Samuel Tak Lee v. Lee Tak Yan

CACV 118/1999

HEADNOTE

Company law - winding up - nature of order under s.182 of Companies Ordinance, Cap. 32.

CACV 118/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 118 OF 1999

(ON APPEAL FROM HCCW NO. 467 OF 1998)

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J U D G M E N T

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Rogers, J.A. :

1. This is an appeal from an order made by Le Pichon J. on 8th April 1999 under Section 182 of the Companies Ordinance, Cap. 32. The order followed a decision handed down on 16th March 1999. The order was in the following terms:

Background

2. On 10th July 1998 the Petitioner presented a petition to wind up the Company on the Just and Equitable ground and in the alternative sought relief under Section 168A of the Companies Ordinance. The 1st Respondent was the brother of the Petitioner. The Company is what has been termed a family company.

3. By separate proceedings, the Petitioner and his son sued his brother, the 1st Respondent. The 1st Respondent, who in those proceedings was, of course, the Defendant, is the executor of the estate of both the mother and father of the Petitioner and 1st Respondent. The Plaintiffs claimed nearly $13 million against the Defendant. The claim was in respect of dividends paid on shares in another family company, HY and HT Lee Brothers & Company Limited. The dividends had arisen since the death of the mother. In those proceedings, the Plaintiffs' case was that those dividends were paid into the Company. That was money which should have been retained in an executor's account. As a result there was a breach of trust.

4. In the course of these proceedings, the 1st Respondent has filed an affidavit in which he has said amongst other things:-

5. The Plaintiffs in the High Court Action applied for summary judgment and interlocutory injunctions. The matter came before Findlay J. in December last year. In his judgment dated 14th December 1998, Findlay J. proceeded on the basis that even accepting that the Plaintiffs would be entitled to receive the shares and the dividends that would only be when the administration of the estate of the mother was complete. That had not happened by December last year. The Judge however held that it was wrong that the dividends had been paid into the Company. Furthermore, this was exacerbated because there was no obligation to pay interest nor any obligation to repay on a fixed date.

6. Findlay J. then said:-

The matter then went back before Findlay J. on 21st January this year because the parties were in dispute about the form of order. The Plaintiffs argued that it should be a simple order that the Defendant should pay that sum of money into a fiduciary bank account. The Defendant argued that it should be an order that the Defendant do "cause and procure" the Company to pay the money into the bank account, that the 1st Plaintiff render such assistance as may be required to this end and that the Court should authorise the transfer by the Company because there may be difficulties in this by reason of the Petition in these proceedings. The Judge continued:-

It is in those circumstances that the application was made before Le Pichon J. for an order under Section 182. It will be borne in mind that Section 182 provides that:

7. Naturally in this case, it is not known whether there will in fact be a winding up by the Court. Any order applied for under Section 182 prior to a winding up order is, of course, a provisional order and may in the outcome have no effect. The purpose of Section 182 is to preserve the assets of the Company, primarily for the benefit of the unsecured creditors and to insure that there is no dissipation of assets after a Petition is presented and prior to the company being wound up.

8. In view of the facts as I have outlined, it was clear that the dividends were trust money and had been paid into the Company. Since the Company was at all material times controlled by the 1st Respondent who had full knowledge of the matter, the 1st Respondent's knowledge is deemed to be that of the Company. In those circumstances, the Company knew and must be taken to have known that the money which was received was trust money. Indeed, Mr. Yu S.C. on behalf of the Petitioner does not challenge that.

9. Coupled with that the Court, in different proceedings, has said that the dividends and interest arising thereon should be paid into a separate account. As between the Company and those entitled to the trust fund, there can be no doubt that the Company was under an obligation to make good the value of the funds received to those entitled to the trust fund or, empirically, the trust fund itself.

10. The judge below was well aware of all these factors and bore in mind that the executors themselves had not made the present application. She said:-

11. In view of the fact that the Company is clearly a cash rich company and that no creditors stand to be in any jeopardy whatsoever, it seems to be manifestly both in the interest of the Company and in the public interest that the Company should, so far as possible, insure that in so far as trust monies had been paid to, and the benefit of them received by, the Company, the value of them should be restored to the trust as soon as possible particularly in circumstances where there may be a winding up.

12. In those circumstances, not only do I not see any objection to the Order made below but in my view, it is manifestly right to make abundantly clear that should the Company so transfer money which has been demonstrated to the Court should be transferred, no objection can subsequently be taken by reason of Section 182 of the Companies Ordinance.

13. A number of objections were taken on this appeal by Mr. Yu on behalf of the Petitioner. In the first place it was said that there was no present intention on behalf of the Company to make the payment since there was no board meeting at which the same had been resolved. This Court is not in a position to make any determination as to the capacity of any person within the Company to authorise the payment nor can the Court form any conclusion as to whether a board resolution is necessary or otherwise. The question as to the validity of the authorisation of any payment as regards the Company's internal management is a matter which, if at all, would have to be determined in other proceedings.

14. Whilst it was submitted that the real intention of the 1st Respondent in seeking the order was to obtain the Court's authority to make the payment, the only order that was made and could be made under Section 182 was that any payment would not be void because of the provisions of Section 182. The order simply prevents any payment, which is made in accordance with the order, being subsequently held to have been void should a winding up order be made.

15. Nor does the Order in any way direct or authorise the timing of any disbursement. It simply says that a disbursement which falls within the terms of the Order will not be void. Still less does the Order direct the 1st Respondent not to pay or prevent him from paying the Company any money that he owes the Company.

16. At times Mr. Yu's submissions came close to saying that there would be no objection to an Order under Section 182 declaring that the payment of trust money into a trust account would not be void provided the 1st Respondent paid the Company what was said to be owing by him to the Company. Mr. Yu quickly tried to rephrase his position on the matter when he appreciated that the practical effect of such a stance would be that the redress of the Petitioner and the Company's private grievance against the 1st Respondent should take priority over the protection of a trust.

17. It was then argued that although the estate might have a personal claim against the Company, the 1st Respondent himself had no claim. Furthermore, because the 1st Respondent was a trustee who had allowed trust money to be paid into the Company in breach of his fiduciary duties, the Court would not assist him to right a wrong by relieving himself of liability for breach of his fiduciary duties. On the contrary, relying on the proposition that a trustee who wrongly uses trust money can be taken and treated as having used his own money, it was submitted that the money should be treated as having been lent by the 1st Respondent personally on terms that there was no fixed term for repayment and that it was interest free.

18. Whilst, of course, the law and equity will, in so far as it is possible, seek to insure that a trust fund does not suffer because of a breach of trust by a trustee, that does not mean that the assumptions which a Court is prepared to make to force a trustee to compensate a trust fund will prevent the Court from insuring that a trust fund receives payments which were due to it but which have been demonstrably diverted.

19. In this case, trust funds have demonstrably been diverted to the Company. The Company may well be owed a great deal of money by the 1st Respondent. No doubt the Petitioner's purpose in objecting to the Section 182 order was to attempt to force the 1st Respondent to pay into the Company the amounts said to be owing. There can hardly be said to be a balance to be made between whether, on the one hand, the Company should suffer by reason of the 1st Respondent's failure to pay what he owes the Company and, whether on the other hand, the trust fund should stand in jeopardy of not receiving the benefit of the dividends which have undoubtedly been diverted to the Company. But, in the circumstances of this case, it is undoubted that the law would protect, as far as possible, the trust fund and the Company and the Petitioner would be left to pursue their remedies against the 1st Respondent.

20. Put in another way, the application of the rule expressed in Wallersteiner v Moir (No. 2) [1975] QB 373 that the rule of equity that, whenever possible a trustee will be deemed to have acted properly will be brought to play to ensure that a trustee at fault will suffer personally rather than the trust fund does not extend to absolve a knowing recipient of trust funds from observing the rights of the trust.

21. Mr. Yu also submitted that before making a Section 182 order, the Court should be satisfied that any disposition sanctioned under an order would be in the interests of the Company. In my view, it can only be in the interests of the Company that it observes the interests of a trust fund and does not benefit from trust monies which it knowingly has received in circumstances which are alleged to be a breach of trust.

22. The argument that it is not in the interests of the Company to part with the money because it is entered in its books of accounts as an interest free loan could, perhaps not unkindly, be likened to a recipient of stolen property resisting restitution on the footing that he would be deprived of the enjoyment of the articles which he had received and that any restitution should be made by the thief alone. In my view, this appeal should be dismissed and an order nisi made that the 1st Respondent's costs of the appeal be taxed if not agreed and paid by the Petitioner.

Leong JA:

23. I agree.

Nazareth V-P:

24. I also agree.

25. The bequests of 2,750 shares and 130 shares to the petitioner and his son and the dividends received upon them were clearly trust property in the hands of the 1st respondent and his sister as executors. The 1st respondent, being in control of the day-to-day management of the company, his knowledge that the dividends were trust property must clearly be attributed to the company, and upon that basis it would be a constructive trustee. The return of such trust property to the trustees would plainly not have been a disposition of the property of the company. It follows upon that basis s.182 would not be engaged.

26. But what if the dividends transferred to the company by the 1st respondent were not dividends due to the petitioner and his son, but to the 1st respondent? This would produce the position under the "Wallersteiner fiction" [1975] QB 373, 398C-E that has been mentioned. That position would be further complicated by the 1st respondent's dividends being significantly less than those of the petitioner and his son, and also by the intermingling of the trust funds representing the dividends being intermingled by the company with its own funds. That would ordinarily result in the necessity for a tracing exercise to identify the precise funds. But why that should be necessary when clearly the company has ample funds to ensure full recovery and indeed that the order of Findlay J has now already been complied with, is not at all clear.

The judge held that:

Mr Benjamin Yu SC has questioned this conclusion of the judge and submits that there is a substantial issue behind the plaintiff's opposition to the summons and behind his appeal. The 1st respondent is indebted to the company to the extent of some $29m. If the judge's order were to stand, then the company, in which the petitioner is a substantial shareholder, would not be able to set off its debts against monies that in reality are due to the 1st respondent. He also submits that regardless of the existence of that substantial issue, s.182 does not apply and that therefore the order could not and should not have been made. He adds that it only benefits and serves the purposes of the 1st respondent and is contrary to the interests of the company in terminating an interest-free loan.

It seems plain to me from her very comprehensive judgment that the judge was fully aware of the foregoing matters and their implications. She pointed out early in her judgment that the 1st respondent's position was that the summons had been taken out only as a matter of prudence. She was also perfectly well aware that the order would apply only to a disposition by the company of its own funds. And it is upon that basis that I have no doubt that the order should be upheld by this Court. Whether or not the funds specified in the judge's order are the property of the company will presumably become clear in the course of and is a matter for the impending winding-up proceedings. If they are found not to be the property of the company but trust funds, the order that the disposition shall not be void under s.182 will simply have no application to the disposition.

For the foregoing reasons and those more cogent given by Rogers JA, it seems to me to have been right and prudent that the order should have been made.

I, too, would dismiss the appeal with an order nisi that the 1st respondent have his costs of the appeal to be paid by the petitioner.

The appeal is accordingly dismissed. There will be an order nisi that the petitioner pay the 1st respondent's costs to be taxed if not agreed.