TRUE RANK HOLDINGS LTD AND ANOTHER v. LAM KA CHUNG AND OTHERS

HCMP4078/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.4078 of 2003

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R U L I N G

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1. By an Originating Summons dated 17 September 2003 and subsequently amended the plaintiffs seek, inter alia, the reliefs of accounts and inquiry against the defendants. By a summons dated 1 November 2003 the 1st defendant applies to have the Originating Summons struck out as against him on the grounds that it discloses no cause of action and/or is an abuse of process of the court.

2. The plaintiffs are two companies, one registered in the British Virgin Islands and one in Hong Kong, both of which are controlled by Mr Albert Chan Chun Wai ("Mr Chan"). The only evidence in this matter comes from his affirmation.

3. The 1st defendant was a shareholder in the 4th and 5th defendants at different times. He was a director of the 4th defendant from June 1992 to August 1997, and a director of the 5th defendant from September 1995 to August 1997.

4. The 2nd defendant was and is a shareholder, through different companies, in the 4th and 5th defendants and a director of both. The 3rd defendant, his sister, was and is, in her own right and through another company, a shareholder in those companies and a director of both.

5. The 4th defendant was incorporated in Hong Kong in March 1992. By a special resolution passed on 9 December 2002, it was wound up by way of a members' voluntary winding-up. Its shares at all material times were and are held by the plaintiffs and the 1st, 2nd and 3rd defendants as mentioned above. The 5th defendant was incorporated in Hong Kong in November 1993, and its shares were held by the same shareholders in the same proportions as in the 4th defendant.

6. The 6th defendant was incorporated in Hong Kong in 2003. Its shares are held by two companies, but the beneficial ownership of them is unknown. Its directors are the 7th and 8th defendants who are respectively the son and the daughter of the 3rd defendant.

7. The plaintiff companies invested a total of $18,000,000.00 in a property development project known as Lakeview Garden in Hua Du District, Guangzhou (the "Project"). In September 1992 the 1st plaintiff invested $9,000,000.00 by the purchase of shares in the 4th defendant. In October 1994 the 1st and 2nd plaintiffs each invested a further $4,500,000.00 by purchasing shares in the 4th defendant.

8. According to Mr Chan, the 1st defendant was and had been for some time a financial and investment adviser to his family, and had, through a company owned by him, had a consultancy agreement with the Chan family company. That agreement is, it appears, irrelevant to this case, but the evidence is that the 1st defendant generally provided financial and investment advice to the Chan family, including introducing and recommending various investment opportunities and giving advice on the same.

9. One such investment was that in the Project. In this connection the 1st defendant introduced Mr Chan to the 2nd and 3rd defendants in early 1992. They discussed the matter and in particular said that the three defendants would be responsible for the management of the Project and that the 1st defendant would be responsible for its day-to-day management. After discussion the Chan family decided to invest money in the Project. It was agreed that the 2nd and 3rd defendants would take a 50% capital share with a 70% share of the profits; the 1st defendant would take a 20% capital share with a 15% share of the profits; and the Chan family would take a 30% capital share with a 15% share of the profits. The greater profit shares for the defendants were agreed on the basis that they would take part in the management, while the Chan family would not.

10. The actual investment was done, in the first instance, by the 1st plaintiff putting in $9,000,015.00 for 15 "A" shares and 900 "B" shares of $10,000.00 each in the 4th defendant. The 1st to 3rd defendants took shares in the 4th defendant also, so that the shares were held in the proportions set out above.

11. The 4th defendant held two wholly-owned subsidiaries named Hamford Development Limited ("Hamford") and Hamilton Development Limited ("Hamilton") and these entered into joint venture agreements with PRC companies. The first of these was for the development of the Project and the second for the management of the properties.

12. In about 1993 the sale of the uncompleted properties in Phase 1 of the Project commenced in Hong Kong, and according to Mr Chan the 1995 accounts of the joint venture for the development of the project showed that the proceeds of sale and other revenue amounted to RMB 240 million.

13. In about 1994 Mr Chan was approached for more money to go towards the construction costs of the Project. The Chan family agreed to put up another $9,000,000.00 and this was done by way of a rights issue of new class "C" shares of $10,000.00 each in the 4th defendant, of which the plaintiffs each took 450 shares.

14. Between 1993 and 1996 the 1st plaintiff was paid $13,125,000.00 and the 2nd plaintiff was paid $4,125,000.00 which were expressed to be loans or advances from the 4th defendant to them as shareholders.

15. In about December 1995 the interests held by the 4th defendant in Hamford and Hamilton were transferred to the 5th defendant, which was then a newly formed company, at a nominal consideration of $4.00. The purpose of this was said to be that the 4th defendant would not be committed to any legal liability in future. In 1997 the management of the 4th defendant proposed to wind it up. Mr Chan says that the purpose of this was to evade the claims of and liabilities to third parties. The plaintiffs objected to the winding-up, which was not then implemented; but a special resolution of the membership of the 4th defendant to this effect was passed in December 2002. Mr Chan says that the directors' statutory declarations as to the solvency of the 4th defendant were made despite the fact that the directors knew of the outstanding claims of buyers, the PRC Government and other creditors against the 4th defendant. Then in July 2003 the 5th defendant transferred its holdings in Hamford to the 6th defendant; a move which Mr Chan says was a sham designed to avoid the claims of creditors and remove the Project from the reach of the plaintiffs.

16. Mr Chan says that throughout all the years of the Project, the defendants have never accounted fully and accurately to the plaintiffs as to how their investments were applied and what has become of them; the amount of the proceeds of sale and other revenue, how those were used and what has become of them; the sales of the properties and what remains unsold, and the liabilities incurred by the companies used in the Project. Such financial statements as have been disclosed were, according to him, grossly deficient. Therefore the plaintiffs seek the remedies applied for in the Originating Summons.

17. So far as the 1st defendant is concerned, Mr Chan says that as the investments of the plaintiffs were made specifically for the purpose of the Project and based on the trust and confidence reposed in the 1st defendant, who was entrusted with and has assumed responsibility for the management of the Project and its companies, a trust and/or fiduciary relationship exists between the plaintiffs and the 1st defendant, who is accordingly liable to account to the plaintiffs for the matters set out in the Originating Summons.

18. The 1st defendant's primary case is that, on the plaintiffs' own case, no trust or fiduciary relationship existed or could exist between the plaintiffs and the 1st defendant. There is no allegation as to what duties were owed by the 1st defendant as trustee or fiduciary and no allegation of breach of duty. Even if breaches of duty were alleged they are now time barred. Insofar as it is alleged that the 1st defendant acted in breach of his duties as director of the 4th or 5th defendant, such duties were owed to those companies and not the plaintiffs as shareholders. The allegation that the 1st defendant caused the 4th and 5th defendants to put their assets beyond the reach of the plaintiffs is a misconception of the plaintiff's position as shareholders and gives rise to no cause of action. In any event some of those alleged breaches of duty are time barred. Lastly there is no reason or legal basis for the plaintiffs to commence the proceedings by way of Originating Summons.

19. So far as the limitation point is concerned it now seems to be accepted that by reason of section 4(7) of the Limitation Ordinance and the fact that the plaintiff is seeking equitable remedies, the statutory limitation period of six years would not apply.

20. Mr Tang SC, for the plaintiffs, also confirms that they do not rely on any allegation of breach of trust or fiduciary duty but rather that, since there was a trust or other fiduciary relationship, the 1st defendant is an accounting party with a duty to account to the plaintiffs.

21. It is not in dispute that striking out is only for plain and obvious cases, and that there should be no trial on the affidavits; that the claim must be obviously unsustainable and it must be impossible for the claim to succeed; and that where the legal viability of a cause of action is sensitive to the facts, an order to strike out should not be made. See the Hong Kong Civil Procedure, paragraph 18/19/4.

22. Mr Tong SC, for the 1st defendant, argues in the first place that there could be no trust because no legal title to property ever passed to the 1st defendant. The plaintiffs paid their money direct to the 4th defendant for the purchase of shares. The legal and beneficial title of the shares both belong to the plaintiffs. None of the plaintiffs' monies or shares were transferred into the legal or beneficial ownership of the 1st defendant so he could not be a trustee.

23. Mr Tang argues that the 1st defendant's assertion is that the plaintiffs were investing in the company but not in the Project through the company. This raises a question of fact which cannot be resolved on an application to strike out. The position is very like that in the case of Koo v. Kao and Yip, Civil Appeal No. 75 of 1995, where the Court held that the question of whether the plaintiff was investing in a company or through a company of which the defendants were the shareholders and directors, and to whom he said he had entrusted his money, was not suitable for resolution on an application to strike out.

24. It is also argued that there was either an express trust or a "Quistclose" purpose trust; see Barclays Bank Ltd v. Quistclose Investments Ltd [1970] AC 567. Reference is also made to the analysis of the "Quistclose" trust in Twinsectra Ltd v. Yardley & Ors, [2002] 2 WLR 802, HL. Now it seems to me that there may very well have been a trust between the plaintiffs and the 4th defendant by which the former entrusted their funds to the latter for the specific purpose of investing in the Project but this seems to beg the question of how the 1st defendant who was a shareholder and director of the 4th defendant could be made liable as trustee when he did not himself receive the funds. No doubt if there was a trust and he knowingly assisted in a breach of it he could be personally liable but breach is not relied on here; what the plaintiff is seeking to set up is a duty to account based on trusteeship. It is difficult to see how the 1st defendant could have a duty to account personally if he was not himself trustee of the plaintiffs' investment funds.

25. The plaintiffs' other argument is based on the evidence of Mr Chan that factually he and his relatives, or at any rate the family company, had employed the 1st defendant (through his service company) as a business advisor under a two-year consultancy agreement in 1990 and that since then, the 1st defendant had provided financial and investment advice to the Chan family, including introducing and recommending to them various investment opportunities and giving advice on the same from time to time. The 1st defendant had introduced the Chans to the Project and to the 2nd and 3rd defendants. He had told them that he and the 2nd and 3rd defendants would be responsible for the management of the Project and in particular he would himself be responsible for its day-to-day management. Against this background the family had decided to invest in the Project and had entrusted the 1st, 2nd and 3rd defendants with its management.

26. It is argued that the critical feature of a fiduciary relationship is that one person agrees to act for another in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical way. The fiduciary has the opportunity to exercise his power or discretion to the detriment of the other person, who is vulnerable to abuse by the fiduciary of his position. The categories of fiduciary relationships are not closed. See Hospital Products Ltd v. U.S. Surgical Corporation (1984) 156 CLR 41. So, on the facts of this case such a relationship arises or at any rate could arise.

27. There are I think two ways to look at the situation, the one being that argued for above and the other being that argued for by counsel for the 1st defendant which is simply that the plaintiffs took the advice of the 1st defendant as investment advisor and on that basis invested in the Project; and in the absence of misrepresentation, they cannot complain against him.

28. There may be various kinds of fiduciary relationships. That of trustee and cestui que trust is one of them. But the categories can never be exhaustively defined. See the general comments of Ma J, as he then was in Kao, Lee & Yip v. Koo [2003] 2 HKC 131; that case is of no direct application here because it arose out of a solicitors' partnership where there were fiduciary relationships in any event, but it was cited for the general comments and I respectfully adopt them.

29. Mr Tong refers to the questions posed by Frankfurter J in S.E.C. v. Chenery Corporation (1943) U.S.80, 885-886, cited by Lord Mustill in In re Goldcorp Exchange Ltd [1995] 1 AC 74 at 98 :

"To say that a man is a fiduciary only begins analysis; it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed to discharge those obligations? And what are the consequences of his deviation from duty?"

30. He argues that it is not sufficient simply to say that the 1st defendant is a fiduciary; one must ask to whom, and what obligations he owes. Analysis will show that he owes them, not to the plaintiffs but to the 4th defendant.

31. The difficulty here is that we have allegations of fact namely that those who controlled the plaintiffs did in fact repose trust and confidence in the 1st defendant, and they did in fact put money into a project which he recommended. Crucially, the evidence is that he did in fact represent that he would be running the project; and there seems to be some evidence that he did. It is not just a situation of a financial adviser advising a client or even a friend to put money in a project but rather of inviting the friend to put money in the adviser's own project which the adviser himself administered. In that situation the 1st defendant would have the opportunity to exercise power or discretion to the detriment of the plaintiffs. He could dissipate the funds they had invested. They would be vulnerable.

32. On that basis it seems to me that it cannot be said that the claim is obviously unsustainable or that it is impossible for the claim to succeed. The legal viability of the cause of action is sensitive to the facts of the relationship between the 1st defendant and the Chans so that an order to strike out should not be made.

33. I take the point that this matter should perhaps not have been commenced by Originating Summons. See the commentary at the Hong Kong Civil Procedure, paragraph 5/4/1. But I accept that it would not be right to send the plaintiffs back to start over. If there are contentious issues of fact they can be provided for in due course by an order under Order 28 for the action to continue as if begun by writ.

34. The 1st defendant's summons is accordingly dismissed with costs (nisi) to the plaintiffs in any event, with certificate for two counsel.