WANG MEI NA v. TANG MU LIEN alias JULIE TANG AND OTHERS

HCMP 751/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 751 OF 2011

(ON AN INTENDED APPEAL FROM HCA No. 421 of 2010)

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REASONS FOR DECISION

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Hon Chu JA (giving the Reasons for Decision of the Court of Appeal):

1. This is the application of the 1^st to 7^th defendants for leave to appeal and for stay of execution of the order of Deputy High Court Judge L Chan (as he then was) made on 27 January 2011 (“the Order”). By the Order, the Judge appointed interim receivers to the estate (“Estate”) of Mr Tong Zang, deceased (“Deceased”), granted an injunction restraining the defendants from dealing with the Estate and ordered the defendants to render an account of the Estate to the interim receivers.

2. On 7 April 2011, the Judge dismissed the defendants’ application for leave to appeal and for stay of execution.

3. By summons dated 21 April 2011, the defendants applied to this Court for leave to appeal and stay of execution.  The application was dismissed by Hartmann JA on 27 May 2011 without a hearing.

4. By summons dated 7 June 2011, the defendants applied for a reconsideration of the summons at an oral hearing.

5. At the hearing, after hearing counsel’s submissions, we granted the defendants leave to appeal, ordered a stay of execution upon the undertaking of the defendants to abide by the terms of paragraph 1(2) of the Order and further ordered the costs of the application to be in the cause of the intended appeal, with certificate for two counsel.  Our reasons appear below.

Applicable legal principles on leave to appeal

6. Under section 14AA(4) of the High Court Ordinance, Cap 4, leave to appeal to the Court of Appeal will only be granted where the appeal has a reasonable prospect of success or where there is some other reason in the interests of justice why the appeal should be heard.  Reasonable prospect means that it is more than fanciful without having to be probable: SMSE v. KL [2009] 4 HKLRD 125. 

The facts

7. The plaintiff is the widow of the Deceased. The 1^st to 3^rd defendants are the children of the Deceased from his marriage with Madam Tang Yung Chin, who died in 1989.  The Deceased married the plaintiff in Hong Kong on 27 September 2002.

8. The Deceased died intestate on 4 January 2005 and domiciled in Taiwan.  He was a man of substantial wealth.  The Estate comprises assets in Taiwan, Hong Kong and other jurisdictions.  According to the Schedule of Property issued by the Estate Duty Office dated 12 June 2007, the properties and assets that form part of the Estate in Hong Kong have a net value of HK$95,656,492.  They include money in bank accounts, investment account, shares and the contents of a deposit box. Among them are 4,990,000 shares in the 8^th defendant, Bowdex Hong Kong Limited (“Bowdex”).

9. The plaintiff and the 1^st to 3^rd defendants are the beneficiaries of the Estate.  No Letters of Administration has yet been granted.  The plaintiff has entered successive caveats against the Estate.  On 28 January 2010, she issued a writ for grant of administration (HCAP3/2010), but has not served it. 

10. The 4^th defendant was acquired by the 1^st to 3^rd defendants on 18 February 2005.  The 1^st to 3^rd defendants were its shareholders and directors.  On 30 July 2007, they caused their respective shareholdings to be transferred to the 5^th to 7^th defendants respectively and also resigned from directorship.  It is the plaintiff’s case that the 1^st to 3^rd defendants remain in control of the 4^th defendant through the 5^th to 7^th defendants.

11. Bowdex is a company acquired by the Deceased in 1980. It has an authorized and issued share capital of HK$5,000,000 divided into 5,000,000 shares of HK$1 each.  The Deceased held 99.8% of the shares.  He was until his death, one of the directors of the company.  After his death, the 2^nd defendant was appointed a director to fill the vacancy on 4 January 2005. The other directors are the plaintiff, the 1^st and 3^rd defendants and Madam Sze Kin Mui. 

12. The principal activities of Bowdex were investment holding and trading of motor vehicles.  It has five subsidiaries that were incorporated in mainland China.  They are:

Names	Shareholding of Bowdex at the time of the Deceased’s death	Directors	Nature of business
Wenzhou Yuande Automobile Company Limited (“Yuande”)	51%	1st & 2nd defendants, Wu Hui, Li Wei Wei and Mao Qian Ping	Repair and sale of spare parts and information of BMW vehicles
Nangjing Ningde Automotives (“Ningde”)	100%	1st , 2nd & 3rd defendants and Tang Xiao Xiong	Repair and information services of motor vehicles
Hangzhou Hangde Automobiles (“Hangde”)	60%	1st and 2nd defendants and Mao Qian Ping	Automobile repair and consultation and technology development
Shanghai Baode Wai Gao Qiao Automobile Company Limited (“Baode”)	100%	Not known	Not known
Shanghai Huide Automotives (“Huide”)	Joint venture with Shanghai Fande Automotives Sales Company Limited (“Shanghai Fande”)[1]	1st, 2nd & 3rd defendants, Tang Xiao Xiong and Wu Yuan Shun	Supply of spare parts, repair and maintenance and technology consultation for motor vehicles. Since December 2005, also deals with import and sale of BMW and mini vehicles.

13. The plaintiff and the 1^st to 3^rd defendants had executed two agreements relating to the administration and distribution of the Estate.  Under the first agreement dated 24 May 2005 (“24 May 2005 Agreement”), the parties agreed, inter alia, that the 4,990,000 shares held by the Deceased in Bowdex be divided among themselves equally with each being entitled to 1,247,500 shares and that they would work to promote and develop the business of Bowdex.  The other agreement is a Partition Agreement dated 22 June 2005 (“the Partition Agreement”), which is stipulated to be part of the 24 May 2005 Agreement.  Under this agreement, the parties agreed, inter alia, to appoint an agent to sell the Deceased’s real and personal properties and to divide the proceeds among the plaintiff and the 1^st to 3^rd defendants equally.

14. The plaintiff also executed a power of attorney dated 6 July 2005, authorizing the 3^rd defendant to deal with the administration and distribution of the Estate on her behalf.  She revoked it on 18 July 2006.

The plaintiff’s case

15. On 22 March 2010, the plaintiff commenced High Court Action No. 421 of 2010 against the defendants. In the Amended Statement of Claim, she claims: (1) a declaration that the 1^st to 7^th defendants are liable as constructive trustees to render an account to the plaintiff and/or the Estate; (2) a declaration that the 1^st to 7^th defendants are liable to the plaintiff in damages for the tort of conspiracy; (3) an order that, pending the appointment of a personal representative, a receiver be appointed to the Estate; (4) an order that the 1^st to 7^th defendants render an account to the plaintiff and/or the Estate and/or the receiver so appointed; and (5) damages and/or equitable compensation to be assessed.

16. The plaintiff’s pleaded case is for breach of fiduciary duties.  In a nutshell, it is pleaded that: (1) the plaintiff was induced by the false representations of the 1^st to 3^rd defendants into signing the 24 May 2005 Agreement and the Partition Agreement; (2) as a result of the conduct of the 1^st to 3^rd defendants, the plaintiff had reposed trust and confidence in them and allowed them to deal with the affairs of the Estate; (3) accordingly, the 1^st to 3^rd defendants owe to the plaintiff fiduciary duties that include a duty not to intermeddle with, damage or injure the Estate; (4) in breach of their fiduciary duties, the 1^st to 3^rd defendants wrongfully and fraudulently intermeddled with, damaged or injured the Estate to the plaintiff’s detriment and prejudice; (5) the 1^st to 3^rd defendants are therefore liable to the plaintiff as constructive trustees; (6) the 4^th to 7^th defendants also become liable to the plaintiff and/or the Estate as accessories of the 1^st to 3^rd defendants on the ground of knowing receipt and/or dishonest assistance; and (7) the 1^st to 7^th defendants are also liable to the plaintiff and/or the Estate for damages for conspiracy to injure by unlawful means.

17. The gravamen of the plaintiff’s complaint is that the 1^st and 3^rd defendants, acting through the 4^th defendant, have dealt with the affairs of Bowdex and its subsidiaries in such a way as to divert and deplete their business and assets, thereby diminishing the value of the Estate while benefitting themselves.  As this is an application for leave to appeal, it is not necessary to dwell into the details of the plaintiff’s complaint. It is sufficient to note the gist of the wrongful acts complained of. It is that the 1^st to 3^rd defendants had, on the one hand, caused the subsidiaries of Bowdex to be closed down or liquidated while, on the other hand, caused the 4^th defendant to establish new companies, whose personnel, location and business are similar or identical to those of the subsidiaries of Bowdex, and to take over the business of the subsidiaries. The plaintiff also complains about some questionable transactions that include an unexplained loan of HK$502,218,276.78 and extensions of guarantee to businesses in competition. 

The Judge’s decision

18. In his Decision granting the plaintiff’s application (at paragraphs 58 and 59), the Judge noted that the plaintiff’s initial case was in misrepresentation as contained in the 24 May 2005 Agreement and the Partition Agreement and also in constructive trust.  At the hearing, however, these issues were given secondary importance and the attack was focused on the 1^st to 3^rd defendants as intermeddlers of the Estate and executors de son tort. 

19. The Judge accepted the argument that the 1^st to 3^rd defendants, in administering the affairs of Bowdex and the subsidiaries, had taken possession of the Estate’s property in Bowdex and the subsidiaries and had acted characteristically of an executor.  He considered they had usurped the Estate’s rights and powers as Bowdex’s 99.8% shareholder and had exercised the rights and powers pertaining to the shares, not in their capacity as directors, but characteristically of executors of the Estate.  On this basis, he held they have intermeddled with the Estate and become liable as executors de son tort.

20. The Judge rejected the argument that the plaintiff did not have locus to bring a personal claim because of the reflective loss principle.  He considered the plaintiff had rights and interests in the Estate that amounted to a floating equity and that there is a serious question to be tried on whether the Estate’s loss, hence the plaintiff’s loss, though reflective, still deserves protection by the appointment of a receiver. 

21. The Judge was further of the view that there was risk of further damage to the Estate in that the defendants could not be trusted with the assets of the Estate, in particular the assets of Bowdex and its subsidiaries.  On the other hand, he did not believe much harm would be caused by the appointment of receiver.

Grounds of appeal

22. The defendants’ intended appeal is directed at (1) the Judge’s holding that the 1^st to 3^rd defendants were intermeddlers and executors de son tort; (2) the rejection of the defendants’ argument on reflective loss principle; and (3) the exercise of discretion in favour of the appointment of receivers.

23. In respect of the holding that the 1^st to 3^rd defendants were intermeddlers and executors de son tort, the defendants say there is no evidence of the 1^st to 3^rd defendants having taken possession of the rights and powers pertaining to the Estate’s shares in Bowdex.  It is said that all the conduct complained of by the plaintiff are referable to the defendants’ management of Bowdex as directors and not in exercise of any right or power in the Estate’s shareholding in Bowdex.  There was no plea and no evidence of any dealing by the 1^st to 3^rd defendants with the Estate’s shares in Bowdex.

24. On the reflective loss argument, the defendants complain that the Judge ignored the difference between the assets of the Estate (which is confined to 99.8% of the shareholding in Bowdex) and those of Bowdex, wrongly equated the plaintiff’s allegations of the defendants’ dealings with the assets of Bowdex as wrongful dealings with assets of the Estate and further wrongly equated the Estate’s loss as the plaintiff’s loss.  It is further said that a floating equity is merely an equity giving the plaintiff a right to compel proper administration of the Estate by an administrator, and does not give her a personal cause of action against the defendants so as to ground an application for receivership of the Estate. 

25. As to the need to appoint receivers, the defendants contend that there is no evidence of misappropriation of assets of the Estate or of Bowdex and that all the allegations of wrongful acts and transactions against Bowdex relate to past conduct and do not support a real risk of dissipation of assets of the Estate. It is also argued that there are alternative relief open to the plaintiff and that receivership is not justified.

Discussions

26. The thrust of the defendants’ grounds of appeal on the holding that they are executors de son tort is that the Judge erred in disregarding the corporate personality of Bowdex (i.e. treating Bowdex’s assets as assets of the Estate) and in equating the acts of a director as the acts of an executor.

27. To be liable as an executor de son tort, the person must have taken possession of the deceased’s property free from his liabilities and has acted characteristically as an executor: Williams, Mortimer and Sunnucks on Executors, Administrators and Probate (19^th & 7^th Ed) paras.8-17. 

28. Executor de son tort has not been specifically pleaded in the Amended Statement of Claim. The plaintiff’s argument is that by the defendants’ acts of intermeddling with the Estate (as pleaded in paragraphs 22, 24, 25, 33 and 40 of the Amended Statement of Claim), the defendants have become executors de son tort. The pleaded acts of intermeddling are acts in relation to the business and affairs of Bowdex and its subsidiaries, namely, diversion of the business of Bowdex and its subsidiaries and the depletion of their assets.  However, the assets and business of Bowdex and its subsidiaries are not properties of the Estate.  The asset of the Estate is only the 99.8% shareholding in Bowdex.

29. Further, the plaintiff’s pleaded case is that the 1^st to 3^rd defendants committed the acts of intermeddling “acting as directors of [Bowdex] and the subsidiaries or through their nominees or persons who acted as directors of [Bowdex] or the subsidiaries under their control” and by “dominating and controlling the board causing [Bowdex] to enter into transactions … against its interest” (paragraphs 26 and 27 of the Amended Statement of Claim). The plaintiff has not in the pleading or submissions identified other conduct of the defendants that show they had acted characteristically of an executor. 

30. Mr Fung SC (together with Ms Wu and Ms Ho) for the plaintiff relied on the Judge’s holding that it was not simply because they were directors that the defendants had been able to deplete the assets of Bowdex and divert its business, but that they had usurped the Estate’s rights and powers as the 99.8% shareholder and had exercised those rights and powers purportedly as directors but characteristically of executors of the Estate. In reply, Mr Wong SC  (together with Mr Wou and Mr Wang) for the defendants pointed out that there is no allegation or evidence of the defendants having exercised any right or power pertaining to the Deceased’s shares in Bowdex or that they have in any way dealt with those shares.  Hence, the wrongful acts relied on by the plaintiff remain acts of directors of Bowdex and the subsidiaries. 

31. We agree that having regard to the fact that the asset of the Estate is in the 99.8% shareholding in Bowdex and that the allegations of intermeddling relate to affairs and assets of Bowdex and its subsidiaries conducted by the defendants as directors, it is at least arguable whether the defendants can be made liable as executors de son tort. 

32. Turning to whether the plaintiff has locus to bring a personal claim against the defendants, there is no dispute as to the relevant law as set out in Johnson v. Gore Wood & Co [2002] 2 AC 1 at 35, 61 & 62 and Waddington Ltd v. Chan Chun Hoo Thomas & Ors (2008) 11 HKCFAR 370. The plaintiff’s pleaded case is that because of the defendants’ wrongful acts, the business turnover of Bowdex dropped drastically and the assets of Bowdex and its subsidiaries were depleted, thereby causing detriment to the Estate’s 4,990,000 shares in Bowdex and the plaintiff, being a beneficiary of the Estate, has suffered loss and damage (paragraphs 36, 37 and 40 of the Amended Statement of Claim).  The drop in business turnover and the depletion of assets are losses of Bowdex.  The loss of the Estate is in the diminution of value of the shares it holds in Bowdex. Thus analyzed, any loss of the Estate and, in turn, the plaintiff’s loss will be reflective of the loss suffered by Bowdex in respect of which Bowdex has its own cause of action.  

33. The Judge appeared to have accepted this, but was of the view that the plaintiff had a floating equity in the Estate that required protection and that there was a serious question to be tried on whether the Estate’s and the plaintiff’s loss, though reflective, deserved protection by the appointment of a receiver (paragraphs 67 to 72 of the Decision).  There was, however, no elaboration on how the floating equity of the plaintiff could overcome the difficulty presented by the reflective loss principle. 

34. Mr Fung SC argued that because the plaintiff is claiming for an account on the basis of breach of fiduciary duties, the reflective loss principle has no application.  It was said that the claim for an account is a “standalone” relief and an independent cause of action, separate from the other claims for equitable compensation or damages for breach of fiduciary duty or monetary compensation.  The law is that where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other: Johnson v. Gore Wood & Co, at 35H-36A. 

35. Mr Wong SC queried how the claim for information, not being a claim for damages or monetary compensation could constitute a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder.  He also pointed out that there is an absence of evidence or plea that the plaintiff’s request for information had been rejected.  More importantly, he submitted that even if the claim for account could be a separate and distinct loss, it could not have justified the appointment of receivers, given that the plaintiff lacks the locus to sue for the other loss that is reflective of the loss of Bowdex. 

36. In our view, there is force in Mr Wong’s submission.

37. The defendants also seek to appeal against the Judge’s exercise of discretion to appoint receivers on the ground that no risk of dissipation of assets of the Estate has been shown.  It is pointed out that all the wrongful acts relate to the management of Bowdex and the subsidiaries and dealings with their business and assets, which are not assets belonging to the Estate. Moreover, all the matters complained of were past conduct that took place in or before 2009 and there is no evidence of any impending transaction that will give rise to risk of dissipation. In reply, Mr Fung SC drew our attention to the First Report of the Interim Receivers (paragraph 4.3), which indicated that the Deceased had further assets which had not been disclosed in the Schedule of Property issued by the Estate Duty Office. 

38. We note that the plaintiff does not appear to dispute that Bowdex and its subsidiaries have no significant business activity since 2009. We also note that the plaintiff has been a director of Bowdex since before the Deceased’s death and it is not suggested that she did not receive notices of directors’ meetings or has been completely in the dark as to the affairs or activities of the company. However, she did not take out proceedings to protect her interest until 2010.  At the same time, there is alternative relief open to the plaintiff, including applying for grant of Letters of Administration.  She had in fact issued a writ for grant of administration.  We agree that in these circumstances, it is arguable that there is no necessity to resort to the intrusive remedy of receivership.

39. For the reasons stated above, we granted leave to the 1^st to 7^th defendants to appeal against the Order dated 27 January 2011.

40. Mr Wong SC indicated that the defendants were agreeable to providing an undertaking in terms of paragraph 1(2) of the Order, namely, they, whether by themselves or their servants or agents or otherwise howsoever, be restrained from receiving, selling, charging or otherwise dealing with the Estate or any part or parts thereof. 

41. We considered that on the materials before the court, the position of the Estate and the plaintiff will be sufficiently safeguarded by the undertaking.  Accordingly, we ordered that upon the 1^st to 7^th defendants undertaking through counsel to abide by paragraph 1(2) of the Order, execution of the Order be stayed until the determination of the intended appeal.  With no disagreement from counsel, we further ordered that the costs of the defendants’ application be in the cause of the intended appeal with a certificate for two counsel.