LI SHIU TO v. CHEUNG PIK NG AND OTHERS

HCA 416/2003

[2018] HKCFI 222

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 416 OF 2003

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J U D G M E N T

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INTRODUCTION

1.  I mean no disrespect by referring the parties to this case as P, D1, D2, the Company (D3) and TP respectively.

2.  In this case, executors of D1 who had settled the Main Action with P, seek contribution from the executor of TP.  It raises a novel issue on construction of the Civil Liability (Contribution) Ordinance, Cap 377 (“the Contribution Ordinance”) in the case of accessory liability in dishonest assistance.

3.  It is D1’s case that assuming the facts pleaded by P in the Main Action were true, D1 would have been liable to P for breach of fiduciary duties.  TP was liable to P in respect of the same damage as D1 by reason of dishonest assistance.  The settlement was a bona fide settlement and the contribution of 50% sought by D1 was just and equitable.

4.  TP denies that D1 is entitled to rely on the assumption.  TP also says that D1 fails to plead and establish TP’s knowledge of breach of fiduciary duty or that TP’s assistance was dishonest.  If liability is established, TP suggests that the extent of contribution should be 30%.

UNDISPUTED FACTS AND INDISPUTABLE FACTS ESTABLISHED BY DOCUMENTARY EVIDENCE

5.  P, D1 and TP are sons of Mr Li Po Chun deceased and the only remaining beneficiaries of his estate (“the Estate”).  D1 had been the sole administrator of the Estate from 1973 until his demise in 2012 and TP was aware of D1’s status as administrator.  TP has passed away by the time of trial.

6.  One of the main assets of the Estate was shareholding in the Company, a company incorporated by Mr Li Po Chun.  The shares in the Company have been held by the late Mr Li Po Chun, P, D1, TP and 3 individuals named Li Wai To, Li Sing Chi and Li Hoi Yeung (“the 3 Shareholders”) since 1949. The 3 Shareholders collectively held 801 shares in the Company (“the 801 Shares”).

7.  The Estate has already been substantially administered with distributions made.

8.  Long before the events complained of, P had sold his interests in the Estate as well as the Company to D1 and TP pursuant to what was known as a 1971 Agreement, a 1981 Agreement to distribute the Estate among P, D1 and TP in the ratio of ⁴¹/₁₄₄ :^51.5/₁₄₄ :^51.5/₁₄₄, and entered into a 1984 Deed with D1 and TP regarding the distribution of the remaining assets of the Estate.

9.  In 1987, P threatened to take action on the basis that the 3 Shareholders were fictitious and that the 801 Shares fell within the Estate.  He requested D1 to collect them in. 

10.  In 1989, D1 and TP (as the only directors of the Company and only shareholders present) procured the Company (i) to allot preference shares to entities associated with them; (ii) to dispose of the Company’s real estate to other entities associated with them; and (iii) to declare dividends in favour of the preference shareholders (being entities associated with D1 and TP) such as to remove from the Company the sale proceeds of its real estate (collectively “the 1989 Acts”). 

11.  In 2003, 16 years after he first raised the issue, P commenced the Main Action against D1 and TP (then as D2) seeking further distribution from the Estate by reason of the 3 Shareholders being fictitious.  He claimed that as administrator D1 failed to collect in and distribute the 801 Shares which should belong to the Estate.  He complained that the 1989 Acts had the effect of depleting the value of the 801 Shares and appropriating the value to entities associated with D1 and TP.  P claimed that his share should be 228 shares, based on the 1981 Agreement.  As the underlying value of the Shares had already been removed, P claimed against D1 and TP (then as D2) for the depleted value of his 228 Shares instead of a declaration that the Shares belonged to the Estate.

12.  P’s claim against TP (as D2) was discontinued on 1 June 2005 for reasons never disclosed.

13.  As a result of P’s change of stance, D1 obtained leave to join TP on 9 July 2013.

14.  P and D1 settled the Main Action on the first day of trial on 4 August 2015. The terms of settlement were set out in a letter signed by solicitors for P and D1 on the same date.

15.  By the time this judgment was written, D1 had paid the settlement sum to P in full.

THE PARTIES’ RESPECTIVE CASE

16.  Subsequent to the settlement, D1’s executors filed the statement of claim in these third party proceedings (“TPSOC”).  D1 continued to maintain the position taken in their defence to the Main Action, ie to deny that the 3 Shareholders were fictitious, that the 801 Shares were vested in the Estate or that D1 had knowledge of any knowledge of such matters or had acted in breach of his duties as administrator as alleged by P.

17.  TP’s defence was similar to D1’s position set out in the preceding paragraph.  TP alleged that the 1989 Acts were for proper purposes in the normal course of business of the relevant companies.  The disposals of real estate of the Company in 1989 were at market value.

18.  For the purpose of these third party proceedings, D1 has to prove the following:

(1)   That assuming the facts pleaded by P in the Main Action were established, D1 would have been liable to P for breach of fiduciary duties (“the statutory assumption”);

(2)   TP was liable to P “in respect of the same damage” as D1 by reason of dishonest assistance in that;

(a)   there was breach of fiduciary duty by D1;

(b)   in which TP assisted;

(c)   there was dishonesty on the part of TP; and

(d)   resulting in loss to P;

(3)   The Settlement Agreement was a bona fide settlement; and

(4)   The contribution of 50% sought by D1 is just and equitable.

19.  TP does not dispute items (1), 2(d) and (3).  Whilst TP insists that P has to prove item 2(a), D1 says that on a proper construction of the relevant provisions of the Contribution Ordinance, in a case of accessory liability like dishonest assistance, D1 is entitled to rely on the statutory assumption, because it was the same breach in items (1) and (2)(a).

20.  The issues are therefore:

A.   What is D1 required to do in order to establish his own breach of fiduciary duty for the purpose of the dishonest assistance claim?

B.   Whether TP assisted in D1’s breach of fiduciary duty;

C.   Whether there was dishonesty on the part of TP; and

D.   The extent of contribution if TP is held liable to contribute.

THE WITNESSES

21.  In considering the credibility of parties’ assertions the court is best assisted by the objective facts and documents, the parties’ motive, and the overall probabilities: see The Ocean Frost [1985] 1 Ll Rep 1, 57, per Robert Goff LJ (as he then was).

22.  Only Mr Li Sui Chee (executor of D1) has given evidence.  He did not have personal knowledge of the material facts surrounding the 1989 Acts as he was then aged 19, studying in the United States.

23.  D1 and TP had filed witness statements before they passed away.  Under section 49 of the Evidence Ordinance, Cap 8, the court has to consider the weight to be attached to those witness statements having regard to a basket of factors, in particular:

(a)   Whether it would have been reasonable and practicable for the party by whom the evidence was adduced to have produced the maker of the original statement as a witness;

(b)   Whether the evidence involves multiple hearsay;

(c)   Whether the circumstances in which the evidence is adduced as hearsay are such as to suggest an attempt to prevent proper evaluation of its weight; and

(d)   Whether or not the evidence adduced by the party is consistent with any evidence previously adduced by the party.

24.  D1 and TP were direct participants in the 1989 Acts. Their witness statements gave first-hand evidence of their knowledge and state of mind at the material time.  Such evidence was consistent with D1’s defence (personally verified by D1’s statement of truth) in the Main Action and TPSOC; and TP’s defence (personally verified by TP’s statement of truth) to the TPSOC.  There was nothing coming under factors (c) and (d) to justify excluding the witness statements.  I therefore place great weight on the witness statements.

RELEVANT PROVISIONS OF THE CONTRIBUTION ORDINANCE

25.  Sections 3(1) and (4) of the Contribution Ordinance provide as follows:

“(1) Subject to the following provisions of this section, any person [D1 in this case] liable in respect of any damage suffered by another person [P] may recover contribution from any other person [TP] liable in respect of the same damage (whether jointly with him or otherwise).

…

(4) A person who has made or agreed to make any payment in bona fide settlement or compromise of any claim made against him in respect of any damage (including a payment into court which has been accepted) shall be entitled to recover contribution in accordance with this section without regard to whether or not he himself is or ever was liable in respect of the damage, provided, however, that he would have been liable assuming that the factual basis of the claim against him could be established.” (words in square brackets and underline added)

26.  In respect of the concept of a person being liable in respect of certain damage suffered by another, section 2(3) of the Ordinance provides that:

“A person is liable in respect of any damage for the purposes of this Ordinance if the person who suffered it (or anyone representing his estate or dependants) is entitled to recover compensation from him in respect of that damage (whatever the legal basis of his liability, whether tort, breach of contract, breach of trust or otherwise).” (emphasis added)

27.  Section 3(4) was enacted to overcome the problem created by Stott v West Yorkshire Road Car Co Ltd [1971] 2 QB 651. There, a joint tortfeasor who settled a plaintiff’s claim could not claim contribution from a third party unless he could prove that he would have been held liable to the plaintiff if the plaintiff had sued him to judgment.  This led to the enactment of the Civil Liability (Contribution) Act 1978 (“1978 Act”).  Section 1(4) of the 1978 Act is identical to section 3(4) of the Ordinance. 

28.  The UK Law Commission’s Law of Contract: Report on Contribution (Law Com No 79) (1977) explained the reasoning for the recommendations that led to section 1(4) of the 1978 Act as follows:

“44. One of the problems that we discussed in our working paper concerned the defendant who settled the plaintiff’s claim against him before judgment and then sought to recover contribution from another defendant. The problem was exposed in Stott v West Yorkshire Road Car Co Ltd where the first defendants settled the plaintiff’s claim against them, which arose out of a traffic accident, by paying £10,000 without admitting liability; they then sought to recover a contribution from the other defendant who they alleged had contributed to the accident by the negligent parking of his vehicle. The Court of Appeal held that the contribution claim should proceed but pointed out that it would fail unless it was established in the contribution proceedings that the defendant claiming the contribution was a tortfeasor. …

45. In our working paper we suggested that it was unsatisfactory to require the “settling” defendant to prove his own liability as a tortfeasor in order to entitle him to contribution from the other. It is convenient to repeat here the three points that we made. The first is that it means turning all the usual conventions of civil litigation upside down; D1 (the settling defendant) has to call evidence that is in the possession of the plaintiff in order to establish his own liability in tort, and D2 (the other defendant) then calls D1’s witnesses in order to raise a doubt as to D1’s liability. The second is that if the result of the contribution proceedings on the facts of Stott’s case was that the liability of D2 was established but that the liability of D1 was not, the person who made the compromise, D1, would get no contribution towards the £10,000 although he was not in fact to blame, and D2 who really was to blame would have to pay nothing at all. The third reason is that defendants might be deterred from compromising claims in which liability was in doubt if their right of contribution was thereby put at risk. Salmon LJ said in Stott’s case that it would be very unfortunate if a defendant was obliged to fight a case to judgment in order to protect his contribution rights. We attached particular importance to the third point and made the provisional recommendation thata person who had compromised a claim made against him so as to benefit some other possible defendant should have the right to claim a contribution from the other defendant provided that the other could be shown to be liable; we added that it should not be an answer to such claim that the person who settled the claim would not have been held liable if the action against him had been tried. …

…

50. As for the point about prejudice to D2, the suggestion was made that D2 might find it harder to defend himself on issues of liability and quantum after the fait accompli of a settlement between P and D1, and that D1’s right of contribution after the compromise with P should only be available where D2 has unreasonably refused to be party to the compromise or to take part in the negotiations.

51. We are not convinced by the fait accompli argument. We do not see why D1’s compromise should make it harder for D2 to defend himself on the issue of liability or on the question of the amount recoverable. As to liability, D1 would have to establish that D2 was liable to P, and the case against D2 would, presumably, be much the same whether it was advanced by P in the main proceedings or by D1 in his claim for contribution. …

…

55. We accordingly recommend that the defendant who compromises a claim against him should be entitled to claim a contribution from any wrongdoer against whom liability can be proved. … ” (emphasis added)

29.  It was clear from the above that section 1(4) of the 1978 Act (and the corresponding section 3(4) of the Contribution Ordinance) served the purpose of reversing Stott and conferred a right or an entitlement on the settling defendant to seek contribution from a third party upon a bona fide settlement.

30.  The Law Commission’s discussion cited above clearly showed that the section was not intended to affect the other basic requirement for a claim for contribution that the defendant must establish that the third party was liable to the plaintiff.  That basic requirement was similarly emphasised by the Law Reform Commission of Hong Kong in its Report on the Law Relating to Contribution between Wrongdoers (which led to the enactment of the Contribution Ordinance in Hong Kong), at §5.12:

“… the claimant (D1) can only recover contribution from the defendant (D2) if he establishes that D2 was liable to P.”

31.  In short, the function of the statutory assumption is to ensure that there is a reasonable cause of action by the plaintiff against the defendant such as to (1) make the defendant liable in law to the plaintiff in respect of the damage, and (2) enable the defendant to further make a claim for contribution in respect of the same damage against a third party despite the fact that there was a settlement between the defendant and the plaintiff. 

32.  At the end of section 3(4) of the Contribution Ordinance is a proviso, ie “provided, however, that he would have been liable assuming that the factual basis of the claim against him could be established”.  The proviso was inserted at the Committee stage of the UK Civil Liability (Contribution) Bill and hence the UK Law Commission Report said nothing about this proviso.  This is, as was said by both the Law Reform Commission of Hong Kong and the UK Law Commission, to emphasise, amongst others, the bona fide element of the settlement.  An example was given to illustrate the purpose of the proviso:

“Thus if D1 settles with P in a situation where D1 was clearly not liable to P, even if P could establish the facts relied upon, D1 could not claim contribution from D2. …”

See the Report on the Law Relating to Contribution between Wrongdoers, at §5.14.

33.  On a proper interpretation of sections 3(1) and (4), D1 must prove, among other things, that TP is liable to P (in the sense that P is entitled to recover compensation from TP) and that such damage is the same damage for which D1 is allegedly liable to P.  Section 3(1) is subject to the following provisions of section 3, including section 3(4) which requires the settlement to be bona fide.

ISSUE A - WHAT IS D1 REQUIRED TO DO IN ORDER TO ESTABLISH HIS OWN BREACH OF FIDUCIARY DUTY FOR THE PURPOSE OF THE DISHONEST ASSISTANCE CLAIM?

34.  A cardinal principle of statutory interpretation is that all of the relevant provisions must be read together and in the context of the whole statute as a purposive unity in its appropriate legal and social setting: Medical Council of Hong Kong v Chow Siu Shek (2000) 3 HKCFAR 144, 154B-C, Bokhary PJ.  The different sections in a statute (and all the more so for different parts of the same section) should be read in a consistent manner.

35.  D1’s proposition is that: where (i) P and D1 have settled and (ii) insofar as there are any overlapping material facts to be established in the Main Action and the third party proceedings, the statutory assumption would apply.  In other words, in the third party proceedings, D1 does not have to prove facts overlapping those in the Main Action.  Otherwise the very vice that section 3(4) intends to remove (namely D1’s practical inability to prove against himself) would be resurrected through section 3(1), and no third party who is liable as an accessory would ever be liable for contribution.

36.  Mr Joffe and Ms Sit relies on the case of Dubai Aluminium Co Ltd v Salaam and ors [2003] 2 AC 366 for their proposition.  At §69 of the judgment, Lord Hobhouse had this to say:

“69 Section 1(1) of the 1978 Act requires the person claiming a contribution to prove that he was a “person liable in respect of” the damage suffered by the injured party. But subsection (4) qualifies this where the person claiming the contribution has made a bona fide settlement or compromise of the claim against him, in which case all he need prove is that he would have been liable “assuming that the factual basis of the claim against him could be established”. This raises the question: how is the factual basis of the claim against him to be identified? The answer to this question must obviously depend upon the circumstances. The claim may have been settled or compromised without the commencement of legal proceedings or it may only be settled later after the exchange of pleadings or during the trial. Some proceedings may be governed by strict procedural rules; others may allow a party to inform the other of the factual basis of his claim with greater informality. Pleadings may be dispensed with. In the Commercial Court factual allegations can be particularised informally in a number of ways.

70 In the present case the factual allegations in the pleading were more than sufficient to lay the factual basis for a liability of the partnership under section 10 of the Partnership Act 1890 in the tort of deceit. So, once it is appreciated that it is a case of the vicarious liability of the partnership for the tort committed by one of the partners in the course of the partnership business no further problem arises under this head. But I would not wish it to be thought that material other than pleadings may never have to be looked at. The variety of circumstances to which I have already referred demonstrates this. Further, if the state of the pleadings is to be decisive, a defendant wishing to compromise a case may have to insist that the claimant first amend his pleading so as to make express the basis of claim which justifies the settlement, even though neither would be taken by surprise nor able later to resist appropriate amendments. The purpose of subsection (4) is to facilitate bona fide settlements without prejudicing the rights of the paying party to claim a contribution from another. Of course the factual basis for the claim has to be identified in order to enable the remainder of section 1 to be applied but it would be mistaken to introduce inappropriate formalities into the criterion required by the subsection.” (underline added)

Lord Hobhouse’s statement was in the context of the liability of a defendant to the plaintiff in the main action, as opposed to the liability of the third party to the plaintiff in the contribution proceedings.

37.  On a proper construction of the statutory provisions, I agree with Mr Joffe and Ms Sit.  Their construction tallies with the legislative intent expressed in §45 of the UK Law Commission Report, especially the first of the three points therein.  Accordingly, D1 does not have to prove his own breach of duty because of the statutory assumption, but he has to prove other elements of the dishonest assistance claim against TP. 

ISSUE B: WHETHER TP ASSISTED IN D1’S BREACH OF DUTY

38.  As in all situations where assumptions are made, those assumptions can be displaced by evidence to the contrary.  The court is not precluded from considering materials beyond pleadings in the main action: Dubai Aluminium, §70.  And as in all cases, even those in which he relies on the statutory assumption, a party is bound by his own pleadings.

39.  In the present case, the TPSOC was filed after the settlement. See paragraph 16 above.  D1’s express denial (in the Main Action, the third party proceedings and his witness statements) that the 801 Shares fell within the Estate meant that there could not be a failure to collect them in.  Hence it could not be said that D1 had put himself in a position of conflict, thereby causing loss of the Estate’s property by reason of the 1989 Acts. In fact, as Mr Joffe stated in his oral closing submission, if D1 had amended the TPSOC, D1 would be contradicting his own witness statements.

40.  Li Sui Chee unequivocally confirmed that he was not in a position to dispute D1’s position set out in paragraph 16 above.

41.  Further, as shown in Li Sui Chee’s witness statement, one of the concerns that gave rise to the Settlement was that Li Hoi Yeung (one of the 3 Shareholders) might have been a genuine person.

42.  Even after the Settlement, D1 has maintained in correspondence (between 2015 and 2017) that the 801 Shares did not form part of the Estate. See the letters dated 11 August 2015, 17 August 2015, 9 March 2016 (including a draft letter to the Deputy Commissioner of Estate Duty), 29 June 2017, and 24 July 2017.

43.  In the premises, the statutory assumption was displaced by D1’s own pleadings and first-hand evidence to the contrary.  Consequently, there was no breach of fiduciary duty in which TP could have assisted.  That was sufficient to dismiss the claim for contribution.

44.  In the following analyses, I shall assume that I am wrong and there was breach of fiduciary duty in which TP could have assisted.

ISSUE C: WHETHER THERE WAS DISHONESTY ON THE PART OF TP

C1.  The law on dishonesty

45.  The law is not in issue and has been aptly summarized in counsel’s written submissions.

46.  Dishonesty is an objective standard but also has a strong subjective element.  It has to be proved with cogent and compelling evidence.  See by analogy Re H (Minors) [1996] AC 563, 586D-587F, per Lord Nicholls.

47.  It is an objective standard because the courts apply the normally acceptable standards of honest conduct in determining whether the accessory is dishonest.  It mattered not that the accessory judged by different standards: Royal Brunei Airlines Sdn Bhd v Philip Tan Kok Ming [1995] 2 AC 378, 389C-F, Lord Nicholls; Barlow Clowes International Ltd v Eurotrust International Ltd [2006] 1 WLR 1476, §§10, 12-16, Lord Hoffmann.

48.  The accessory has the requisite dishonest state of mind if he knows it involves an application of trust assets to the detriment of the beneficiaries.  Or he may harbour suspicion but deliberately closes his eyes and ears, or deliberately refrains from asking questions, lest he learns something he would rather not know, and then proceeds regardless: Royal Brunei v Tan 389F (per Lord Nicholls); Barlow Clowes §§10-12.

49.  Since the standard is objective, so the court will take into account the circumstances known to the accessory at the time he acted, including:

(a)   the nature and importance of the proposed transaction;

(b)   whether the transaction serves another purpose in which the accessory has an interest of his own;

(c)   the importance and nature of the accessory’s role;

(d)   the ordinary course of business;

(e)   the degree of doubt;

(f)   the practicability of the trustee proceeding otherwise; and

(g)   the seriousness of the adverse consequences to the beneficiaries.

The court will also have regard to the accessory’s personal attributes such as his experience and intelligence; the reason why the accessory acted as he did.  Royal Brunei v Tan, 390F-H, 391B-C, Lord Nicholls.

50.  The subjective aspect is concerned with ascertaining the circumstances actually known to the person in question, as distinct from what a reasonable person would have known or appreciated: Royal Brunei v Tan at 389D and 391B-C, Lord Nicholls.  The objective aspect is concerned with an objective assessment of the person’s mental state as established by the subjective element.  Barlow Clowes §10.

51.  For the most part, dishonesty is to be equated with conscious impropriety, and not with negligence, carelessness or imprudence.  It is vital to remember, and must be strongly re-emphasised, that in applying the objective standard to determine dishonesty, a court does not ask what a reasonable person would have known or appreciated or done in the circumstances of the defendant.  Royal Brunei v Tan, 389 C-D & H; Aktieselskabet Dansk Skibsfinansiering v Brothers (2000) 3 HKCFAR 70 at 83H-J, Lord Hoffmann NPJ.

52.  The facts which a party must have known before he can be said to have acted dishonestly will vary from case to case, but at the very least the party must have known “the person he is assisting is not entitled to do what he is doing”: Underhill and Hayton, Law Relating to Trusts and Trustees, 19^th ed (2016), §98.67.

53.  Accordingly, TP should only be found to have dishonestly assisted in D1’s breach of fiduciary duty if TP had actual knowledge that the 801 Shares should vest in the Estate such that D1 was not entitled to do what he was doing, i.e. engaging in the 1989 Acts. 

C2.  Pleading dishonesty

54.  There are strict rules on pleading dishonesty. A plaintiff who alleges dishonesty must plead and establish facts to show that the defendant was dishonest and not merely negligent.  The Court will not infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with innocence. 

55.  In Three Rivers DC v Bank of England (No 3) [2003] 2 AC 1 at §§184-186, Lord Millett stated as follows:

“[184] It is well established that fraud or dishonesty (and the same must go for the present tort) must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence ... This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so.

[185] It is important to appreciate that there are two principles in play. The first is a matter of pleading. The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him. If the pleader means 'dishonestly' or 'fraudulently', it may not be enough to say 'wilfully' or 'recklessly'. Such language is equivocal. …

[186]   The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient. This is only partly a matter of pleading. It is also a matter of substance. As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.”

56.  These principles were followed in Peconic Industrial Development Ltd v Yu Ka Hong Paul [2006] 4 HKC 406 at §33 Cheung JA.

57.  See also Hong Kong Civil Procedure 2018, Vol 1, §18/8/15 which stated that an allegation that the defendant “knew or ought to have known” is not a clear and unequivocal allegation of actual knowledge and will not support a finding of fraud.

C3.  The pleaded case on dishonest assistance against TP

58.  The relevant paragraphs are §5(3) and 6 of the TPSOC:

“5(3) The Third Party participated in the [1989 Resolutions and Disposals] with knowledge that the 801 Shares should vest in the Estate (as alleged by the Plaintiff, which is denied) and [the 1989 Acts] would have had a dilutive effect on the value of the 801 Shares and hence such acts would have amounted to a breach of fiduciary duties on the part of LST qua administrator.

(a) The Third Party knew, at all material times, that LST was the sole remaining administrator of the Estate.

(b) It is the Plaintiff’s case that the Third Party (together with LST) had knowledge that the 801 Shares should vest in the Estate.

(c) The Third Party in participating in the [1989 Resolutions and Disposals] knew or must have known that the same would have a dilutive effect on the value of the ordinary shares of the 3^rd Defendant, including the 801 Shares, that being a direct consequence of the [1989 Resolutions and Disposals].

…

6. In the premises, assuming the factual basis of the claims by the Plaintiff against LST could be established, the estate of LST would have been liable to the Plaintiff as claimed in the Re-Re-Amended Statement of Claim, and the Third Party is liable to contribute to such extent as may be found by the court to be just and equitable …” (underline added)

59.  Without disrespect, the pleading was deficient at least in 3 aspects, namely, (i) failure to aver that the 801 Shares fell within the Estate; (ii) failure to plead TP’s knowledge; and (iii) failure to give particulars as to dishonesty. 

60.  With regard to the first failure, in fact, D1 denied that the 801 Shares fell within the Estate.  I repeat paragraphs 39 and 40 above.

61.  With regard to the second failure, P had withdrawn his initial allegation that TP had such knowledge: §39 of the re-re-amended statement of claim.  Yet in TPSOC, §5(3), D1 alleged that TP had knowledge that D1’s actions would have amounted to breach of fiduciary duty as an administrator. The basis for asserting that TP had knowledge was the dilutive effect on the value of the 801 Shares as a direct consequence of the 1989 Acts. 

62.  TP did not deny participation in the 1989 Acts and the dilutive effect at the trial, but that was different from saying that TP knew that the 801 Shares fell within the Estate or that he knew D1 was acting in breach of fiduciary duty.  Both D1 and TP had consistently denied in their defences and witness statements such knowledge.

63.  D1 raises a new case on knowledge at the trial, alleging that given what had transpired up to 1987 and the 1989 Acts thereafter, P raised issue with D1 regarding the 801 Shares in 1987, D1 must have informed TP of P’s threat to take action; and that in response, D1 and TP together hatched a plan to deal with those threats by implementing the 1989 Acts (collectively “the New Case”).

64.  I consider it to be wholly unjust to permit D1 to run the New Case after TP has passed away. 

65.  Anyway, P’s threats regarding the 801 Shares and request for D1 to get them in had been communicated to D1 by solicitors’ correspondence between August 1987 and 15 January 1988. D1 had admitted the communication but there was no suggestion that TP was informed or involved in it.

66.  In his amended defence in the Main Action, TP expressly pleaded that the correspondence did not concern him and he made no admission thereto.  There was no evidence to contradict this plea.

67.  In any case, the knowledge to be established must be of facts and not of mere claims or assertions:  Baden v Société Générale SA [1993] 1 WLR 509 at §249 (Peter Gibson J).  The mere fact of D1 having informed TP of P’s threats was insufficient to establish or infer dishonesty.  At best, it purported to show only that TP “must have known” as opposed to TP knew.

68.  The third failure to plead dishonesty was fatal. D1 invites the court to draw inferences on the objective facts.  Mr Joffe says that there was a highly unusual, elaborate and expensive corporate restructuring in 1989 for no conceivable commercial purpose.  D1 suggests that TP participated in that restructuring and incurred considerable expense to that end because he knew the 801 Shares would revert to the Estate, such that it was worth the trouble and expense of engaging in this complicated restructuring to strip the value of the 801 Shares before P could lay his hands on them.

69.  With respect, the court is not permitted to do so without a proper plea on dishonesty.  Nor could TP be blamed for saying little to explain the highly unusual 1989 Acts, because he had no case on dishonesty to meet. 

C4.  Objective facts pointing to dishonesty

70.  The objective facts are well documented.  They are summarized in §35 (pp 14-19) of the closing submission of Mr Joffe and Ms Sit.  I analyze the evidence for the sake of completeness, in case I have taken a wrong view of the pleading.

71.  Over the years (from 1963 to 1984), P had on many occasions tried to monetize his interests in the Estate and the Company.  In 1971 he petitioned for winding up against the Company, ending up with the 1971 Agreement whereby D1 and TP agreed to purchase in equal shares the 692 shares registered in P’s name.  By the 1981 Agreement, P, D1 and TP agreed upon their respective shares in the Estate.  The 1984 Deed dealt with distribution of the remaining assets of the Estate and released D1 as administrator from claims and demands in respect of the Estate.

72.  Throughout the years of dealing with P, D1 and TP had always acted together, on the basis that D1 and TP would have equal interests in the Estate and the Company.  This could be seen from (i) the terms of the 1971 Agreement; (ii) the agreed distribution ratio under the 1981 Agreement; and (iii) the transfers and acquisitions of shares in the Company over the years which resulted in D1 having 1,173 shares and TP having 1,174 shares as at 1989.

73.  The 1989 Acts involved an elaborate, well-planned, and costly corporate restructuring using nominee companies and at least 2 trusts (LSK 1989 Trust and LST 1989 Trust) for which D1 and TP had retained JSM to advise on.  It took a year for advice to be obtained and then D1 and TP began in February 1989 to implement the 1989 Acts. JSM was involved throughout to prepare corporate vehicles, resolutions and conveyancing documents regarding sale of the Company’s real estate.

74.  The Company was incorporated in 1946.  No significant corporate events happened after P’s winding-up petition in 1971 until 1989.  There was nothing to show why there was suddenly a need to create a class of preference shares. 

75.  The preference shares were allotted to Gregson Ltd and Dredson Ltd, plainly corporate vehicles associated with D1 and TP.  They were created by JSM, and the directors of these 2 corporate vehicles were JSM’s partners. 

76.  A mere 2 weeks after the 2 Trusts were established, on 30 June 1989, D1 and TP caused the Company to dispose of all its real estate to Arracourt Ltd and Aucilla Ltd (also not disputed to be entities associated with D1 and TP).  There was no dispute that the “sales” were at market value.

77.  The Company was not in need of funds. There was no apparent reason why the Company suddenly had to dispose of all its properties, and to D1 and TP, as opposed to independent third parties.  The sale proceeds were used to declare dividends to the preference shareholders, ie to no one but D1 and TP beneficially.

78.  If it had been D1 and TP’s intention to have the landed properties change hands, the question remained why they had to do so at such inconvenience and great expense? 

79.  The 1989 Acts could not possibly be in the “normal” course of business as suggested by TP in his defence.  They were done without regard to the interests of the 3 Shareholders.  The irresistible inference was that the 1989 Acts were to take the value of the real estate out of the Company to Arracourt and Aucilla. 

80.  The combined value of the real estate in 1989 was $954,000,000.  The real estate was held by Arracourt and Aucilla as tenants in common. Arracourt and Aucilla formed a partnership known as “Aucilla and Arracourt Partnership”. The business of the Partnership included “investing in properties, shares and other assets”.  The “key assets of the Partnership” was Li Po Chun Chambers. There were plans to redevelop LPC Chambers (as could be seen from the valuation reports dated 23 May 1989) and Wing Lok Street.  Three other properties were let out. 

81.  It was plain, in my view, that the Partnership was set up to enable TP and D1, through Aucilla and Arracourt, to carry on the business which (but for the disposals) would have been carried out by the Company. 

82.  By the Partnership, D1 and TP could obtain the economic benefits of that business for themselves alone through the respective Trusts.  Each of them was a direct beneficiary to the Partnership and each was likely to have a 50% interest (valued at about $477,000,000) thereunder.

83.  The timing of the 1989 Acts was consistent with their being a response to P’s threats made in 1987 and repeated in the 2 subsequent years.

84.  Given (i) the unusual nature of the 1989 Events from the Company’s point of view; (ii) the lack of any real explanation for this elaborate and costly exercise; (iii) the pivotal role played by D1 and TP therein; and (iv) their direct and substantial personal gain arising from the 1989 Events, the irresistible inference was that the 1989 Acts served no real purpose other than (a) to strip the 801 Shares of any real value and (b) to remove the Company’s business to a structure controlled by D1 and TP. 

C5.  Subjective element of dishonesty

85.  The next question is TP’s knowledge.  Li Sui Chee accepted in the witness box that he had no bases:

(i)   to suggest that TP knew that the 801 Shares should form part of the estate;

(ii)   to dispute TP’s averments in his witness statement that TP was never informed, had never thought and did not believe that the 3 Shareholders were fictitious; or

(iii)   to dispute that TP did not have any knowledge that the 801 shares should form part of the Estate when the 1989 Acts were undertaken.

86.  Li Sui Chee also confirmed in the witness box that he had no personal knowledge of what had happened between D1 and TP after P made threats to D1 regarding the 801 shares in 1987. He accepted that he had no personal knowledge to support the New Case.

87.  According to P’s witness statement, the Company was a family company incorporated by Mr Li Po Chun.  Mr Li Po Chun was a very traditional Chinese merchant and P considered that he would not admit non-family members as shareholders of the Company.  Prior to the death of Mr Li Po Chun, P had never heard of the names of the 3 Shareholders and there were no family members of those names.  The address of the 3 Shareholders which stood in the Company’s records used to be 61 Robinson Road which had been demolished.  P who had been there to collect rent had never known anyone by the names of the 3 Shareholders. 

88.  Four months before his death, Mr Li Po Chun executed a declaration showing that P, D1 and TP each had 2 aliases by which they held shares which Mr Li Po Chun gave them by way of gift.  According to P, Mr Li Po Chun’s mechanism of using fictitious names to make gifts to his sons applied not only to the shares in the Company but also to shares in the Bank of East Asia Limited.

89.  TP, however, suggested that the 3 Shareholders were not fictitious. Li Hoi Yeung, was one of the 2 original subscribers to the Memorandum and Articles of Association of the Company. Li Hoi Yeung had signed the Memorandum and Articles of Association in the presence of Mr Wai Chiu Hung (“Mr Hung”), then a solicitor with Deacons.  Li Hoi Yeung remained as one of 2 directors between the date of incorporation and 11 August 1964.

90.  By a statutory declaration dated 31 October 1946, Mr Hung declared that all the requirements of the Companies Ordinance 1932 in respect of matters precedent to the registration of the Company had been complied with, including, amongst others, that there had to be to subscribers, each of whom must sign the Memorandum and Articles of Association of the Company pursuant to sections 6 and 12 of the then Companies Ordinance.

91.  The Company’s particulars of directors filed on 1 November 1946 included the provision of specific personal information of Li Hoi Yeung to the Company’s solicitor (not Mr Hung).

92.  The Company’s annual returns for 1957 and 1959 were signed by Li Hoi Yeung as one of two directors of the Company.

93.  Bought and sold notes regarding transfer of shares in the Company dated 28 April 1951 were signed by each of the 3 Shareholders and stamped.

94.  Whilst Mr Li Po Chun executed a declaration saying that some shareholders’ names were aliases of P, D1 and TP, he never executed one in relation to the 3 Shareholders.

95.  These facts in paragraphs 89-94 showed that at least Li Hoi Yeung, if not also the other 2 Shareholders, was not fictitious.  Even Li Sui Chee took into account this possible scenario when computing the settlement sum with P (§32 of Li Sui Chee’s witness statement).

96.  There was no evidence to support the New Case.  I repeat paragraphs 65-67 above.

97.  Mr Joffe suggests that TP must have well known that P would have used any pretext to extract more money from D1 and TP.  I do not think this was an irresistible inference.  P’s threat of action in 1987 came years after the 1971 Agreement, 1981 Agreement and 1984 Deed when distribution of the Estate appeared to have been completed and the administrator released.  Without the requisite knowledge, TP’s involvement in the 1989 Acts may be consistent with innocence.  He could not be blamed for not offering explanations on various matters or putting forth a lame defence that the corporate acts were done in the ordinary course of business or that the real estate was sold at market value. 

98.  Applying the objective and subjective tests for a charge of dishonesty, D1 simply failed to prove that TP knew that the 3 Shareholders were fictitious, that there was trust property that D1 should have collected in, or that TP knew of D1’s breach of trust, such that D1 and/or TP was not entitled to engage in the 1989 Acts.

99.  D1 had no excuse for not adducing enough evidence.  This case did not have the vice referred to in §45 of the UK Law Commission’s Report (paragraph 28 above).  Not only could D1 (in his lifetime) prove his own breach of duty but he could have provided first-hand evidence of TP’s knowledge and dishonesty, if any.  D1’s executors could have made concessions or invited the court to draw the same inferences of breach of duty and dishonesty against D1, but they chose to rely on D1’s witness statements.

ISSUE D - THE EXTENT OF CONTRIBUTION IF TP IS HELD LIABLE TO CONTRIBUTE

100.  Again, I only deal with this issue for the sake of completeness.

101.  According to section 4(1) of the Contribution Ordinance:

“Subject to subsection (3), in any proceedings for contribution under section 3 the amount of the contribution recoverable from any person shall be such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question.”

102.  TP was not consulted when D1 settled with P.  D1 suggests that there should be equal apportionment but TP’s position is that TP should only contribute, say, 30% of the Settlement Sum.  He submits that D1, being the sole administrator, had an ongoing duty to collect and get in the assets of the Estate.  The 1989 Acts would not have been possible if D1 did not commit an antecedent breach of duty in failing to get in the 801 Shares for the Estate.  On this basis, the causative potency and moral blameworthiness of the acts of D1 were greater than those of TP’s.

103.  I am unable to agree.  D1 could not have performed the 1989 Acts without TP’s participation.  TP and D1 obtained equal benefits out of the 1989 Acts.  The settlement was rightly accepted by TP as bona fide.  Accordingly, if I had found liability against TP, I would have no hesitation in requiring him to contribute to 50% of the Settlement Sum.

CONCLUSION

104.  The statutory assumption that D1 could and did rely on was displaced by his own pleading and evidence.  There were no pleas or evidence that the 801 Shares fell within the Estate, that TP knew that the 801 Shares did fall within the Estate, that he knew D1 was in breach of trust or that TP was dishonest in assisting D1 in the 1989 Acts.  D1 fails to prove that TP was liable to P.  I dismiss the claim for contribution. 

105.  Costs should follow the event and be to TP with certificates for 2 counsel.  I make an order nisi accordingly.

106.  I thank counsel for their able assistance.  I also thank the solicitors for preparing the bundles in a very easy to comprehend manner.