WANG MEI NA v. TANG MU LIEN AND OTHERS

HCA 421/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 421 OF 2010

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D E C I S I O N

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1.  On 27 January 2011, I appointed interim receivers to the estate of Tong Zang in Hong Kong.

2.  There are now an application for leave to appeal against my decision, an application for stay of execution of my decision and an application for variation of my costs order nisi given in that decision all by the 1st to 7th defendants:

3.  The application for leave is made under section 14AA of the High Court Ordinance and Order 59 rule 2B of the Rules of the High Court.  Section 14AA(4) provides:

‘(4) Leave to appeal for the purpose of subsection (1) shall not be granted unless the court hearing the application for leave is satisfied that —

(a)       The appeal has a reasonable prospect of success; or

(b)      There is some other reason in the interests of justice why the appeal should be heard.’

4.  This application is made on the basis of a reasonable prospect of success in the appeal under subsection (4) (a).  A reasonable prospect of success under subsection (4) (a) means a prospect that is more than fanciful but without having to be probable (see SMSE v KL [2009] 4 HKLRD 125 at para. 17).

5.  The application for appointment of interim receivers was made by the plaintiff as one of the beneficiaries of the estate of Mr Tong.  She is the surviving widow and the 1st to 3rd defendants are her step children.  The 4th to 7th defendants are companies set by the children. Mr Tong’s estate in Hong Kong includes 4,990,000 shares of and in the 8th defendant Bowdex Hong Kong Limited.  Bowdex has a number of subsidiaries operating in the mainland.  

6.  The plaintiff complains that the 1st to 3rd defendants had set up a modus operandi to deplete the value of the estate to their benefit.  I have already set out the plaintiff’s allegations in my decision.  The plaintiff submitted that the 1st to 3rd defendants are executors de son tort as they have been handling matters of the estate.

7.  The 1st to 7th defendants opposed the application for appointment on the ground that the plaintiff has no proprietary right in the estate.  She has only a floating equity in it.  They further argued that the 1st to 3rd defendants had not intermeddled with the estate. They had only dealt with the business of Bowdex as its directors.  They only dealt with the assets of the company but not that of the estate as Bowdex has its own legal personality and is not an asset of the estate.  Furthermore, the estate is only the holder of 99.8% of the shares of Bowdex.  If Bowdex should have suffered, the loss suffered by its shareholders is reflective loss which they cannot sue for recovery.  It is only for Bowdex to sue for recovery.

8.  On the basis of these arguments, the defendants take the stance that despite the allegations of depletion of the business and assets of Bowdex and reflective loss is being inflicted on the estate, the law will not provide any remedy to the plaintiff as one of the beneficiaries of the estate.  The law cannot protect and preserve the estate.  The plaintiff can only act when she has become the registered owner of 25% of the Bowdex shares currently held by the estate.  She will then be able to act as a minority shareholder of the Bowdex.

9.  I disagree with this stance.  I said in paras. 65, 68, 71 and 72 of my decision:

“65. However, I am of the view that the obvious reason for the 1st to 3rd defendants to have been able to deplete Bowdex and divert its business and the businesses of its subsidiaries to their companies is not simply because they were directors of Bowdex and the subsidiaries. I do not think any shareholder of Bowdex who has not allied with them would have allowed them to do so. They could have been so acted because they have usurped the estate’s rights and powers as Bowdex’s 99.8% shareholder. They have taken possession of the rights and powers pertaining to these shares and have exercised such rights and powers purportedly as directors of the companies, but characteristically of executors of the estate. On the evidence before me, I hold that they are intermeddlers and executors de son tort.

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68. However, apart from not allowing the estate to claim against the 1st to 7th defendants for reflective loss, it does not mean that the law will provide no remedy to the estate or the plaintiff, being the only beneficiary who suffers from the acts and conduct of the 1st to 3rd defendants. Though Bowdex has an independent legal personality, the court is alert to the reality that the estate and the plaintiff suffer from the depletion of Bowdex by the 1st to 3rd defendants.

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71. Though the plaintiff is not a shareholder of Bowdex and cannot bring a derivative action for it, she no doubt has some rights and interests in the estate that has been described as a floating equity in Snell. The evidence also shows that her rights and interests need protection. The appointment of a receiver appears to be the appropriate remedy at this stage (see also Kerr & Hunter on Receivers & Administrators, 18^th edn., paras. 2-13 to 2-14).

72.          In answer to the argument of the 1st to 7th defendants that the loss of the estate is merely a reflective loss and there is therefore no serious question to be tried, I disagree and hold that there is a serious question to be tried on whether the estate’s loss and hence the plaintiff’s loss, though reflective, still deserves protection by the appointment of a receiver.”

10.  In this application for leave to appeal, the 1st to 7th defendants argue that the 1st to 3rd defendants are not executors de son tort as there is no evidence of their having dealt with the shares of Bowdex like exercising their voting rights or receiving the dividends. However, what I have referred to was the usurpation by the 1st to 3rd defendants of the rights and powers pertaining to the shares.

11.  They are in a position to do what they have done because the estate, being the current shareholder, cannot exercise the rights and powers pertaining to the shares.  This has given the 1st to 3rd defendants the opportunity to commit from their office of directors abuses against Bowdex and deplete the assets and business of Bowdex to their own advantage.  It is not a boardroom battle that the plaintiff has loss out as the 1st to 7th defendants would like it to be.  The plaintiff has lost out because she cannot exercise the rights and powers of a minority holder of a ¼ of 99.8% of the shares of Bowdex and the 1st to 3rd defendants seized this opportunity to commit their abuses.

12.  The 1st to 7th defendants also repeat their arguments that the depletion of Bowdex only caused reflective loss to the estate for which the estate can have no claim.  The plaintiff is a further layer away from Bowdex.  Hence, there can be no serious question to be tried on any claim by the plaintiff against Bowdex.  But I have not made any order which would have furthered any claim by the plaintiff against Bowdex.  I have only appointed interim receivers to protect the estate.  The 1st to 7th defendants further argue that there is no risk of dissipation of the assets of the estate and there is no need to appoint receivers. 

13.  I have said in paras. 75, 78 and 79 of my decision:

“75. I do not accept this. Though Yuande and Ningde have been liquidated and the interests in Hangde have been sold to Jin Chang, there are still the businesses of Huide and Baode. Huide has allegedly lost the authorisation of BMW, but it is still there. There is little known about Baode save that it had made some doubtful loans to its competitors. There are also the assets of Yuande and Ningde and the proceeds of sale of Hangde that should be protected.

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78. However, judging from what the 1st to 3rd defendants have done to Bowdex and the subsidiaries on the purported ground of the new policy of the mainland government, if there is no intervention by a receiver, it is likely that Bowdex and the remaining subsidiaries will go out of all their businesses soon. The 1st defendant has in fact said that Bowdex and the subsidiaries have no significant business activities since 2009. Mr Wong has also said in the written submissions that:

“[t]here is no dispute that business of Bowdex (and its subsidiaries) had been closed down and its turnover dropped as a result.’

79.       I am fully alerted to the risks and warnings about the appointment of a receiver.  But in these circumstances, I do not think the 1st to 7th defendants can say that there is much that can be harmed by the appointment of a receiver.  I would rather think that a receiver should be appointed to save whatever that remains and to protect the estate from further depletion.”

14.  There may not be a big risk for one or two instances of depletion that I have referred to.  But that is the general picture.  I think this is a case where it is not too late to shut the stable-door after the horse has bolted as there may still be a pony idling in a corner of the stable.

15.  I disagree with the arguments of the 1st to 7th defendants.  I do not think the law is so helpless to the plaintiff.  I do not think the 1st to 7th defendants have any reasonable prospect of success in the appeal.

16.  I therefore dismiss the application for leave to appeal. 

17.  In the premises, I also dismiss the application for stay of execution of the decision pending appeal.

18.  At the end of my decision, I made a costs order nisi reserving the costs of the application but ordered the 1st to 7th defendants to pay the plaintiff the costs of the argument. 

19.  The 1st to 7th defendants submitted that the plaintiff had abandoned almost all her arguments on alleged fraud, deceit, misrepresentation etc and just focused her attack on the 1st to 3rd defendants being intermeddlers of the estate.  The mention of executive de son tort was only made at the start of the arguments.  It is submitted that the plaintiff has infringed paras. 7 and 30 of Practice Direction 5.4 which require skeleton arguments to be comprehensive and any point not taken there may not be pursued at the hearing or there may be adverse consequence on costs.

20.  I do not think it correct to say that the plaintiff has abandoned her arguments of fraud, deceit, misrepresentation and so on.  I think there has been a change in the emphasis of legal arguments but the factual basic remained the same.  The main arguments of the 1st to 7th defendants were still advanced.  The shift in emphasis in legal arguments has caused no problem to the 1st to 7th defendants.  All points raised by both sides had been canvassed thoroughly and adequately.  I see no reason to vary the costs order nisi.  I dismiss the application for variation of the costs order nisi.

21.  I also make a costs order nisi that the 1st to 7th defendants do pay the plaintiff the costs of these applications in any event with certificate for three counsel.