HOTUNG INVESTMENT (CHINA) LTD v. ERNST & YOUNG (sued as a firm) AND OTHERS

HCA 2376/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2376 OF 2009

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REASONS FOR DECISION

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The background

1.  These proceedings are parts of a series of proceedings between members of the Hotung family.  The plaintiff’s pleaded case is that the plaintiff had since late 1979 been owned by Sean Eric Hotung (“Sean”), Mara Tegwen Hotung (“Mara”), Gabrielle Marie Hotung (“Gabrielle”), Sheridan Patricia Hotung (“Sheridan”), Michael Hotung, and Anthony Eric Ryan Hotung.  The 6 beneficiaries were sons and daughters of Mr Eric Edward Hotung (“EEH”) and his wife Patricia Ann Shea.  Sean gained control of the plaintiff in July 2007 and began an investigation into the affairs of the plaintiff before he took control.  The current proceedings concern a transaction at purported undervalue discovered by the investigation.

2.  In 1997 to 1998 the plaintiff’s directors included one Joseph Gregory Hitselberger (“JGH”) and Song Fok Tek Frank (“SFT”). At that time the plaintiff owned land of over 100,000 square feet in size, described as “the NT Properties” in paragraph 16 of the Statement of Claim.  EEH, who was a director of the plaintiff at that time as well, approached the plaintiff to negotiate a sale of the NT Properties to one Hotung Estates Ltd. Hotung Estates Ltd was wholly owned and controlled by EEH.  The assignment of the NT Properties was completed on 28 December 1998 for a consideration of HK$17,500,000.  The defendants do not dispute any of the above facts.

The disputed facts

3.  The plaintiff now says that the transaction of the NT Properties was undervalued, and that JGH and SFT knew the same because they knew EEH owned plots of land adjacent to the NT Properties (“the Adjacent Lands”) and would be willing to pay a substantially higher price to unite the NT Properties and the Adjacent Lands.  The plaintiff says that JGH and SFT were in breach of their fiduciary duties as directors of the plaintiff.

4.  The plaintiff says that the 3^rd defendant (“Ronald”) assisted in the breach of fiduciary duties by JGH and SFT by representing to Mara, Gabrielle and Sheridan that :

(1) Hotung Enterprises Ltd (“HEL”), as opposed to Hotung Estates intended to acquire the Adjacent Lands in 1998;

(2) Issuance of new shares of HEL, issuance of blank transfer forms and execution of indemnity were necessary; and

(3) The plaintiff and HEL were being properly managed in their best interests with the intention of causing them to refrain from asserting their beneficial rights and inquiring into the plaintiff’s affairs.

5.  The plaintiff based their allegations on a letter dated 29 April 1998 purportedly drafted by Ronald (Exhibit : HSE‑19).

6.  Ronald was a partner in the 1^st defendant (“EY”).  EY used the 2^nd defendant to hold shares in HEL.  The plaintiff alleges that EY is vicariously liable for Ronald’s wrongdoing.

The present application

7.  By a summons dated 8 March 2011, the defendants applied to strike out the writ and the statement of claim “as disclosing no reasonable cause of action, frivolous and vexatious or an abuse of the process of the Court”.  Particularly :

(1) Ronald owed no duty to the plaintiff of which he could commit a deliberate breach (“the First Ground”).

(2) The plaintiff’s causes of action are time‑barred
(“the Second Ground”).

8.  Alternatively they applied under paragraphs 2(1), (2), and (3) of the summons for the following issue to be tried as preliminary issues :

(1) Whether Ronald owed any duty to the plaintiff of which he could commit a deliberate breach.

(2) Whether Gabrielle and /or Sheridan could, with reasonable diligence, have discovered the alleged fraud or deliberate concealment relied upon by the plaintiff more than 6 years before the date on which the writ was issued.

(3) Whether the plaintiff’s causes of actions are time‑barred.

9.  Further or alternatively, they applied, under paragraphs 3(1) and (2) of the summons to determine paragraphs 2(1) and (2) as preliminary questions of law.

10.  On 7 September 2011, I dismissed the defendants’ application.  I now give my reasons herein below.

Reasons for decision

11.  Although the First and Second Grounds are closely intertwined, for the purpose of Order 18, rule 19 they must be considered separately.  This is because the First Ground appears to rest on the “no reasonable cause of action” ground provided by Order 18, rule 19 and extrinsic evidence is not admissible to support an application under such ground.  In considering the First Ground, I must assume the facts to be true and decide whether the statement of claim discloses a reasonable cause of action (per Nazareth V.P. in Beijing Television v Brightec Ltd & Others [1999] 2 H.K.C. 665).

12.  After considering the statement of claim, particularly paragraph 24, I am satisfied that the plaintiff has at least a cause of action in assisting breaches of fiduciary duties.  I hold that the defendants cannot succeed on the First Ground.

13.  In relation to the Second Ground, which was seriously contested before me, the defendants say that the sale of the NT Properties was concluded in 1998, and both Gabrielle and Sheridan suspected the NT Properties was at an undervalue in around 2002 or 2003.  Accordingly they had knowledge of the alleged fraud practised by JGH and SFT, or at least could have reasonably discovered the same had they used reasonable diligence.  The defendants base their allegation on witness statements taken from another case HCA571/2003.

14.  The defendants said that both Gabrielle and Sheridan had knowledge of, or could have discovered the fraud in the transaction 6 years before the writ was issued.  Mr Benjamin Yu, SC, leading Mr Bernard Man submitted that the knowledge should be attributed to the plaintiff and accordingly the action is time‑barred.

15.  Mr Barrie Barlow, SC, for the plaintiff did not address the issue of whose knowledge should be attributed to the plaintiff for the purpose of limitation.  He submitted that the witness statements heavily relied upon by the defendant were just “2 unsworn witness statements from non‑agents of [the plaintiff]”.  He further submitted that the plaintiff was under the control by “fraudsters” until late 2007, so time should not run against the plaintiff in the period between 2007.

16.  In my judgment, the defendants can only succeed if they can prove :

(1)     for the purpose of the limitation issue, the knowledge of Gabrielle and Sheridan are attributable to the plaintiff; and

(2)     Gabrielle and Sheridan had knowledge of the fraud more than 6 years before the writ.

17.  Although I do not have to rule on the first element at this stage and decide whether the knowledge of Gabrielle and Sheridan is attributable to the plaintiff for the purpose of the limitation issue, I am inclined to think that it does not.  While it is true that the entire pleaded case of the plaintiff rests on the acts done by Ronald towards Gabrielle and Sheridan, one must not forget that the plaintiff in this action is a company.  The usual law regarding companies should still apply to the plaintiff and this rule should not be bent merely because the alleged mechanism for the fraud happens to involve 2 beneficiaries of the company.

18.  If I am wrong about the first element and the knowledge of Gabrielle and Sheridan should indeed be attributed to the plaintiff, the defendants should still fail in their application.  Admittedly, those witness statements are strong evidence that tend to suggest Gabrielle and Sheridan had knowledge of, or suspected the fraud in the sale of the NT Properties as early as 2002, despite Mr Barlow’s best attempt to disavow them.  However the threshold for a striking‑out application is high, requiring the applicant to make out a “plain and obvious case”.  In my judgment, these witness statements do not support such a case as it is still open for Gabrielle and Sheridan to challenge the validity of these statements. It is also open to the plaintiff to adduce extrinsic evidence to prove that Gabrielle and Sheridan did not in fact have such knowledge and suspicion.

19.  For the above reasons I dismissed the application to strike out the writ and the statement of claim.  My reasons should apply with equal force to paragraphs 2(1), 2(3), 3(1) and 3(2) of the summons.  The only outstanding matter is 2(2) :

“Whether Gabrielle and /or Sheridan could with reasonable diligence have discovered the alleged fraud or deliberate concealment relied upon by the plaintiff more than 6 years before the date on which the writ was issued.”

20.  This issue will no doubt depend on what exactly were made known to Gabrielle and Sheridan, and in turn on what steps Ronald took to mislead them.  Therefore I do not deem it efficient to try the issue in paragraph 2(2) as preliminary issue at this moment.

Conclusion

21.  On the face of the Statement of Claim, there is a prima facie case of assistance to breach of fiduciary duty against Ronald.  After taking a broad overview of the evidence and the pleadings, the application of s26 of the Limitation Ordinance Cap 347 is not hopeless. Accordingly I dismissed the application to strike out the statement of claim and the writ with costs to the plaintiff.

22.  The determination of paragraphs 2(1), 2(3), 3(1), and 3(2) should follow my decision regarding the striking‑out application.  I dismissed the application under paragraph 2(2) because it is not efficient to do so.