HCMP 1695/2015
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
MISCELLANEOUS PROCEEDINGS NO 1695 OF 2015
____________________
IN THE MATTER of LIN FUNG INDUSTRIAL COMPANY
and
IN THE MATTER of the Estate of LI WAN LUNG, Deceased
and
IN THE MATTER of Order 85 of the Rules of the High Court, Cap 4A
____________________
BETWEEN
LI LIM CHI DOROTHY, the Sole Administratix
Applicant
and
LIN FUNG INDUSTRIAL COMPANY
1st Respondent
LI KIN YAN
2nd Respondent
____________________
Before: Deputy High Court Judge Le Pichon in Court
Date of Hearing: 12 October 2016
Date of Judgment: 12 October 2016
Date of Reasons for Judgment: 17 October 2016
__________________________________________
REASONS FOR JUDGMENT
__________________________________________
1. This was an application by the sole administratrix (“the applicant”) of the estate of Li Wan Lung (“the deceased”) by originating summons (amended on 3 October 2016) for an order pursuant to Order 85, rule 2(2)(a) of the Rules of the High Court (“RHC”) that Li Kin Yan (the former administrator of the estate) (“the 2nd respondent”) takes all necessary steps to procure that the applicant be registered as sole proprietor of Lin Fung Industrial Company (“New Lin Fung”) with business registration number 50434564‒000‒01 (“the new BR”) and all documents relating to New Lin Fung. At the conclusion of the hearing, the court granted the relief sought and made an order in terms of §§2 and 3 of the amended originating summons. The reasons appear below.
Background facts
2. The applicant and the 2nd respondent are siblings and two of three children of the deceased who died intestate on 27 January 2009.
3. During his lifetime the deceased was mainly engaged in manufacturing plastic hardware with Lai Fung Plastic Factory Company Ltd (“Lai Fung”), a company incorporated in Hong Kong as the retail arm of the business and a sole proprietorship business he established on 4 September 1987, carried on under the name of Lin Fung Industrial Co (“Old Lin Fung”) with business registration number 11268978 (“the old BR”) as the manufacturing arm. The products were manufactured in a factory in the PRC.
4. The three siblings agreed that the 2nd respondent as the eldest son should be appointed administrator of the estate. Letters of administration were granted to the 2nd respondent on 3 July 2009.
5. Differences arose and on 19 May 2014, the applicant obtained a court order for the removal of the 2nd respondent as administrator and her appointment as administratrix in his place.
6. The following facts are not disputed and supported by relevant documentation:
(a) The deceased’s assets included (i) Old Lin Fung and (ii) an 85% shareholding in Lai Fung.
(b) The 2nd respondent held the remaining 15% of issued shares in Lai Fung.
(c) On or about 3 November 1987, Old Lin Fung established Lin Fung Plastics Factory as a processing and assembly factory (“the PRC factory”).
(d) Annual inspection reports of the PRC factory for the years from 2002 to 2007 as well as that filed on 14 May 2009 (shortly after the deceased’s death) for the year 2008 contained the business registration certificate of Old Lin Fung showing its stamp or chop on the certificate.
(e) On the advice of Old Lin Fung’s then accountant, on 9 March2009, the 2nd respondent made an application for the business registration of New Lin Fung with the 2nd respondent named as sole proprietor for the period commencing 28 January 2009 (the day following the deceased’s death).
(f) The establishment of New Lin Fung was a device to enable the business of Lai Fung and the PRC factory to continue, so that orders could be fulfilled.
(g) After 14 May 2009, annual inspection reports of the PRC factory contained the business registration certificate of New Lin Fung but showing the stamp/seal of Old Lin Fung on the new BR.
(h) A year or so later, on or about 6 July 2010, the PRC factory applied for a change of registration details the effect of which was to replace the deceased with the 2nd respondent as its foreign contracting party. For this purpose, the PRC factory submitted, inter alia, a Supplemental Agreement signed by the 2nd respondent using the stamp/seal of Old Lin Fung.
(i) Several months later, on 27 October 2010, New Lin Fung established Lin Fung Plastics Factory (“Dongguan Lin Fung”) as a wholly foreign‑owned enterprise. Dongguan Lin Fung was described as being “transformed locally” or “transitioned in situ ” from the PRC factory.
(j) The PRC factory was de‑registered on 12 March 2012 due to its change from a processing assembly factory into a wholly foreign‑owned enterprise, the relevant authorities having decided to phase out processing assembly factories.
7. In relation to §6(g) above, the 2nd respondent’s PRC lawyers have opined that the 2nd respondent may have made abnormal representations to the relevant government departments in the PRC and that he faces a risk of being held legally accountable.
8. The ‘representations’ relate to the concealment of the fact of the deceased’s death. Under PRC law, the foreign investor of the PRC factory was Old Lin Fung and not the deceased personally such that Old Lin Fung was a ‘civil subject’ with civil rights and obligations but its legal status/personality came to an end upon the deceased’s death. The PRC law firm opined that acts undertaken to continue or extend the operation ofthe PRC factory and changing the contract signatory of the foreign investor could have legal repercussions.
9. In any event, the PRC law firms instructed by the applicant and the 2nd respondent respectively are agreed that a third party such as the applicant cannot collect or assert any rights over assets registered in the name of Old Lin Fung or New Lin Fung by registering a new sole proprietorship in Hong Kong. That is the case even if the name of the new sole proprietorship were to be identical.
The issues arising
10. Mr Smith submitted that the applicant’s entitlement to the order she seeks depends on whether it can be shown that:
(1) it is necessary for the applicant to be registered as the sole proprietor of New Lin Fung in order for her to collect or assert the estate’s rights to any assets of the deceased in the PRC acquired or held in the name of New Lin Fung; and
(2) it is possible upon being so registered for the applicant to collect or assert the estate’s rights to the assets of the deceased in the PRC acquired or held in the name of New Lin Fung.
11. In so far as assets of the estate in the PRC are concerned, Mr Smith confined them to machinery purchased and transported into the PRC factory by Old Lin Fung when the PRC factory was established. It would appear from renewal agreements made in 1997, 2002 and 2007 that additional machinery was subsequently supplied.
12. In the submissions and evidence filed in support, the applicant also asserted that Old Lin Fung owned two plots of land in the PRC where the PRC factory is situated as well as the factory building itself. That is controversial as appears from the evidence filed by the 2nd respondent in that regard. However, for present purposes, the court need not be concerned with those other assets and their ownership, the issue being confined to machinery only.
13. The 2nd respondent contended that:
(a) New Lin Fung does not form part of the estate because a sole proprietorship is no more than the name a person trades underand has no separate identity: the 2nd respondent is New Lin Fung;
(b) there is evidence to show that the machinery in question does not belong to Old Lin Fung or New Lin Fung for that matter but to PRC entities; and
(c) in any event, given HCA 2531/2015, the appropriate course for the applicant to take is to litigate the estate’s claim through those proceedings.
14. The issues that emerge are considered under the headings below.
(A) Whether, on death of a sole proprietor, the business he carried on is an asset of his estate
15. Mr Remedios, counsel for the 2nd respondent, advanced the following propositions:
(i) as a matter of law, the deceased’s sole proprietorship ceased to exist upon his death;
(ii) Old Lin Fung and New Lin Fung are separate legal entities/businesses;
(iii) it follows from (ii) that it is legally and conceptually impossible for New Lin Fung to be an asset of the deceased’s business.
16. The statements of principle in (i) and (ii) above are unexceptionable. But underlying and implicit in (iii) is the notion that upon death of the sole proprietor, the business he had carried on during his lifetime ceases to exist and is not and cannot be an asset that could pass to his estate. As formulated, (iii) sidesteps the relevant question, namely, whether the business carried on by the deceased during his lifetime forms part of his estate.
17. It is to be noted that the Schedule of Assets attached to the Letters of Administration filed by the 2nd respondent lists Old Lin Fung as an item under the group of assets headed “BUSINESS”. As such, it is recognition of Old Lin Fung as an asset of the estate.
18. In any event, the short answer to the question is to be found in §57‒85 of Williams, Mortimer & Sunnucks on Executors, Administrators and Probate (2013 Edition):
“When a person engaged in trade or business dies, his trade or business descends to his representatives as part of his assets.”
19. Accordingly, in so far as it is suggested that the business of the deceased in Old Lin Fung is not or cannot be an asset of the estate, it is plainly wrong.
(B) Whether prima facie case shown that the estate (through Old Lin Fung) owns assets in the PRC
20. As regards the existence of machinery in the PRC to which the estate is entitled, the applicant relied on the following:
(a) The statement (on p 5) in a Legal Opinion (“the Junmu Opinion”) the 2nd respondent and his brother obtained from Guangdong Junmu Law Firm on 8 September 2015 to the effect that:
“...[m]achinery and equipment were purchased and transported into the PRC Factory by [Old Lin Fung] from Hong Kong”
to show that Old Lin Fung was the purchaser of the machinery that was transported to the PRC factory.
(b) The statement in Section V §2 of a document entitled “Contract for the Termed and Non‑gratuitous Lease of Factory and Premises” between The People’s Government of Qingxi Town, Dongguan City, Guangdong Province and Old Lin Fung dated 25 November 1995 (“the Factory Contract”) (exhibited as Appendix 1 to a Legal Opinion dated 13 May 2014 obtained by the 2nd respondent from Anderson & Anderson LLP):
“... [m]achinery and equipment, tools and utensils imported or purchased domestically by [Old Lin Fung] shall be owned permanently by [Old Lin Fung]” (emphasis added )
and the statement in the Junmu Opinion on the Enterprise Nature and Vesting of Interests of Old Lin Fung, stating as its conclusion of Part I that Old Lin Fung was:
“a foreign‑funded enterprise without legal person status, of which interests (after payment of all taxes on wages of workers according to the investment agreement signed with the Mainland government) had to be vested in its foreign investor — Old Lin Fung”
to establish Old Lin Fung’s ownership of and entitlement to the machinery.
(c) The 2nd respondent’s evidence in §32 of his first affirmation dated 30 September 2015 to the effect that upon the official termination of the PRC factory on 30 March 2012, its remaining assets which were mostly machineries were left in the PRC factory to show that the machinery existed as at that date which was well
21. While the 2nd respondent did not challenge the evidence the applicant relied on, the court was referred to another document relating to ownership of the machinery, being an Agreement registered on 3 November 1987 made between Dongguan External Processing and Assembling Services Company–cum–Qingxi Lin Fung Products Factory (“the Dongguan Company”) as Party A and Old Lin Fung as Party B. That agreement was renewed on three occasions and the renewal agreements were registered on 4 September 1992, 3 September 1997, and 18 June 2007 respectively (collectively “the Processing Agreements”). The last renewal provided for 29 October 2007 to be the expiration date of the term under the Processing Agreements.
22. In summary the Processing Agreements provided that Old Lin Fung was to be responsible for providing equipment of an unknown value (the amount stated being illegible) for processing production to the PRC factory to be repaid by the PRC factory through processing fees of an unknown (illegible) amount and further provided that “the equipment shall be owned by Party A’s [the Dongguan Company’s] factory” but “title of [sic ] the equipment borrowed shall belong to Party B [Old Lin Fung]”.
23. The renewal registered on 4 September 1992 provided for the addition of equipment and expansion of production. Repayment for the equipment was to be by an unspecified percentage of the processing fees and upon completion of the repayment, the equipment “shall be owned by [the Dongguan Company]”.
24. All that can be said about the Processing Agreements is that, at best, upon full repayment of the cost of the equipment, the Dongguan Company rather than Old Lin Fung would own the equipment. However,there is not a shred of evidence concerning the amount to be repaid and the amount actually repaid to Old Lin Fung. The key figures were illegible and there is nothing to substantiate repayment, much less full repayment. Nor do I not accept that the onus is on the applicant to show non‑payment.
25. It is important to note that while the Processing Agreements came to an end on 29 October 2007, the term of the Factory Contract was for 50 years expiring 30 December 2045. If that 50‑year term came to an end on the deceased’s death, it would not have occurred until 29 January 2009.
26. When the 2nd respondent made his first affirmation in September 2015, he clearly believed that the machinery was left in the PRC factory and that the estate would be entitled to the same, having imported them into the PRC in the first place.
27. Whether Old Lin Fung will ultimately succeed in establishing its right to the machinery in the PRC is not the relevant question.
28. I am satisfied from the evidence adduced that there is reason to believe that Old Lin Fung had assets in the PRC that are now registered in the name of New Lin Fung. It is also clear from the 2nd respondent’s own evidence that New Lin Fung was established to complete existing orders and to continue Lai Fung’s business and so its assets would form part of the deceased’s estate.
(C)Whether the relief sought in §(2) of the amended originating summons is appropriate
29. On 30 October 2015, the applicant as administratrix brought proceedings (HCA 2531/2015) against the 2nd respondent (as the 1st defendant) and Li Kin Wing her younger brother (as the 2nd defendant)for, inter alia, breaches of fiduciary duty in relation to Old Lin Fung, diversion of the business of Old Lin Fung into New Lin Fung and the Dongguan Company and sought an account of profits. Pleadings have now closed.
30. The 2nd respondent submitted that since there is already an action on foot, the proper course is for the applicant to add a claim to the existing action against the 2nd respondent for the machinery and delivery up of the same to the estate.
31. However, what the applicant is seeking here is an order that would allow her as administratrix to collect in assets of the estate which should be done as soon as possible. That is wholly different in nature from bringing an action against the 2nd respondent for wrongdoing (the intent of HCA 2531/2015) and, on any view, that action is not likely to be heard or determined for some time. For those reasons, I do not consider that to be an appropriate route.
32. I accept the applicant’s submission that it is clear from the PRC legal opinions obtained that it is not possible for the applicant in her capacity as administratrix per se to deal with the deceased’s assets in the PRC. While concerns have been expressed over the propriety of certain acts or steps taken by the 2nd respondent to continue the business of Lai Fung and the PRC factory, it is a fact that New Lin Fung has been operating for over 7 years under the new BR albeit using the stamp of Old Lin Fung.
33. I am satisfied that unless the applicant is registered as sole proprietor of New Lin Fung, she will not be able to collect or assert the estates rights to any assets of the deceased in the PRC acquired or held in the name of New Lin Fung.
34. It should be mentioned that there is correspondence with the Inland Revenue Department regarding the procedure for the applicant to be registered as sole proprietor of New Lin Fung.
35. The 2nd respondent has stated on affirmation that he has wanted to close down New Lin Fung for some time since he does not consider that it serves any practical purpose. The applicant takes issue with the 2nd respondent’s view on that subject. But the relevant point here is that if that be the 2nd respondent’s stance, he can have no objection to adopting the procedure outlined in the correspondence with the Inland Revenue Department to enable the applicant when registered as the sole proprietor of New Lin Fung to retain the same business registration number.
36. Accordingly, an order was made in terms of §§2 and 3 of the amended originating summons with an order of costs in favour of the applicant subject nevertheless to the costs provision contained in §6 of the order dated 20 January 2016, with certificate for two counsel.
(Doreen Le Pichon)
Deputy High Court Judge
Mr Clifford Smith SC, leading Mr Edward H M Tang, instructed by Waller Ma Huang & Yeung, for the applicant
Mr Leo Remedios and Mr Robert Chan, instructed by Ho & Partners, for the 1st and 2nd respondents