SHUN HING HOLDINGS CO LTD AND OTHERS v. LI KWOK PO DAVID also known as DAVID LI KWOK AND OTHERS

HCA 664/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 664 OF 2012

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HCA 2417/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2417 OF 2014

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D E C I S I O N

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1.  There are 3 Summonses before the court in relation to 2 connected actions – HCA 664/2012 (“1^st Action”) and HCA 2417/2014 (“2^nd Action”).

Background

2.  These actions arose after the late Dr William Mong (“Mong”) passed away in July 2010.  Many people in Hong Kong would have heard about Mong.  He was a self-made billionaire, who started trading in electrical and electronic products in 1953.  He developed an exclusive business relationship with the Matsushita group of Japan (which later became Panasonic Corporation), a well-known maker of electrical appliances under various brand names including “National”, “Panasonic”, “Rasonic” and “JVC”. 

3.  Mong conducted his business via various companies under the Shun Hing Group, which was founded by him.  The plaintiffs in the 1^st Action are members of this group.  The 1^st defendants are the executors of Mong’s estate (“Estate”).  They are taking a neutral stance in this action.  The 2^nd and 3^rd defendants (“Cynthia” and “David”) are Mong’s daughter and son under his first marriage[1], which was dissolved in January 2002.  The 3^rd and 4^th defendants are respectively the widow (“Wong”) and daughter (“Perlie”) of Mong.  For reason which will become obvious, neither Cynthia nor David is contesting this action. 

4.  In the 1^st Action, the plaintiffs claim against Mong for alleged breach of fiduciary duties and breach of trust during the subsistence of his directorship in those companies by diverting monies (in the region of HK$872 million) belonging to the plaintiffs to himself and/or third parties nominated by him (“Unauthorised Transfers”).  It is contended, alternatively, that the Unauthorised Transfers constituted loans from the plaintiffs to Mong[2]. Upon his death, such liability fell upon the Estate, which is represented by the 1^st defendants.  All the other defendants are joined because they are the beneficiaries of, and thus have an interest in, the Estate.

5.  At a high level of generality, Wong and Perlie[3] oppose the plaintiffs’ claim on the basis that there was an agreement between, inter alia, the plaintiffs and Mong that the latter’s liabilities towards the former would be shouldered by other entities, including one Liberian company known as Timmerton Co Inc (“Timmerton”).  Wong and Perlie rely upon the fact that in the plaintiffs’ audited financial statements (“FS”) over many years Mong’s alleged liabilities to the plaintiffs were consistently booked against those other entities as their liabilities.  Wong and Perlie say that the subsequent reversals of those accounting entries by the plaintiffs after Mong’s death, ie, booking the withdrawals of funds against Mong, are improper[4]. 

6.  The reversals of the accounting entries are not in dispute.  The plaintiffs say that the reversals accurately reflect the true nature of the transactions in question.

7.  The 2^nd Action was initiated by 2 of the plaintiffs of the 1^st Action (“SHEH” and “SHET”).  These 2 companies claim against Wong for knowing receipt of 3 sums (out of the Unauthorised Transfers) totalling HK$280 million.  It is alleged that out of the monies wrongfully diverted away from SHEH and SHET by Mong, Wong received HK$280m with the requisite knowledge[5].

8.  Wong has filed what appears to be a “holding Defence” in the 2^nd Action, in which she referred to the 1^st Action and made no admission to both the issues of receipt of the HK$280m and her knowledge.  However, she specifically denies that she was put on notice (of any wrong) and denies any basis for the claim against her[6]. 

9.  Under Mong’s Will dated June 2007, he provided generously to David and Cynthia.  The latter had been given HK$100m, whilst the former had received the shares of a number of companies, including (i) a BVI company called Timmerton Co Inc (“Timmerton BVI”) which owns 40% of the shares in Shun Hing Holdings Co Ltd (“SHH”) (the 1^st plaintiff in the 1^st Action and the holding company of the Shun Hing Group); and (ii) Mong’s 30% interest in Timmerton (the other 70% are held by the children of Mong’s first marriage).  By virtue of such gifts, David has become the largest single shareholder of both Timmerton and SHH.  It appears that these companies are now controlled by David, which may explain why, after the Mong’s death, Timmerton (which owns 10% of SHH) has refused to acknowledge the debts owed to the Shun Hing companies in accordance with the FS.

10.  Wong and Perlie are entitled to the residue of the Estate, which includes a landed property in Shek O valued at about HK$1 billion. 

11.  It appears from the particulars of the Unauthorised Transfers[7] that Mong was using the resources of the Shun Hing companies freely, eg, substantial amounts of expenses of a personal nature were paid by the companies on Mong’s behalf.  On the other hand, the FS and the related written representations to the auditors by the directors suggest that everything was above board and had passed the scrutiny of the auditors.  However, what had transpired many years ago are now put under the microscope of company lawyers. 

The Summonses

12.  In chronological order, they are as follows :

(a)  Wong’s Summons dated 6 April 2016 in the 2^nd Action for strike out or stay of proceedings or alternatively for limiting the discovery (“1^st Summons”);

(b)  A Summons dated 21 April 2016 of the plaintiffs in both Actions seeking an Order that the 1^st Action and the 2^nd Action be heard and tried together and to compel Wong to make discovery in the 2^nd Action (the “2^nd Summons”); and

(c)  Wong’s Summons dated 23 August 2016 in relation to the 1^st Action such that the pleas concerning breach of fiduciary duty and/or breach of trust be struck out (“3^rd Summons”).

13.  In the course of the hearing, Mr Chang SC, appearing for Wong with Ms Po and Mr Yuen, had abandoned the 3^rd Summons.  This court is therefore only concerned with the 1^st and 2^nd Summonses.  If the 2^nd Action is stuck out under the 1^st Summons, the 2^nd Summons would become redundant.

Knowing receipt

14.  The arguments here rest within a narrow compass: whether SHEH and SHET have a viable claim that Wong had knowledge of the alleged breach of fiduciary duty or trust on Mong’s part. It is undisputed that in the absence of such a viable claim the 2^nd Action cannot stand.  The relevant plea is contained in para 17 of the SOC as follows :

“17. The Defendant received the Unauthorised Transfer Sums with knowledge of the following facts which put her on inquiry as to the source of the Unauthorised Transfer Sums and the Deceased’s authority (or the lack thereof) to transfer the same to her :-

PARTICULARS OF KNOWLEDGE

(1) Each of the Unauthorised Transfer Sums was transferred by the Deceased to the Defendant in addition to the household expenses which the Deceased regularly gave the Defendant every 2 to 3 months in the range of HK$300,000 to HK$600,000 (“the Household Expenses”).

(2) The value of each of the Unauthorised Transfer Sums was substantially and significantly larger than the Household Expenses which the Defendant received from the Deceased from time to time.

(3) The Unauthorised Transfer Sums, in the total amount of HK$280,000,000, were transferred to the Defendant within a short period of 5 months.

(4) The Defendant had never received such a large sum of HK$280,000,000 from the Deceased within 5 months.

(5) The Deceased was the founder of the Shun Hing Group, and had the power to withdraw monies from the companies within the Group. Having regard to the substantial amounts involved, it was highly likely that the sums came from companies within the Shun Hing Group.

(6) The Defendant never gave consideration for any of the Unauthorised Transfer Sums; and had no right to receive any monies from any of the companies within the Shun Hing Group.”

15.  On behalf of the SHEH and SHET, Mr Lam SC (appearing with Mr Lung and Ms Seto) relied on the CFA authority of Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 3 HKCFAR 479 for the requisite mental element for knowing receipt (see §§62, 127, 134 and 135).

16.  For completeness, in paras 18 to 21 of the SOC it is alleged that Wong should have made inquiries on (a) the source of the HK$280m and (b) Mong’s authority to make those payments to her; that she turned a blind eye regarding the source of the funds and the requisite authority to transfer them to her; that it was irrational for her to assume or believe that Mong had the requisite authority; and that it is unconscionable for Wong to retain the benefit of the funds. 

17.  It should also be pointed out that para 8 of the SOC pleads as follows :

“At all material times, the Defendant was not a shareholder, director, officer, business associate, or otherwise involved in or related to the business operations, of any of the companies in the Shun Hing Group, including the Plaintiff Companies.”

18.  In addition to the pleas in the SOC, there is uncontroverted evidence that Mong was a man of immense wealth.  As an indication of his wealth, he paid his ex-wife HK$1 billion to settle the ancillary relief claim.  The 3 payments in question were all made by way of cheque from Mong’s personal bank account.  They were, according to para 11 of the SOC, made on 2 December 2008, 4 February 2009 and 27 April 2009.  Mong was very ill in early 2009 and he died in July 2010 at the age of 82.

19.  Given the timing of these payments, it is plain common sense that they were made with the view to secure the future of Wong and Perlie, who was about 15 years old at the time[8].

20.  With respect, I have great difficulty understanding the basis for the second sentence in para 17(5) of the SOC.  By that plea, it is alleged that because the sums given to Wong were substantial, it was highly likely that they came from the Shun Hing companies.  First of all, all 3 payments came from Mong’s personal account.  Secondly, it is the plaintiffs’ own case that Wong had no involvement with any of the companies in the Shun Hing Group.  Thirdly, it is an empty assertion with no identifiable basis.

21.  I am unable to agree with Mr Lam that the court is, for purpose of the present strike out application, bound to accept the pleaded case of SHEH and SHET.  I see no reason to accept an untenable plea. The whole point of the present exercise is to strike out such pleas. 

22.  Despite Mr Lam’s attractive submissions, I am unable to see any reason why the receipt of HK$280m from her immensely wealthy husband during a period of 5 months at the time when he was very ill would have raised any suspicion on Wong’s part, let alone the suspicion that he might have misused the money of his companies.

23.  If the case of SHEH and SHET is taken to its logical conclusion, every time when a wife receives an unusually substantial gift from her immensely rich husband, she will have to inquiry if he had committed a wrong against his company.  There is no support in either common sense or law for such proposition. 

24.  I agree with Mr Chang that there is no merit in the 2^nd Action.  It is accepted that an obviously unsustainable case is liable to be struck out as frivolous (see Hong Kong Civil Procedure 2016, vol 1, pp 451-452, 18/19/8).  I am satisfied that the requisite threshold has been met and the 2^nd Action is accordingly struck out.

Conclusions

25.  The 2^nd Action is struck out.  I make an order nisi that the costs of that action, including the costs of the 1^st Summons, be to Wong with a certificate for 2 counsel.  However, the costs of the affirmations of Mr Raymond Lo filed on 6 April 2016 and 8 July 2016 are disallowed.  It is generally inappropriate for a solicitor to give evidence on behalf of his lay client: see UES International (HK) Ltd v Maritima Maruba SA, HCA 632/2011, 19 November 2013, §§13-17.

26.  The 2^nd Summons be dismissed with an order nisi that the costs of the Summons be to Wong with a certificate for 2 counsel.  For the reason stated above, the costs of Mr Lo’s Affirmation filed on 8 July 2016 are disallowed. 

27.  The 3^rd Summons be dismissed with an order nisi that the costs of the Summons be to the plaintiffs with a certificate for 2 counsel.