SHUN HING HOLDINGS CO LTD AND OTHERS v. LI KWOK PO DAVID AND OTHERS

CACV 509/2018
and CACV 510/2018
(Heard together)

[2020] HKCA 309

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 509 OF 2018

(ON APPEAL FROM HCA 664/2012)

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________________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 510 OF 2018

(ON APPEAL FROM HCA 2417/2014)

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(HEARD TOGETHER)

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J U D G M E N T

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Hon Lam VP (giving the Judgment of the Court):

Introduction

1.  These are appeals against the decision (“the Decision”) of Anthony Chan J (“the Judge”) on 10 September 2018, in respect of the striking out of certain claims in HCA 664/2012 (“the 664 Action”) and refusal of leave to file a fresh statement of claim in HCA 2417/2014 (“the 2417 Action”).

2.  This is the second time these Actions have come before this Court.  Previously, by a decision dated 30 September 2016, the Judge struck out the claim in the 2417 Action (being a personal claim for knowing receipt).  By a judgment dated 21 August 2017, this Court dismissed the Plaintiffs’ appeal against that decision, but granted leave to the Plaintiffs to make an application for leave to file a fresh statement of claim to advance a claim based on proprietary tracing.

3.  The background to these proceedings has been summarized by the Judge in [2] to [11] of his decision dated 30 September 2016.  In short, the Plaintiffs in these proceedings are members of the Shun Hing Group, a successful business empire founded by the late Dr Mong.  By the 664 Action, the Plaintiffs seek to recover from the estate of Dr Mong (“Estate”) a total sum in excess of HK$872 million.  The Plaintiffs’ case is that the said sum was wrongfully appropriated from the Plaintiffs by Dr Mong in breach of his fiduciary duties as director of the Plaintiff companies.

4.  The 1^st Defendants in the 664 Action are the Executors of the Estate.  The remainder of the Defendants are the beneficiaries of the Estate. The 2^nd and 3^rd Defendants (“Cynthia” and “David”) are the children of Dr Mong from his first marriage.  The 4^th Defendant (“Madam Wong”) is the widow of Dr Mong, and the 5^th Defendant (“Perlie”) is the daughter of Dr Mong and Madam Wong.

5.  The Plaintiffs in the 664 Action only seek relief against the Executors of the Estate, no relief is sought against the other defendants.

6.  In the 2417 Action, the 2^nd and 3^rd Plaintiffs in the 664 Action (“SHEH” and “SHET”) seek to recover from Madam Wong a total sum of HK$280 million which Dr Mong gave to Madam Wong and which is alleged to represent part of the monies wrongfully appropriated by Dr Mong from the Shun Hing Group.  Madam Wong is the only defendant in that action.

7.  The only parties taking part in these appeals are the Plaintiffs and Madam Wong and Perlie.  The Executors of the Estate, David and Cynthia did not take part.  However, as noted by the Judge at [9] of the decision of 30 September 2016, David is the largest single shareholder of the 1^st Plaintiff (“SHHC”) and a Liberian company called Timmerton Co Inc (“Timmerton”).

The Applications and the Decision Below

8.  After the dismissal of the previous appeal by this Court, the Plaintiffs took out the application for leave to file a fresh statement of claim in the 2417 Action by way of an Amended Summons dated 6 October 2017 (“SOC Summons”).

9.  In the meantime, the parties took out the following applications:

(1)  Madam Wong filed a Summons on 1 December 2017 for a stay of the 2417 Action pending the disposal of the 664 Action (“Stay Summons”);

(2)  The Plaintiffs filed a Summons on 23 March 2018 in both Actions for them to be heard and tried together (“Heard Together Summons”); and

(3)  Madam Wong and Perlie filed a Summons for the pleas concerning breach of fiduciary duty and/or breach of trust (“Relevant Pleas”) in the 664 Action be struck out by way of a Summons dated 29 June 2018 (“Striking Out Summons”).

10.  These 4 Summonses came before the Judge on 15 August 2018.  By the Decision dated 10 September 2018, the Judge dismissed the SOC Summons and acceded to the Striking Out Summons.  With the previous statement of claim having been struck out, as a result of the dismissal of the SOC Summons, the 2417 Action is no longer extant.  Hence the Judge made no order on the Stay Summons and the Heard Together Summons.

11.  The Judge’s reasoning can be summarized as follows:

(1)  At [31] of the Decision, the Judge defined the issue as “firstly, whether the loans were approved by the directors.  If the loans were approved, I fail to see any basis for contending that Dr Mong had acted in breach of fiduciary duty.”

(2)  The Judge considered what he described as “incontrovertible evidence” ([32] of the Decision), namely:

(a)  The Audited Financial Statements (“AFS”) of the Shun Hing Group, which booked the unauthorized transfers as “amounts due from shareholders”, “amounts due from related companies” or “long term receivables from related parties”.  In the corresponding notes, particulars of the loans were disclosed pursuant to s.161B of the Companies Ordinance, Cap.32 then in force (“the CO”).  The stated borrower was Timmerton, a company used by Dr Mong as treasury or depository for various matters including his personal affairs. (see [11] and [13] of the Decision)

(b)  The Representations made by the directors accompanying the AFS (set out in [16] of the Decision), whereby the directors acknowledged their responsibilities on the fair presentation of the consolidated financial statements and confirmed that there were no additional facts applicable to the consolidated financial statements that had not been disclosed to the auditors.  David, as the director of the Plaintiffs, signed each set of the Representations relating to the AFS. (see [16]-[17] of the Decision)

(c)  The continued treatment of the unauthorized transfers as “loans” in the AFS for the year 2010, after the death of Dr Mong (Dr Mong passed away on 21 July 2010). (see [19] of the Decision)

(3)  In the face of the aforesaid “incontrovertible evidence”, the Judge found it “very difficult to understand how it can be maintained that the loans were not approved by the directors.” (see [32] of the Decision)

(4)  The Judge then went on to consider the pleading in paragraph 15B(5) of the Re-Re-Re-Amended Reply in the 664 Action (“the Reply”), as follows:

“ The Plaintiff Companies had never considered whether Timmerton would have the financial capability to repay any amount recorded as due from it to the Plaintiff Companies pursuant to the Initial Treatment, because it was the Plaintiff Companies’ expectation that the late Dr. Mong would resolve the matter prior to his death by making appropriate accounting adjustments and/or payments by himself…” (“the Expectation Plea”)

(5)  The Judge found that such an expectation “tends to fortify the proposition that the loans were approved by the directors”.  He reasoned that the directors “must have known of and agreed to the loans with the expectation that the matters would later be ‘resolved’ by Dr Mong, otherwise there [is] nothing to call for an expectation.” (see [33] of the Decision)

(6)  Next, the Judge criticised the evidence put forward by the Plaintiffs in respect of the Expectation Plea.  The Judge criticised the absence of any evidence from David and found the evidence of Mr Tam (a director of SHET and the Financial Controller of the Group) unsatisfactory as a mere “regurgitation of the Plaintiffs’ pleadings”. (see [35] of the Decision)

(7)  In the light of the “incontrovertible evidence” that the loans were approved by the directors and the absence of any evidence to suggest otherwise, the Judge rejected the Plaintiffs’ argument that the loans had to be ratified by the shareholders.  He also rejected the Plaintiffs’ contention that the General Meetings which adopted the AFS would not suffice for the purpose of ratifying the unauthorized transfers.  The Judge held that ratification was not necessary as there was no breach if the loans were approved by the directors. (see [37]-[39] of the Decision)

(8)  Finally, the Judge rejected the Plaintiffs’ reliance on s.157HA of the CO on the basis that the approval by the company in general meeting could be a process (as opposed to an isolated act) and that non-compliance of the provision did not equate with breach of fiduciary duty. (see [41]-[43] of the Decision)

12.  For the above reasons, the Judge found that the Plaintiffs had no viable case on breach of fiduciary duty.  The Judge therefore allowed the Striking Out Summons and dismissed the SOC Summons. (see [46]-[47] of the Decision)

Grounds of Appeal

13.  The appeals were originally scheduled to be heard on 13 March 2020.  By reason of the public health risk arising from the COVID-19 pandemic, the courts were generally closed with cases generally adjourned [“GAP”] from 29 January 2020.  On 25 February 2020, this Court gave directions to the parties to consider alternative modes for processing the appeals.  Pursuant to such directions, the parties agreed to have the appeals determined on the papers and supplemental submissions were lodged accordingly.

14.  The last round of supplemental submissions was the submissions in reply lodged on 27 March 2020 on behalf of the Plaintiffs.

15.  We have read and considered all the submissions and we now give our judgment in the appeals.

16.  The Grounds of Appeal as set out in the Amended Notice of Appeal (“ANOA”) dated and filed on 8 March 2019 focus on the following issues:

(1)  Whether the Judge was correct to find the evidence to be incontrovertible for the inference that the loans had been approved by the directors;

(2)  Whether the Judge should have held that the adoption of the AFS in General Meetings had not, and could not have, constituted a valid ratification of the Unauthorised Transfers as loans;

(3)  Whether the Judge failed to appreciate the true relevance and significance of ss.157H, 157HA and 151I of the CO, which, according to the Plaintiffs, required prior approval in general meetings of loans to directors.

17.  The Plaintiffs also challenge the Judge’s decision to make no order on the Heard Together Summons.  This obviously depends on the outcome of the appeals against the Judge’s decision on the Striking Out Summons and the SOC Summons.  Hence, we shall deal with those two Summonses first.

The Striking Out Summons and the SOC Summons

18.  The SOC Summons was dismissed on the basis of the Judge’s finding that the Plaintiffs had no viable case on breach of fiduciary duty, which is a prerequisite for a proprietary tracing claim.  As such, we agree with Mr Paul Shieh SC (appearing with Vincent Lung for the Plaintiffs) that the SOC Summons is “the mirror image” of the Striking Out Summons.  We shall deal with them together.

19.  There is no dispute on the general principles governing a striking out application.  The Judge set out the approach of the court in determining if a claim should be struck out in [25] of the Decision as follows:

“ …The strike out power of the court is only exercised in plain and obvious cases. The court will not conduct a mini-trial on affidavits. The burden is on the applicant to show that the pleaded case is impossible, not just improbable, to succeed ...”

20.  Having read the parties’ written submissions, we have identified the following issues for the purpose of determining whether the Plaintiffs have a viable case on breach of fiduciary duty and/or breach of trust:

(1)  Whether, in light of their pleaded case, it is open for the Plaintiffs to pursue a case on breach of fiduciary duty and/or breach of trust (Issue 1);

(2)  Whether it was necessary for the loans to be approved by the shareholders (Issue 2);

(3)  Whether the approval of the AFS in the General Meetings constituted sufficient approval/ratification of the loans (Issue 3);

(4)  Alternatively, whether the Duomatic principle applies such that the shareholders should be treated as having approved the loans (Issue 4);

(5)  Finally, in the context of the 2417 Action, whether the Plaintiffs’ proprietary tracing claims were time barred (Issue 5).

The pleaded cases of the parties

21.  Since the matters are to be considered in an amendment/striking out context, one should start from examining the pleaded causes of action in the Plaintiffs’ pleadings.

22.  The statements of claim in both actions[1] alleged breach of fiduciary duty against Dr Mong by reference to the transfers of funds from the companies into his personal bank accounts or third parties nominated by him as pleaded therein[2].  It is also pleaded that the transfers were unauthorized as they did not have the approval of the board of directors of each of the companies[3].  It is further pleaded that the transfers were effected for the dominant purpose of benefitting Dr Mong and/or the third parties nominated by him without any consideration or commercial benefit given to the companies, and not in the best interest of the companies[4].  It is also averred that Dr Mong was in a position of conflict of interests[5].  All these pleas should be considered as making up the Relevant Pleas.

23.  There is an alternative plea of loans in the SOC of 664 at paragraphs 27 to 31.  The plea was not repeated in FSOC 2417.

24.  It should be noted that though there are pleas of lack of board approval in the case advanced by the Plaintiffs on breach of fiduciary duties, the Relevant Pleas are by no means confined to the same.  As we shall discuss further below, if the other allegations pleaded in the FSOC 2417 and SOC 644 are established, it is reasonably arguable that the mere fact that the transactions had the approval of the directors could not absolve Dr Mong from the consequences of breach of fiduciary duties.  

25.  The Defence in HCA 2417/2014 refers back to the Re-re-amended Defence of the 4^th and 5^th Defendants in HCA 664/2012 of 12 January 2016.  In the latter document as subsequently re-re-re-amended, Madam Wong and Perlie set out their case on the disputed transfers in Section J.  The averments in that section, as highlighted under paragraph 32, were made “on the basis of documents which have so far been disclosed by the Plaintiffs and pending interrogatories and further discovery”.  In a nutshell, they averred that according to the accounting records of the Plaintiffs and Timmerton and the audited financial statements of the Plaintiffs, the transfers were not regarded as unauthorized withdrawals but as intercompany indebtedness.

26.  It was further averred at paragraph 35B that the directors of all the Plaintiffs had made representations to the auditors confirming the recoverability of the intercompany indebtedness.

27.  There were then further averments pleading to the developments subsequent to the death of Dr Mong.  It is not necessary for us to recite such details in this judgment.  Suffice to mention that there had been reversals in the accounting treatments relating to these transfers pursuant to adjustments presented in a report of Pricewaterhouse Coopers of 17 December 2010 (arising from the change of position on the part of the directors of Timmerton as pleaded in paragraphs 37 to 40).  Madam Wong and Perlie alleged that such course was impermissible.

28.  It should be pointed out that whilst Section J pleaded the defence case on the nature of the transfers, the main defence to the allegations on breach of fiduciary duty is actually pleaded under Section L.  In particular, the primary line of defence was pleaded at paragraph 53: that there had been a tripartite agreement or alternatively an implicit understanding between Dr Mong, the companies in the Shun Hing Group and Timmerton that these payments or transfers would be attributed to SHHC which would then further attribute the same for the account of Timmerton and there should be no recourse by the companies to Dr Mong or his estate.  Such tripartite agreement or implicit understanding is to be inferred or evidenced from the accounting treatment of the payments.

29.  Variations to the theme in paragraph 53 were pleaded in the subsequent paragraphs: novation (paragraph 55A); directors and shareholders could not object in light of the position of Dr Mong (paragraph 55B); tacit acceptance by the directors and shareholders (paragraph 55C and 55F); due authorization by the companies[6] for the intercompany indebtedness (paragraph 55E); common assumption and estoppel (paragraphs 56, 58-59); acquiescence (paragraphs 60 and 64); approval and ratification by boards of directors (paragraph 62).

30.  At paragraph 63, it was averred that no separate shareholders’ approval is required having regard to the history, structure and common management of the Shun Hing Group and of Timmerton.

31.  In the Reply of 16 March 2016 of HCA 664/2012, paragraphs 15 to 20 responded to Section J of the Re-re-re-amended Defence on the accounting treatments of the transactions and the reversals.  The Expectation Plea was one of those pleas.  It was pleaded that notwithstanding the accounting treatments, neither Timmerton nor SHEH received any part of the funds (paragraph 15(9)) and after the death of Dr Mong Timmerton refused to acknowledge the indebtedness (paragraph 15(8)).  It was further averred that the reversals reflected the true and accurate nature of the transactions (paragraphs 15A(1) and 16(4)). 

32.  In respect of the AFS, the Plaintiffs pleaded that they were inaccurate and did not reflect the true position: see paragraph 15A(2). Further explanations on the booking of transactions to Timmerton were pleaded at paragraph 15B.  Paragraph 16(3) pleads that the attribution of debts to SHEH in SHTEC’s and SHET’s AFSs was made in accordance with Dr Mong’s previous instructions of 24 July 2009.

33.  The alleged tripartite agreement and implicit understanding were disputed at paragraph 20 and the other variants of such allegations were refuted at paragraphs 21 to 21C.  At paragraph 21B, the Plaintiffs elaborate on their case as to the AFS and the Written Representations of the directors.  Putting aside for time being sub-paragraphs (1) and (2), it was pleaded at sub-paragraph (3) that the directors or senior executives of the companies could not lawfully authorize or permit the transfers and/or absolve Dr Mong’s liability for the same because to do so would not be for any legitimate purpose in the best interest of the companies.

34.  On shareholders’ level, it was pleaded at paragraphs 21AA and 21C(3) that they had never acquiesced, waived or ratified any breach arising from the transfers. 

Issue 1: Viability of the Plaintiffs’ Pleaded Case

35.  From the above overview of the pleadings, in the amendment/striking out context, we are of the view that it would be off-focused to concentrate on asking if the nature of the transfers were loans and who were the borrowers.  Rather, the most important issue is whether the transfers were made in breach of the fiduciary duties owed by Dr Mong to the Plaintiffs in the manner as pleaded in the Statements of Claim.

36.  Whilst it is part of the Plaintiffs’ case that the transfers were unauthorized, it is not the only aspect on which the case of breach of fiduciary duty rests.  Be they loans or otherwise, the transfers constituted disposal of the funds of the companies.  If such funds were not deployed (even if it is disguised as loans advanced to related companies) for the proper purpose or in the best interest of the companies, it is at least reasonably arguable that the transfers would not be within the directors’ powers to approve. 

37.  It is notable that Madam Wong and Perlie did not advance a case that these “loans” were advanced for proper purposes or in the best interest of the companies.  As we have seen, their main defence was a tripartite agreement or implicit understanding.  But such line of defence or its variants beg the questions: is the making of such agreement or the commitment to such implicit understanding in the best interest of the Plaintiffs?  If not, can any approvals short of proper ratification of the same by all the independent shareholders sufficient to forestall a claim for breach of fiduciary duties?

38.  As held by G Lam J in Wei Xing v Willwin Development (Asia) Co Ltd (unreported, HCMP 1922/2016, 13 April 2017), at [22]:

“ To say that the loan was a managerial decision is not a sufficient answer in this case. A substantial loan to a director is clearly a matter potentially germane to the interests of shareholders – not least in this case because s.157H of the previous Companies Ordinance (Cap.32) prohibited loans to directors and the exception in s.157HA(2) depended on approval by the company in general meeting, which is lacking, on Xing’s case, because no general meeting had been held.”

39.  The transfers in the present appeals are substantial.  Though they were not previously booked against the account of Dr Mong, they were nonetheless disposals of substantial assets of the companies.  The Plaintiffs’ case is that the transfers were actually funds taken away by Dr Mong for his own personal benefits though they were previously booked as intercompany indebtedness.  If this case is made good at trial, even if Madam Wong and Perlie establish there had been approval from the fellow directors of the Plaintiffs for such arrangement, it is reasonably arguable that the approval could not provide a defence to the claims for breach of fiduciary duties against Dr Mong. 

40.  In MacPherson v European Strategic Bureau [2000] 2 BCLC 683, Chadwick LJ analysed the permissible scope for which directors of a company could make use of its assets at [37],

“ … The powers of management conferred on directors by the articles of association of a company are to be exercised for the benefit of the company; not for their own benefit without regard to the interests of the company. The observations of Eve J in Re Lee, Behrens and Co Ltd [1932] 2 Ch 46 at 51–52, are relevant in this context:

‘ ... all such grants involve an expenditure of the company’s money, and that money can only be spent for purposes reasonably incidental to the carrying on of the company’s business, and the validity of such grants is to be tested, as is shown in all the authorities, by the answers to three pertinent questions: (i) Is the transaction reasonably incidental to the carrying on of the company’s business? (ii) Is it a bona fide transaction? and (iii) Is it done for the benefit and to promote the prosperity of the company?’ ”

41.  The agreement in that case was entered into by a company with all its shareholders.  Two of them were also the only directors of the company.  Even so, notwithstanding such approval, the court held that the agreement was beyond the permissible scope of corporate power because the distribution of assets failed to make provision for creditors and the company was insolvent at the material times.

42.  Though there is no suggestion that the Plaintiffs were insolvent at the time when the transfers were made, this authority highlighted the legal position that directors’ approval is not sufficient to provide an answer to the claim for breach of fiduciary duties.  Indeed, such approval by fellow directors could by itself be a breach of duties on the part of those directors: see Neville v Krikorian [2006] EWCA Civ 943, [2007] 1 BCLC 1.

43.  On the other hand, if the Plaintiffs were solvent at the material times, the consent or ratification of all the shareholders to the inter-company indebtedness may provide a defence: see Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258.  At p.288F to 289B, Dillon LJ contrasted the position of directors with that of shareholders.

44.  For present purposes, the law on shareholders’ approval can be taken from the judgment of Barma J (as Barma JA then was) in Re Styland Holdings Ltd (No 2) [2012] 2 HKLRD 325, at [107]-[127].  See also the judgment of Nordic International Ltd v Morten Innhaug [2017] 3 SLR 957 cited and applied by Harris J in Lam Kin Chung v Soka Gakkai International (No.2) [2018] 2 HKLRD 769 at [8].  In order that an approval at a general meeting is to be effective as an act of ratification, the shareholders should be informed of the nature and extent of the breach of duty, and the purpose of the general meeting was to excuse the director from the breach.

45.  Apart from ratification of the breach by independent shareholders by resolution passed in general meeting, the principle of Duomatic may also be relied upon to exonerate a director for breach of fiduciary duty.  The relevant law in that regard was examined by Jackson LJ in Sharma v Sharma [2014] BCC 73 at [44] to [52].  After making references to the relevant authorities including Re Duomatic Ltd [1969] 2 Ch. 365, Re Home Treat Ltd [1991] B.C.C. 165, the following was said at [47] to [49],

“ 47. These principles are also applicable when the question is whether the shareholders of a company have authorised a director to do that which would otherwise be a breach of fiduciary duty. In such a situation, however, the court is scrupulous to ensure that the director has made full disclosure of all relevant facts to the shareholders: see Gwembe Valley Development Co Ltd (in rec.) v Koshy (No.3) [2003] EWCA Civ 1048; [2004] 1 B.C.L.C. 131 at [64]–[66]. Although the shareholders must be made aware of the relevant facts, it is not necessary that they understand the legal characterization of those facts, namely that they would constitute a breach of fiduciary duty: see Knight v Frost [1999] B.C.C. 819 at 828.

48. In EIC Services Ltd v Phipps [2003] EWHC 1507 (Ch); [2003] B.C.C. 931 one of the issues was whether the issue and allotment of bonus shares had been effectively authorised by the members of the company, as required by reg.110 of Table A in the Schedule to the Companies (Tables A to F) Regulations 1985 (SI 1985/805). The 13 shareholders had been told of the projected bonus issue and its general effect, but there was no question of their consent being sought or given. Neuberger J. held that the shareholders had not thereby consented to the bonus issue. He formulated the principle as follows at [133]:

‘ If a director of a company informs shareholders of an intended action (or a past action) on the part of the directors, in circumstances in which neither the directors nor the shareholders are aware that the consent of the shareholders is required to that action, I do not think it is right, at least without more, to conclude that the shareholders have assented to that action for Duomatic purposes. As a matter of both ordinary language and legal concept, it does not seem to me that, in such circumstances, it could be said that the shareholders have ‘assent[ed]’ to that action. The shareholders have simply been told about the action or intended action, on the basis that it is something which can be, and has been or will be, left to the directors to decide on, and no question of ‘assent’ arises.’

49. In that passage the words “at least without more” may be significant. It is relevant to consider whether the circumstances were such that the shareholders would be expected to voice any objections, even if they were not aware of their legal rights. When a court is considering what, if anything, can be inferred from a party’s silence, the factual context is a matter of critical importance. If the surrounding circumstances are such that it would be unconscionable for a party to remain silent at the time and only raise his objections later, then I would have thought that assent can be inferred from silence.”

46.  Jackson LJ then summarized the relevant principles at [52].  Though the present case is not concerned with exploitation of opportunities, propositions (ii) to (iv) are equally germane.

“ (i) A company director is in breach of his fiduciary or statutory duty if he exploits for his personal gain (a) opportunities which come to his attention through his role as director or (b) any other opportunities which he could and should exploit for the benefit of the company.

(ii) If the shareholders with full knowledge of the relevant facts consent to the director exploiting those opportunities for his own personal gain, then that conduct is not a breach of the fiduciary or statutory duty.

(iii) If the shareholders with full knowledge of the relevant facts acquiesce in the director’s proposed conduct, then that may constitute consent. However, consent cannot be inferred from silence unless:

(a) the shareholders know that their consent is required, or

(b) the circumstances are such that it would be unconscionable for the shareholders to remain silent at the time and object after the event.

(iv)   For the purposes of propositions (ii) and (iii) full knowledge of the relevant facts does not entail an understanding of their legal incidents.  In other words the shareholders need not appreciate that the proposed action would be characterised as a breach of fiduciary or statutory duty.”

47.  Hence, amongst the issues raised in these appeals as set out at [20] above, Issue 1 is the primary issue.  Issues 2 to 4 are only sub-issues under Issue 1.

48.  Issue 5 is a separate issue raised by way of defence.

49.  Once it is appreciated that as a matter of law, the formal approval of the transfers by the board or even shareholders (when they were not fully apprised of the relevant circumstances) would not necessarily absolve a director from his breach of fiduciary duties towards the company, it is necessary to examine in the present context if the matters relied upon by Madam Wong and Perlie could plainly and obviously refute all the Plaintiffs’ claims. 

50.  As analysed above, the breach alleged against Dr Mong is that these transfers were not made in the best interest of the companies and for the improper purpose of benefitting himself at the expense of the companies. 

51.  Mr Denis Chang SC (leading Ms Wing Kay Po), on behalf of Madam Wong and Perlie, submitted that the Plaintiffs’ Reply “negated” the Relevant Pleas, which were made on the basis that the board of directors of the Plaintiffs never approved the loans.  Mr Chang’s submission in this connection appears to be two-fold:

(1)  First, Mr Chang argues that the Expectation Plea contradicts the Relevant Pleas and in fact positively suggests that the loans had been approved by the directors.

(2)  Second, Mr Chang argues that, because the Relevant Pleas were made exclusively on the basis that the loans had not been approved by the directors, it is not open for the Plaintiffs to advance a case that shareholders’ approval is required.

52.  The first point has been accepted by the Judge at [33] of the Decision as part of his reason for finding that the Loans had been approved by the directors of the Plaintiff companies.  The Plaintiffs challenge this part of the Judge’s decision on the basis that the Judge failed to properly understand its pleaded case.

53.  In gist, the Plaintiffs submit that the Expectation Plea at most shows that the directors knew of the transfers, but “that is qualitatively different from positively approving the transactions by the board, let alone ratifying the breach of duty”[7].  Mr Shieh, on behalf of the Plaintiffs, argues that it is “legally possible for a director (or a board) to be just aware of facts that potentially give rise to a breach of duty, but without at the same time forming a decision to positively approve it” and that it is for the defendant to demonstrate that this is legally unarguable.

54.  Mr Chang, however, submitted that the Plaintiffs’ pleaded case was not viable in light of “the undisputed evidence”[8].

55.  With respect, we do not consider the evidence to be “undisputed”.  The Plaintiffs did dispute the characterization of the Unauthorised Transfers as “loans” notwithstanding the statements in the AFS and the Representations and the continued treatment of them as loans after the death of Dr Mong.

56.  In our judgment, Mr Chang submits in essence that the evidence is incontrovertible and conclusive on two issues: (1) the true nature of the Unauthorised Transfers are loans; and (2) such loans had been approved by the directors of the Plaintiff companies.

57.  However, as discussed above, on the facts of the present case, it is at least reasonably arguable that approval by directors (even assuming that there had been such approval) could not provide a defence to the claims for breach of fiduciary duties. 

58.  Given that the matter would have to proceed to trial, we shall refrain from making further comments on the effect of the AFS and Representations against other disputed evidence.  In our view, it is not plain and obvious that the dispute on the nature of the transfers can be conclusively resolved on the basis of the AFS and the Representations.

59.  Mr Shieh further argues that it is for Madam Wong and Perlie to plead, and prove, that the transfers were valid loans to a director with shareholders’ approval.  For this proposition he relies on (1) the general principle that in a claim for breach of fiduciary duty, the burden is on the fiduciary to account: Gillman & Soame Ltd v Henry Young [2007] EWHC 1245 (Ch), [82] and (2) the sample pleading in Bullen & Leake & Jacob’s Precedents of Pleadings (17^th ed) (Vol.II) paragraph 62-O1, where the absence of shareholders’ approval was not an essential ingredient of the cause of action for breach of fiduciary duties.

60.  Mr Chang, in reply, made the following points:

(1)  The Plaintiffs chose to plead the absence of directors’ approval, as opposed to the absence of shareholders’ approval, in the SOC in the 664 Action and the NSOC in the 2417 Action.  This shows that the Plaintiffs had at all times been prepared to only swear in a statement of truth that there had not been any board approval, but would be unable to swear to an absence of shareholders’ approval.  Mr Chang submits that the Plaintiffs’ silence on these counts is “pregnant with an admission that there had at all material times been shareholders’ approval of the Withdrawals in question.”[9]

(2)  The Plaintiffs only pleaded in the Reply that the shareholders have never acquiesced, waived or ratified any breach of duties or trust against Dr Mong, but did not plead the lack of shareholders’ approval or ratification of the withdrawals themselves.

(3)  In any event, a pleaded case on the basis of the absence of shareholders’ approval is bound to fail because it would be “directly contrary to the undisputed representation in the AFS’s that the Withdrawals were approved loans”[10].

61.  We agree with Mr Shieh that the absence of shareholders’ approval is not an essential ingredient in the Plaintiffs’ cause of action for breach of fiduciary duties.  We do not accept Mr Chang’s submissions that the reference to lack of directors’ approval in the statements of claim are pregnant with an implied admission that the transactions were approved by shareholders.

62.  As we have seen from the brief survey of the pleadings, the issue of shareholders’ approval was first pleaded by Madam Wong and Perlie in the Re-re-amended Defence.  In response, the Reply of the Plaintiffs denied that such approval had been given and pleaded that “The shareholders of the Plaintiff Companies have never acquiesced, waived or ratified any breach of duties or trust against the late Dr. Mong, and the Disputed Transfers were (and still remain) unauthorised.”

63.  In our view, it was quite proper for the lack of shareholders’ approval to be pleaded in the Reply.  For the reasons stated below, we are also not persuaded it is plain that the Plaintiffs would not be able to establish the absence of shareholders’ ratification in respect of these transfers.

Issue 2: Need for Shareholders’ Approval

64.  The Plaintiffs submit that the Judge made an error of law in finding that there could be no breach of fiduciary duties if the loans were approved by the directors.  They argue that directors’ approval is insufficient in cases involving loans to directors, and that shareholders’ approval must be obtained under s.157H of the CO.

65.  In their Skeleton Argument, Mr Chang did not advance any submissions to dispute or challenge the aforesaid proposition.  The main plank of Mr Chang’s submissions, it appears to us, rests on what he calls “undisputed evidence” (namely, the AFS, the Representations and the continued treatment of the withdrawals as loans after the death of Dr Mong).  We shall deal with this further below.

66.  The Judge held in [42] of the Decision as follows:

“ 42. Secondly, non-compliance of those provisions did not equate to breach of fiduciary duty. The consequences had been set out in s.157I. In particular, the director [sic] granted the loan would be liable to repay it to the company forthwith, but the non-compliance would not invalidate any transaction or arrangement entered into in contravention of s.157H (see paragraph 21 above). In other words, the remedy of the company would be a personal one against the director who received the loan.”

67.  With respect, we do not think sections 157H or 157I should be the focus when one is considering breach of fiduciary duties on the part of a director.  Whilst section 157I provides for certain consequences for a loan advanced in breach of section 157H, it cannot exonerate a director from his liability for breach of the common law duty. Section 157I (4) clearly states that the statutory liabilities imposed under the section is without prejudice to any liability imposed on directors otherwise than by that subsection.

68.  As explained at [38] to [46] above, as a matter of common law the approval by fellow directors would not be a sufficient answer to the use of company assets for improper purposes and the liability for acts of a director not in the interest of the company cannot be absolved by such approval. 

69.  It is not very clear whether the Judge was acknowledging that the companies could pursue Dr Mong for breach of fiduciary duties in the last sentence of [42].  If he did, then his analysis of section 157I could not provide a basis for striking out the Relevant Pleas in HCA 664/2012.

70.  Insofar as the Judge was referring to the viability of the claims against Madam Wong in HCA 2417/2014 in light of the effect section 157I (5), we are of the view that that sub-section has to be read with sub-section (1).  Further, even if Madam Wong could establish lack of knowledge of the relevant circumstances (thus not being liable under Section 157I (1) to repay the monies), it is not plain and obvious to us that by reason of that, the Plaintiffs could not pursue a proprietary tracing claim against her (as volunteer recipient of the funds) if the “loans” can be set aside on the ground of breach of fiduciary duties under common law.  The principle discussed by A Chow J and the cases cited at [100] in Tang Ying Loi v Tang Ying Ip [2015] 1 HKLRD 712 (which was cited by the Judge at [24] of the judgment below) provide some support for the viability of such a course.  Section 157I (5) only sets limit on the effect of section 157H.  It does not prejudice the common law position of the Plaintiffs.

71.  In this connection, with respect to the learned Judge, we disagree with his analysis in [38]-[39] of the Decision.  The fact that the loans had been approved by the directors does not necessarily mean that there was no breach of fiduciary duties.  The proper question to be asked is: whether it was within the directors’ powers at all to make and/or approve the loans to Dr Mong or the transfers to his nominee/connected party without shareholders’ approval.

72.  In our judgment, it is at least reasonably arguable that the transfers, even if treated as loans, were not bona fide in the Plaintiff companies’ best interest and/or for a proper purpose, and hence they could not be validly approved by the directors and had to be approved/ratified by the shareholders.

73.  For the reasons stated above, the learned Judge erred in holding categorically that there could be no breach of fiduciary duties because the directors had approved the transfers.  It is, therefore, necessary to consider whether there was sufficient shareholders’ approval.

Issue 3: Whether Shareholders’ Approval of the AFS was Sufficient

74.  The next issue is whether the shareholders’ approval of the AFS in general meetings would be “conclusive”, so as to prevent the Plaintiffs from contending that the loans had not been approved by the shareholders.

75.  The Plaintiffs argue that the shareholders’ approvals of the AFS in the AGM were insufficient for the purpose of ratifying the transfers, because they do not satisfy the stringent requirements as set out in Re Styland Holdings Ltd (No 2),supra.

76.  Mr Chang seeks to distinguish Re Styland Holdings (supra) on the basis that it assumes “a priori misappropriation” and that, given the AFS had disclosed the transfers as “loans to directors” with the requisite particulars pursuant to s.161B of the CO, the transfers have been approved and hence the issue of ratification does not arise.

77.  Mr Chang further relies on the confirmation by the Plaintiffs’ former Leading Counsel at the hearing before the Judge that the accounts had been “adopted” by the shareholders at the AGM, as noted by the Judge in [37] and [40] of the Decision.

78.  Despite Mr Chang’s able submissions, we are not persuaded that the shareholders’ approval or “adoption” of the AFS is conclusive on either (1) the nature of the transactions mentioned in the AFS; or (2) whether the shareholders have specifically approved the transactions in question.  We agree with Mr Shieh’s submission that the AFS can only be relied upon as evidence against the Plaintiffs’ factual case, but it cannot be conclusive as a matter of law.

79.  In our judgment, in appropriate cases, it is open to the court to find that the true nature of the transactions is different from the description given to them in the financial statements or accounting documents.  This is not to say that the company’s approval of the AFS can never be sufficient approval of the transactions disclosed therein.  Whether such approval constituted sufficient approval of the transaction is a question of fact that has to be determined in the light of all the relevant circumstances.

80.  We agree with Mr Shieh that the shareholders’ consent is effective only if they were properly and fully informed.  Therefore, it is necessary to explore whether there was sufficient disclosure in respect of the nature of the transfers at the relevant general meetings.

81.  In the present case, we note that the 3^rd and 4^th Plaintiffs in the 664 Action (SHET and “SHTEC”) had other shareholders in addition to Dr Mong, David and SHEH (the 2^nd Plaintiff in the 664 Action) at the relevant time.[11]  It is necessary to explore the state of mind and knowledge of those shareholders when they voted to approve the AFS (if they had voted at all).

82.  Mr Chang makes the point that the withdrawals which were allegedly made respectively from SHET and SHTEC had already been “assumed” respectively by SHHC or SHEH.  This contention, as put forward in paragraph 32(3) of the Re-Re-Re-Amended Defence in the 664 Action, was contradicted by paragraphs 15 to 15B of the Reply.

83.  Further, since 2001 the shareholders of SHHC were: Timmerton (10%), Timmerton BVI (40%) and Huge Surplus Trust (“The Trust”) (50%)[12].  The Trust is a discretionary trust set up by Dr Mong.  He had intimated to the Trustee that his wishes were that 50% be distributed to the children of his first family other than David and the other 50% be distributed to Madam Wong and Perlie.

84.  SHHC is and was the 100% shareholder of SHEH.

85.  We have no evidence on the stance of the Trustee on the AFS and their knowledge of the true nature of the transfers.

86.  Mr Chang also relies on the Representations signed by the directors as “incontrovertible evidence” that the withdrawals had been approved by directors as well as shareholders.  Since there are shareholders who were not directors at the material times, we fail to see how the Representations, which were made by the directors to the auditors, could serve as shareholders’ approval for the relevant transfers.

87.  In any event, since the transfers were only reflected in the subsequent AFS, there was no approval from all the shareholders of the Plaintiff companies at the time when the payments were made.  Hence, there had to be ratification as explained in Re Styland Holdings Ltd (No 2), supra.

88.  There is no evidence to suggest that when approving the AFS, the attention of the shareholders was drawn to the true nature of the transfers and the breach of fiduciary duties of Dr Mong and that the resolutions were to exonerate Dr Mong from such breaches.

89.  In light of the foregoing, the shareholders’ approvals of the AFS at the general meetings were insufficient to operate as ratifications as required by law.

Issue 4: The Duomatic Principle

90.  Before the Judge, Mr Chang also relied on the Duomatic principle.  The Judge did not find it necessary to decide the case on the Duomatic principle.

91.  The Respondent’s Notice filed on behalf of Madam Wong and Perlie did not seek to rely on the Duomatic principle as an additional ground on which the Decision should be upheld.

92.  However, it was mentioned at paragraph 24 of Mr Chang’s submissions of 20 March 2020 in the context of his argument of absence of “outside” shareholders in light of the assignment to SHEH for the purpose of the submission on ratification (cross-referencing to paragraph 23 of his earlier submissions of 26 September 2019).  There is however no substantive argument on how the Duomatic principle would be engaged independently from the argument on ratification.

93.  We have addressed ratification under Issue 3 above.

94.  We have also highlighted the relevant principle of law on Duomatic as discussed by Jackson LJ in Sharma, supra.  On those principles, as there is no separate argument on Duomatic, in view of our conclusion on ratification, based on the submissions before us we do not find any viable basis for holding that the Relevant Pleas are not sustainable on the Duomatic ground. 

Issue 5: Limitation in the context of the 2417 Action

95.  Finally, Mr Chang submits that, in the context of the 2417 Action, the Judge ought to have held that the proprietary tracing claim is time-barred.  Mr Chang submits that, although the proprietary claim arises out of the same or substantially the same facts as the original claim, there would be irreparable prejudice to Madam Wong because she will have to investigate the allegation of breach of fiduciary duties, when she could have defended the original knowing receipt claim on the basis of lack of knowledge alone.

96.  The same argument has been considered and rejected by the Judge in [49] – [54] of the Decision.  In particular, he said at [54],

“ In fairness, the new claim is nothing more than an additional cause of action based on the same facts. It may be said that it is fortuitous that the cause of action was not previously relied upon. I see no prejudice made out on the evidence or any ground not to exercise my discretion to allow the amendment, and I would have done so if that decision were required.”

97.  We agree with the Judge’s reasoning in this respect.  We are not persuaded that the test is as narrow as contended by Mr Chang.  We are not satisfied that there is real prejudice to Madam Wong simply because she has been deprived of the theoretical possibility of contesting the knowing receipt claim on the basis of lack of knowledge alone.  All along, Madam Wong had been hotly contesting the issue of breach of fiduciary duty in her defence to the original claim in the 2417 Action.  We see no reason to depart from the Judge’s conclusion.

Conclusion

98.  For the reasons stated above, we are not satisfied that the Relevant Pleas are “wholly unarguable” such that it should be struck out.

99.  Hence, leave should be granted for the filing of the FSOC pursuant to the SOC Summons in light of our analysis above.

100.  In the circumstances, we see no reason why the 2417 Action should be stayed pending the 664 Action.  We agree with the Judge’s observation in [55] of the Decision that, given the overlap between the two actions, and the fact that Madam Wong and Perlie are carrying the burden of defending the 664 Action, there is no good reason not to have the actions tried together.

101.  In light of the foregoing, we allow the present appeals and make the following orders:

(1)  The two orders of the Judge of 10 September 2018 be set aside.

(2)  An order be made in terms of the SOC Summons and the Heard Together Summons, save on the issue of costs, which is to be addressed separately below.

(3)  The Striking Out Summons be dismissed.

102.  We also make the following costs order nisi:.

(1)  Madam Wong and Perlie shall pay the Plaintiffs their costs of the appeal in CACV 509 of 2018, such costs are to be taxed if not agreed with a certificate for two counsel;

(2)  Madam Wong shall pay the Plaintiffs their costs of the appeal in CACV 510 of 2018, such costs are to be taxed if not agreed with a certificate for two counsel;

(3)  In respect of the costs of the proceedings below:

(a)  Costs of and occasioned by the SOC Summons shall be in the cause of the 2417 Action, with a certificate for two counsel;

(b)  Costs of the Striking Out Summons be paid by Madam Wong and Perlie to the Plaintiffs in any event, with a certificate for two counsel;

(c)  Costs of the Stay Summons be paid by Madam Wong to the Plaintiffs in any event; and

(d)  Costs of the Heard Together Summonses be in the cause of the 2417 Action and the 664 Action.