TRINITY CONCEPT LTD (In liquidation) v. WONG KUNG SANG AND ANOTHER

CAMP 221/2022

[2022] HKCA 1180

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 221 OF 2022

(ON AN INTENDED APPEAL FROM HCA NO 2334 OF 2019)

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J U D G M E N T

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Hon Yuen JA (giving the Judgment of the Court):

1.  This is the defendants’ application filed on 29 June 2022 for leave to appeal the Decision of DHCJ W Tsui (“the judge”)  given on 28 February 2022 (“the Decision”)[1] in which she dismissed their application to strike out the statement of claim on the basis of time-bar and their alternative application for preliminary issues on time-bar to be determined under Order 14A. The judge refused leave to appeal for reasons given on 21 June 2022.

Background

2.1.  The plaintiff is a company in liquidation (“the Company”).  It was the holding company of a PRC factory called Sam Cheung.

2.2.  The defendants were the only two directors of the Company between June 2009 and its winding-up by order of the court made on 17 February 2016.  As directors, they owe fiduciary duties to the Company and stand in the position of trustees in respect of assets of the Company under their control[2].

3.1.  In a writ with statement of claim (“SOC”)  filed on 18 December 2019, the Company alleges that between January 2010 and August 2011, the defendants caused the Company to make 139 payments in the total sum of nearly $49.7 million to recipients which did not appear to have direct relations with the Company (referred to in the SOC as the “Suspicious Transactions”).

3.2.  The SOC pleaded that there were no documentary evidence for 137 such transactions, and for the remaining 2 transactions, there were only payment summaries but no invoices or payment records, and in any event those payment summaries did not tally with the amounts paid.  An answer was called for from the defendants.

3.3.  The defendants’ answers included:

-  Sam Cheung’s documents had been removed by “gangsters” in 2009[3],

-  some documents had been left in premises which were re-possessed by the landlord4,

-  the Company’s physical and electronic records may have been removed by a former accountant5.

3.4.  Faced with these answers, the Company alleges that the directors were defaulting fiduciaries and were liable to account to it, and failing a proper account (including but not limited to profits made by wrongful dealings with the Suspicious Transactions), they were liable to pay equitable compensation to the Company.

3.5.  The Company sought from the defendants:

(1)  an account of all assets and/or monies (and their proceeds)  derived from the Suspicious Transactions and all necessary inquiries, directions and orders to enable the Company to trace and recover such assets and/or monies;

(2)  an order that the defendants deliver up or transfer to the Company such assets and/or monies (and their proceeds)  found due upon the taking of such account and enquiry;

(3)  alternatively, an award of equitable compensation to be assessed;

(4)  interest;

(5)  further or other relief; and

(6)  costs.

Defendants’ application

4.  As the writ was issued more than 6 years after the Suspicious Transactions occurred, the defendants sought to strike out the statement of claim on the basis that the claims were time-barred, alternatively for preliminary issues on time-bar to be determined under Order 14A[6].

The judge’s Decision

5.  In the judge’s Decision, which ran to 56 pages, the law was discussed thoroughly, with particular reference to the Court of Final Appeal judgment in Libertarian Investments Ltd v Hall[7] and the Court of Appeal judgment in Liu Hsiao Cheng v Wong Shu Wai[8].

6.1.  The judge held the following.

(1)  A beneficiary is entitled to an account from a trustee, irrespective of any breach of trust, and such entitlement is as of right (§§65-76, 101).

(2)  There are 3 stages of accounting (§§84-93):

(i)  asking for an order for an account;

(ii)  the taking of the account (in the course of which the beneficiary may find that the account should be falsified and/or surcharged, as explained by Lord Millett in Libertarian); and

(iii)  consequential orders for restoration of the trust property, failing which there may be an award of equitable compensation;

although the 3 stages are distinct, depending on the facts of the case, the stages may be either sequential or merged (§§98-99).

(3)  The provisions of the Limitation Ordinance (“LO”)  relevant to the case are:

s.4(2):  which applies a time-bar of 6 years for an action for an account;

s.4(7):  which disapplies s.4(2)  to claims for equitable relief;

s.20(2):  which applies a time-bar of 6 years for recovery of trust property or breach of trust; and

s.20(1): which disapplies s.20(2)  in case of

(a)  fraud, or

(b)  recovery from the trustee of trust property (or proceeds thereof)  in his possession, or previously received by him and converted to his use.

(4)  The key questions in the strike-out application were:

(a)  whether the Company is now barred from invoking the accounting procedure because its claim is subject to a 6-year limitation period, and

(b)  whether this is a question which can be definitively decided at this stage (§104).

(5)  For the purposes of the strike-out application based on the limitation argument, the judge held:

(a)  when a beneficiary asks for an account only, without alleging a breach of trust, there is no limitation period (§§107[9], 114-117), although the court has a discretion whether to make an order or not;

(b)  when a beneficiary asks for an account and payment on the basis of a breach of trust, these are different claims which are subject to different limitation considerations (§119);

(c)  in considering whether the defendants can strike-out claims (other than a claim for an account)  by relying on s.20(2)  LO, the court will consider the evidence available; depending on the circumstances, the court can adopt an approach of ordering an account at the 1^st stage of accounting, and reserving the issue of limitation to the 2^nd stage after the facts were ascertained [10];

(d)  however, if all claims (other than a claim for an  account)  are clearly time-barred, an account by itself would serve no useful purpose, and this factor will be considered by the court in the exercise of its discretion whether or not to order an account (§§127, 147, 150 [11]).

(6)  On the facts pleaded in the SOC,

(a)  the Company is entitled as of right to an account from the defendants who were its directors (§§105-6);

(b)  the payment out of sums of money to unrelated recipients with no supporting documents call for an explanation from the defendants (§165)  who have the onus of justifying the payments (§§191, 194);

(c)  at this stage, the Company did not have sufficient information to plead any specific breaches of trust (§§165, 170)  but the facts may be ascertained at a later stage (§187);

(d)  §§13(2), (3)  and 14 of the SOC are sufficiently clear [12] that if and when those facts are ascertained and it is in a position to do so, the Company would plead specific breaches of trust, and hence there is at least a potential claim (§176);

(e)  thus, the court could not at this stage say that the claim for further orders (other than an order for an account)  is bound to be time-barred (§177, 190).

6.2.  Accordingly, the judge dismissed the application for strike-out and the application for Order 14A also failed.

6.3.  As mentioned earlier, the judge refused leave to appeal, hence the renewed application before this court.

Proposed grounds of appeal

7.  The proposed grounds of appeal are as follows:

(1)  the judge erred in conducting her own research without inviting further submissions;

(2-5)  as the relief in the SOC go beyond a claim for an account simpliciter, but no fraud/conversion has been pleaded, the judge should have found that the Company’s claims for the further orders were time-barred under s.20(2)  LO, and the court should have struck-out the claim for an account as a matter of discretion.

Discussion

8.1.  The proposed Ground (1)  can be dealt with briefly.  In Sheridan v Stanley Cole (Wainfleet)  Ltd [13], the English Court of Appeal considered whether proceedings were irregular or unfair when a tribunal referred in its judgment to a case which the parties had not had the opportunity to address.  The Court held that the 1^st stage of the inquiry is to see whether that case had been shown to be central to, and to have played an influential part in shaping, the judgment, in that it must have altered or affected to a significant extent the way the issues had been addressed, such that a fair-minded observer would say that the proceedings had been decided in a way that could not have been anticipated [14]. If that 1^st stage is passed, the 2^nd stage is to see if it has caused any substantial prejudice to the complaining party [15].

8.2.  In the present case, what the defendants complain about is the judge’s reference to 2 articles by Lord Millett at §§70-71 of the Decision which emphasize the principle that a trustee has a duty to account for his stewardship of trust property.  That principle is well-established and incontrovertible, and entirely consistent with other authorities referred to in the Decision, in particular Libertarian at §167.

8.3.  In fact, in the Written Statement of the defendants for leave to appeal, it is accepted that “the propositions in the 2 articles by Lord Millett ... are not in and of themselves controversial”, but it is said that the way in which the judge “developed her analysis therefrom was ... questionable”.

8.4.  As such, the complaint in the proposed Ground (1)  is not made out at all, and it is surprising, to say the least, that such a ground could have found its way into the draft Notice of Appeal in the present case.

9.1.  Grounds (2-5)  also have no reasonable prospect of success.  It is correct that the Company has not (so far)  pleaded fraud or conversion.  But these cannot be pleaded now when the Company still lacks evidence of where the assets of the Company went in the course of the Suspicious Transactions.  The liquidators have to reconstitute the knowledge of the Company.

9.2.  The defendants have proffered some explanations for the Suspicious Transactions.  Suffice it to say that at this stage, it would not be appropriate for this court to comment on the credibility of those explanations, but it is well-established that where a fiduciary has dealt with the beneficiary’s assets, it is up to the fiduciary to justify his dealing, not for the beneficiary to prove that the dealing was unjustified [16].

9.3.  More importantly, the Company cannot verify the defendants’ allegations by reference to its documents as they went missing due to the defendants’ failure to keep them properly¹⁷.  As Lord Millett held in Libertarian, “where the absence of evidence is the consequence of the fiduciary’s own breach of duty, the court ... is entitled to make every assumption against the party whose conduct has deprived it of necessary evidence”¹⁸.

9.4.  As such, the judge was entitled to refuse to strike-out the claims now so that the Company can obtain its entitlement (as of right)  to an account under the 1^st stage.  After this 1^st stage, the Company would then be able to ascertain the facts, and then decide, on those facts, whether to proceed to the 2^nd stage and make such further allegations in the SOC as may be justified.  In the present case, the defendants’ application to strike-out the claims now on the basis of limitation was clearly premature.  In contrast, How v Earl Winterton [19] and Re Page [20] on which the defendants relied, were both judgments given after trial (in How) and after the substantive hearing of an originating summons for administration of a deceased person’s estate (in Page).

10.  For the sake of completeness, we would also refuse leave to appeal on the interest of justice ground.

Order

11.  We would dismiss the renewed application for leave with costs to the plaintiff Company.  Having considered the statement of costs for summary assessment, we would order the defendants to pay the plaintiff’s costs in the sum of $82,100.