD CHARTERED BANK (HONG KONG) LTD AND ANOTHER

HCA 2488/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2488 OF 2009

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J U D G M E N T

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1.  This is an application by the 1^st defendant by summons dated 12 February 2010 to strike out the plaintiff’s amended writ of summons and amended statement of claim as against the 1^st defendant and for an order that this action as against the 1^st defendant be dismissed with costs.

2.  At all material times since 1996 the plaintiff was a customer of American Express Bank in Hong Kong (“AEBHK”).  Mr Kenston Leung (“Leung”) the relationship manager was assigned to handle the plaintiff’s banking accounts with AEBHK.

3.  The 1^st defendant acquired the business of AEBHK and integrated with the same in July 2008.

4.  The 2^nd defendant was formerly known as Amex International Trust (Cayman) Limited and it has changed its name to Standard Chartered Trust (Cayman) Limited since 1 August 2008 as a result of the acquisition of American Express Bank by the Standard Chartered Group in February 2008.

5.  In or about 2000 on the advice and the arrangement of AEBHK the plaintiff set up a family trust through the arrangement of the 2^nd defendant then a subsidiary of American Express Bank (“AEB”) under its former name Amex International Trust (Cayman) Ltd (“AITC”).

6.  As pleaded at paragraph 12 of the amended statement of claim, in reliance on the advice, recommendation and representations of AEBHK a Trust Deed dated 7 September 2000 was executed between the plaintiff as settlor and the 2^nd defendant as trustee under its former name AITC (“the Trust”). 

7.  The original beneficiaries under the Trust were the plaintiff’s children and “subsequent issue of the Settlor and her children”.

8.  By the Deed of Addition of Beneficiary dated 3 August 2005 executed by the plaintiff, the plaintiff as the settlor of the trust was added as a beneficiary to the Trust.

9.  By clause 2 of the Trust it was provided that the 2^nd defendant as trustee should hold the trust fund upon the trusts and subject to the powers and provisions as contained therein in Schedules 1 to X1 of the Trust.

10.  It is clear that the Trust was a discretionary trust and not a bare trust.

11.  In the Letter of Wishes signed by the plaintiff dated 18 September 2006 (which replaced all previous Letter of Wishes) the plaintiff acknowledged that the 2^nd defendant as trustee “have complete discretion as to the administration of the Trust and investments and distributions of the funds in the Trust”.  She accepted that her wishes as set out in the Letter of Wishes were not legally binding on the 2^nd Defendant as trustee.  It was her wish that when dealing with the capital and income of the Trust the 2^nd defendant as trustee consider her to be the principal beneficiary of the Trust during her lifetime to the exclusion of all others.  She also expressed her overriding wish that the trustee “should act in their absolute discretion if the need arises”.

12.  Ideal Investment Management Limited (“Ideal”), a BVI company, is and was a special company legally owned and controlled by the 2^nd defendant for the beneficiaries under the Trust so as to hold and manage the investments and trust funds of the Trust (paragraph 13 of the amended statement of claim). 

13.  By the Nominee Agreement dated 27 September 2001 Global Nominees Ltd certified, acknowledged and declared that the beneficial interest in and the ownership of the 100 shares in Ideal were exclusively vested in the 2^nd defendant in its former name as trustee of the Trust.

14.  In or about September 2000 Ideal opened a bank account with AEBHK (“the account”) and maintained the account with AEBHK and subsequently with the 1^st defendant.

15.  By the Nominee and Indemnity Agreement dated 18 September 2000 executed between the plaintiff and the 2^nd defendant under its former name it was agreed, inter alia, that the 2^nd defendant as nominee held the shares of Ideal as nominee for and on behalf of the plaintiff.

16.  Ideal opened a bank account with AEBHK in or about September 2000 and maintained the same, and subsequently with the 1^st defendant, since then.

17.  By a Limited Power of Attorney dated 21 September 2000 Ideal granted to the plaintiff a Limited Power of Attorney to act on behalf of Ideal as set out therein.  In particular, the plaintiff was authorized to, inter alia, give instructions with regard to the acquisition, investment, purchase and sale of investments held to the credit of the account.  The Limited Power of Attorney was renewed from time to time.

18.  The plaintiff’s case is that in or about February 2008 Leung introduced and recommended a Principal Protected Note to the plaintiff for making investment on the account.  She later discovered that the full name of the Note was 2.5 Year USD 100% Principal Protected Cattle Basket Note (“the Note”) issued by Lehman Brothers Treasury Co. BV and guaranteed by Lehman Brothers Holding Inc.

19.  Her case is that Leung represented to her that the Note was issued by AEB and that the risk of the Note was zero in that the maximum loss would be that no interest would be earned but that the principal sum could be fully repaid on maturity.  She was also assured that the Note was a prudent investment with no risk.  Leung also failed to draw her attention to the fact that the Note was unrated.

20.  It is pleaded at paragraph 32 of the amended statement of claim that in reliance on and induced by the said representation the plaintiff acting for and on behalf of Ideal instructed AEBHK to make investment on the account in the sum of USD1,650,000.  It is plain that her pleaded case is that as a result of the misrepresentation of Leung she instructed AEBHK to make the investment for and on behalf of Ideal.

21.  There is no dispute that the investment was made in the sum of USD1,650,000 for the purchase of the Note.

22.  With the subsequent liquidation of Lehman Brothers Holdings Inc the Note has no value and the Trust has lost the total value of the investment in the Note in the sum of USD1,650,000.

23.  The plaintiff claims that she has suffered loss and damage of USD1,650,000 and claims the said sum from the 1^st defendant alternatively, damages to be assessed, with interest and costs.

24.  Since 1 July 2008 the 1^st defendant has taken over all the obligations and liabilities of AEBHK in relation to the purchase of the Note.

25.  The plaintiff also claims damages for breach of duties against the 2^nd defendant as trustee.  Her case is that the 2^nd defendant has wrongfully refused to take legal action against the 1^st defendant when requested by the plaintiff to do so and is in breach of trust.

26.  The writ of summons and the amended statement of claim have not yet been served on the 2^nd defendant out of the jurisdiction.

27.  The application before me is the application of the 1^st defendant to strike out the amended statement of claim and to dismiss the action against it.

28.  The applicable principles to strike out a pleading are well known and it is not necessary to set these out here.  It is common ground that it is only in plain and obvious cases that the Court would strike out a pleading.  The claim must be obviously unsustainable, the pleading unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the Court will strike it out (note 18/19/4 Hong Kong Civil Procedure 2010).

29.  The sole basis on which the application is made is that on the 1^st defendant’s case the plaintiff has no standing to sue the 1^st defendant in these proceedings.

30.  For the purpose of this application I shall assume that there have been the misrepresentations by the 1^st defendant and the breaches of fiduciary duty and duty of care on the part of the 1^st defendant as pleaded in the amended statement of claim.

31.  Mr Edward Chan SC, with Mr Simon Chan, for the plaintiff, submitted that the plaintiff’s primary claim was in tort. He submitted that the plaintiff has a personal cause of action against the 1^st defendant in tort.  The complaint is that Leung, on behalf of the 1^st defendant, misadvised her and misrepresented to her the matters pleaded in reliance of which she acted to her detriment by giving instructions to AEBHK to purchase the Note.  He submitted that there was a duty of care to the plaintiff who acted to her detriment in pursuance of negligent advice and that she has suffered loss.  He further submitted that the loss she suffered was equitable loss in that as a beneficiary under the Trust her entitlement under the Trust is reduced.

32.  It is important to bear in mind that Ideal is an asset of the Trust.  The investments made by Ideal are assets of the Trust.  The Note was purchased by the plaintiff not in her personal capacity but for and on behalf of Ideal under the Limited Power of Attorney. 

33.  I would observe that under the Limited Power of Attorney the plaintiff as attorney was given the limited power as set out therein.  She was not permitted to withdraw any investment, monies or other form of benefit from the account.

34.  It is pleaded at paragraph 22 of the amended statement of claim that Leung “was well aware that Ideal was (and is) a company under the Trust and all the funds of the Account were (and are) trust funds”.

35.  Paragraph 32 of the amended statement of claim makes it plain that in giving instructions to AEBHK to purchase the Note by making the investment on the account in the sum of USD1,650,000 the plaintiff was “acting for and on behalf ” of Ideal and not in her personal capacity.

36.  It seems to me that the loss that has been suffered is the loss of Ideal.  Clearly the loss is to the Trust and to the beneficiaries under the Trust and not to the plaintiff in her personal capacity.

37.  It is well settled that where trustees administer a trust fund as principals and not as agents for the beneficiaries, the trustees are normally the proper claimants in proceedings against agents and other third parties in actions based on breach of contract or tort and other causes of action arising in the course of administration of the trust (paragraph 43-01 Lewin on Trusts 18^th edn).

38.  If trustees fail to pursue a claim which is vested in them in their capacity as such, then a beneficiary may commence an administration action against the trustees to compel them to take proceedings to enforce the claim (paragraph 43-04 Lewin).

39.  Mr Coleman SC, for the 1^st defendant, submitted that the plaintiff should commence an administration action in the Cayman Islands against the 2^nd defendant as trustee to seek an order in the administration action to compel it to take proceedings to enforce the claim.  It was submitted that as this has not been done, the plaintiff’s claim should be struck out as against the 1^st defendant and the action against the 1^st defendant should be dismissed.

40.  It was submitted also that in the alternative the beneficiaries may take out a derivative action on behalf of a trust provided that there are special circumstances which embrace a failure by the trustees in the performance of their duty to the beneficiaries.

41.  In Hayim v Citibank NA [1987] 2 HKC 1 after reviewing the relevant authorities Lord Templeman said at page 11 

“These authorities demonstrate that a beneficiary has no cause of action against a third party save in special circumstances which embrace a failure, excusable or inexcusable, by the trustees in the performance of the duty owed by the trustees to the beneficiary to protect the trust estate or to protect the interests of the beneficiary in the trust estate.”

42.  It was held in Sharpe v San Paolo Railway Company (1873) 8 Ch App 597 that a cestui que trust could not, on an allegation that the trustees refused to take proceedings, maintain a suit against a debtor to the trust estate.

43.  At page 609 James LJ said

“ Is it to be permitted that every one of the persons who had an interest in a thing assigned to a trustee for the benefit of a great number of persons should file a distinct bill in a distinct branch of this Court against the debtors to the estate? I had lately occasion to consider that question, and I came to the conclusion, very clearly, that a person interested in an estate or a trust fund could not sue a debtor to that trust fund, or sue for that trust fund, merely on the allegation that the trustee would not sue; but that if there was any difficulty of that kind, if the trustee would not take the proper steps to enforce the claim, the remedy of the cestui que trust was to file his bill against the trustee for the execution of the trust, or for the realization of the trust fund, and then to obtain the proper order for using the trustee’s name, or for obtaining a receiver to use the trustee’s name, who would, on behalf of the whole estate, institute the proper action, or the proper suit in this Court. That view I still adhere to, and I say it would be monstrous to hold that wherever there is a fund payable to trustees for the purpose of distribution amongst a great number of persons, every one of those persons could file a separate bill in equity, merely on the allegation that the trustees would not sue.”

44.  Thus it is clear that merely alleging that the trustees would not sue would not entitle a beneficiary to bring the action.  It seems to me that the remedy is for the beneficiary is to bring an administration action to seek an order to compel the 2^nd defendant as trustee to bring the claim.  That has not been done.

45.  Clause 6 of Schedule IV of the Trust provided that

“This Trust shall be construed and take effect in accordance with the laws of the Cayman Islands the courts of which shall be the forum for the administration thereof.”

46.  The plaintiff as the settlor of the Trust expressly agreed that the courts of the Cayman Islands shall be the forum for the administration of the trust.

47.  I am unable to accept the submission made on behalf of the plaintiff that she has a personal cause of action in tort for damages.  The loss that was suffered was the loss suffered by Ideal which is an asset of the Trust.  The cause of action is not the plaintiff’s cause of action but Ideal’s cause of action.  Ideal should be the proper plaintiff.

48.  Mr Chan further submitted that the plaintiff has an alternative claim on breach of warranty.  What is pleaded, however, is that Leung’s representation “amounted to a collateral warranty in consideration of which the Plaintiff acting for Ideal entered into the contract of the purchase of the Note” (paragraph 35 of the amended statement of claim).  

49.  I would observe that

(a)     there is no plea of a collateral contract in the amended statement of claim; and

(b)    the plaintiff acknowledged that she was acting for and on behalf of Ideal and not in her personal capacity.  

50.  It seems to me that as pleaded any collateral warranty would have been made to the plaintiff in her capacity as the attorney for Ideal and not to the plaintiff personally.

51.  I am unable to accept that the plaintiff has a personal cause of action against the 1^st defendant. The cause of action would be the cause of action of Ideal.

52.  The 2^nd defendant as the trustee has the power to institute, prosecute and defend any suits or actions or other proceedings affecting the Trust (Schedule II (p) of the Trust).

53.  The plaintiff has through her solicitors by letter dated 19 August 2009 asked for authorization to institute legal action against the 1^st defendant in Hong Kong and to appoint the plaintiff as an authorized person to handle the litigation.  By letter dated 22 September 2009 the 2^nd defendant replied to the effect that “they did not feel that it would be appropriate to authorize any legal action to be taken by Ideal at this time”.

54.  I would observe that on the unchallenged evidence before me as set out in the affidavit of Cheung Chi Leung, (“Cheung”) the 1^st defendant and the 2^nd defendant are within the Standard Chartered PLC Group.  Notwithstanding this, the 2^nd defendant which is a Cayman Islands company is not owned or controlled by the 1^st defendant. The 1^st defendant has not been involved in the management of the affairs of the 2^nd defendant.  The 2^nd defendant has not sought the 1^st defendant’s views or comments in relation to its decision not to authorize Ideal to take legal action which decision was communicated by the 2^nd defendant to the plaintiff’s solicitors by letter dated 22 September 2009.

55.  Mr Chan further submitted that, in the alternative, assuming that a duty of care was owed not to the plaintiff but to Ideal, arguably Ideal should be the proper plaintiff.  As the 2^nd defendant has refused to authorise legal action to be taken by Ideal at this time, it was submitted that the plaintiff was entitled to bring a double derivative action against the 1^st defendant relying on Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370.  Mr Chan submitted that the plaintiff should be given an opportunity to add Ideal as a defendant and that the Court should give leave to amend rather than strike out the amended statement of claim as against the 1^st defendant and dismiss the action.

56.  Mr Chan relied on the Nominee and Indemnity Agreement dated 18 September 2000 executed between the plaintiff and the 2^nd defendant under its former name.  He submitted that by clause 2 thereof it was agreed that the 2^nd defendant as nominee held the shares of Ideal as nominee for and on behalf of the plaintiff.  However, by clause 6 it is expressly provided that

“ Nothing in this Agreement shall oblige the Nominees to comply with directions which they shall consider to be unlawful in any jurisdiction or otherwise contrary to the best interests of the Nominees or which would cause the Nominees to act in breach of statutory, contractual or fiduciary duty; and the Nominees may (but shall not be obliged to) act without or contrary to directions if they consider that necessary to comply with the laws of any jurisdiction or to preserve their own best interests.”

57.  The 2^nd defendant as trustee owes fiduciary duties to all the beneficiaries under the Trust.  As submitted by Mr. Coleman, correctly in my view, the class of beneficiaries is not a closed class and includes future beneficiaries.  

58.  It seems to me that the Nominee and Indemnity Agreement and the Limited Power of Attorney gave the plaintiff some powers of management notwithstanding the existence of the Trust.  

59.  It is the plaintiff’s pleaded case that Ideal is and was a special company legally owned and controlled by the 2^nd defendant for the beneficiaries under the Trust and that all the funds in the account were and are trust funds (paragraphs 13 and 22 of the amended statement of claim).  The Nominee and Indemnity Agreement and the Limited Power of Attorney do not override the terms of the Trust. 

60.  According to Ideal’s certificate of incorporation, Ideal was incorporated in the British Virgin Islands on 3 August 2000.  According to the share certificate number 001 dated 6 September 2000 in respect of 100 shares in Ideal, Global Nominees Ltd was the registered holder of the 100 shares in Ideal.  

61.  As I have said, by the Nominee Agreement dated 27 September 2001 Global Nominees Ltd certified, acknowledged and declared that the beneficial interest in and the ownership of the 100 shares of Ideal registered in its name were exclusively vested in the 2^nd defendant in its former name as trustee of the Trust.  

62.  Ideal was owned by the Trust and is an asset of the Trust for the beneficiaries.  Indeed the plaintiff herself has accepted this as at paragraph 16 of her affidavit she exhibited a copy of the Nominee Agreement dated 27 September 2001 as exhibit “JT-2” and said that this was “to show the shareholder of Ideal, Global Nominees Ltd held and holds the shares for the Trust at all material times”.

63.  The plaintiff was neither a shareholder nor a director of Ideal.

64.  In Waddington the Court of Final Appeal held that a multiple derivative action was available at common law in Hong Kong.  It was held that the very same reasons which justified a single derivative action also justified the multiple derivative action : if wrongdoers must not be allowed to defraud a parent company with impunity, they must not be allowed to defraud its subsidiary with impunity.

65.  At paragraph 75 Lord Millett NPJ said

“ The reflective loss which a shareholder suffers if the assets of his company are depleted is recognised by the law even if it is not directly recoverable by him. In the same way the reflective loss which a shareholder suffers if the assets of his company’s subsidiary are depleted is recognised loss even if it is not directly recoverable by him. The very same reasons which justify the single derivative action also justify the multiple derivative action. To put the same point another way, if wrongdoers must not be allowed to defraud a parent company with impunity, they must not be allowed to defraud its subsidiary with impunity.”

66.  On the unchallenged evidence of Cheung these reasons just do not exist to enable a double derivative action to be brought by the plaintiff.  

67.  What Ribeiro PJ said in Waddington is also important.  At paragraphs 12 and 13 he said:

“ 12. ….....where a wrong is alleged to have been done to a company and a minority shareholder purports to bring a derivative action on the company’s behalf, it is incumbent on the shareholder to show that the general “proper plaintiff” rule is displaced and that the case falls within the relevant exception.

13. The derivative action is a procedural device invented by the courts to afford protection to the minority.  Procedurally, there is no requirement at common law for a person seeking to sue derivatively first to obtain the leave of the court.  But it does not follow from this that there is no threshold requirement to be met by the plaintiff.  Substantively, such an action is only permitted where it can prima facie be shown that there exists a viable cause of action or equitable claim vested in the company which, if made good, would establish a fraud on the minority; as well as control of the company by the alleged wrongdoers such as to enable them to stifle any proposed action against themselves.”

68.  And at paragraph 20 Ribeiro PJ said

“ The common law rule is therefore that a plaintiff whose standing to bring a derivative action is challenged must establish a prima facie case that the company is entitled to the relief claimed and that the action falls within an applicable exception to the rule in Foss v Harbottle (usually the fraud on the minority exception.)……”

69.  In my view the plaintiff has failed to establish a prima facie case on the material before me that the claim against the 1^st defendant falls within an applicable exception to the rule in Foss v Harbottle (1843) 2 Hare 461, 67 ER 189.

70.  I am unable to accept Mr Chan’s submissions that the plaintiff can bring a double derivative action against the 1^st defendant, that the plaintiff should be given an opportunity to add Ideal as a defendant in the action and that leave to amend the amended statement of claim should be given rather than to strike it out and dismiss the action.

71.  I am satisfied that the proper plaintiff should be Ideal.  As I have said, Ideal is an asset of the Trust.  The plaintiff’s remedy is for her to bring an administration action in the Cayman Islands against the 2^nd defendant as trustee and to seek an order from the Court to compel the 2^nd defendant as trustee to bring the action in the name of Ideal against the 1^st defendant.  There is no dispute that the provisions of Order 85, rule 2 RHC dealing with administration actions are similar to Order 85, rule 2 of the Cayman Islands Grand Court Rules 1995 (Revised Edition), a copy of which was supplied at the hearing.

72.  I am satisfied that the amended statement of claim should be struck out and that the action against the 1^st defendant should be dismissed.  I so order.  

73.  I also make an order nisi that the costs of the application and the action be costs to the 1^st defendant against the plaintiff.